Contract Negotiations – Key Issues

This business briefing highlights the key issues a business should consider during contract negotiations. Always take legal advice when negotiating a large or unusual contract. The first question to ask is "who is the other party to the contract?"

• What is the reputation of the other party? Has the company done business with the other party before?
• Consider doing a credit check if the business has not dealt with the other party before
• If the other party is based overseas, take legal advice to ensure that the business is adequately protected if things go wrong
• Is there any other party that is vital to the deal? If so, consider whether they should be made a party to the contract so they are also bound

Is the identity of the other party important to the performance of the contract?

• Are there specific individuals that the business wants to perform the services?
• Is the business happy to allow the other party to sub-contract some or all of the work or pass on the benefits of the contract to others? If not, this must be made clear in the contract
• If the other party is a company, would the business object if ownership changed, for example, if a competitor took control?

What is the business buying or selling?

• The majority of contractual disputes relate to what services are to be performed or goods delivered
• Describe the goods and services as clearly and accurately as possible to avoid risk of disputes
• Any important issues and assumptions should be confirmed in the contract. Do not rely on verbal assurances or points agreed during negotiations
• List what the other party should and should not be doing regarding the services or goods being sold under the contract

What is the price and how is payment to be made?

• Is it a fixed sum? If not, how is it to be determined?
• If the price is linked to variable factors, what are the mechanics for determining the price and at what points during the term of the contract will the price be determined?
• Is tax included in the price (notably VAT)? Take tax advice if goods or services are being delivered or performed in a foreign country to ensure there is no unexpected tax liability
• What are the delivery terms? Are delivery costs included in the price?
• How is payment to be made (for example, cash, electronic bank transfer or bankers’ draft)?
• When is payment due? Is it a single lump sum or by instalments?

What happens if things go wrong?

• What could go wrong with the deal and what loss could the business suffer as a result? Consider all possible consequences. For example, could the business be prevented from fulfilling obligations to another company and face financial penalties as a result?
• If the business is buying goods and services under the contract, try to ensure that the seller is responsible for all possible losses and that liability is not limited in any way
• If the business is selling goods and services, try to limit liability to a fixed sum. Damages for breach of contract may be far greater than the price and hard to quantify
• Take legal advice before agreeing any clause that seeks to limit liability under a contract

Is the deal time-critical?

• When does the business want the work done or goods delivered?
• A clear timetable is essential, especially if price is tied to delivery or performance dates
• Does the business want to be able to end the contract or to impose a financial penalty if work or goods are delivered late?

In what circumstances might the business want to pull out of the contract?

• How long does the business want to be tied to the contract?
• Should the contract be for a fixed period of time or does the business need to include a right to terminate by giving notice to the other party?
• Are there any circumstances in which the business may want to terminate the contract immediately, for example, if the other party damages the business’ reputation or goes bust?
• Should there be a fee for early termination?

Are there any brand, copyright or other intellectual property issues?

• Is the other party creating something specifically for the business (for example, an advertisement or bespoke computer software)?
• Is the business going to use the other party’s brand or will the other party use the business’ brand?
• Take legal advice to ensure that the correct formalities are followed otherwise valuable intellectual property assets may be lost or infringed

Is there a payment, performance or enforcement risk? Remember that if anything goes wrong, the protections in a contract are only as good as the person giving them. If they have no money it will be very difficult to get any compensation. Consider requiring security (for example, a guarantee or retention).

Is the business dealing on standard terms?

• Most companies have standard terms of business drafted in their favour. If a business’ terms conflict with the other party’s, it will be difficult to decide which terms will apply
• Be wary of purchase orders or delivery notes. These can have a party’s standard terms of business included on them. By signing a delivery note, the business may inadvertently commit itself to the seller’s terms
• Always be clear about the terms on which the business is dealing. If in doubt, take legal advice

The content of this Business Briefing is for information only and does not constitute legal advice. It states the law as at April 2015. We recommend that specific professional advice is obtained on any particular matter. We do not accept responsibility for any loss arising as a result of the use of the information contained in this briefing.