Contract Negotiations – Key Issues

In this article we consider some of the key issues a business should consider during contract negotiations.

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.

• 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 so, is this to be subject to prior written consent?

• If the other party is a company, would the business object if ownership changed, for example, if a competitor took control? If so, what provisions should go in the contract to address this situation?

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 another 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?

• Is the price conditional or to be paid in stages? If so, any preconditions to payment should be clearly set out.

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? Could reputational damage be an issue?

• 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. Check that liability is covered by insurance.

• 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. Deliverables, and preconditions to performance, should be clearly specified.

• 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? If for a specified period, should the contract renew automatically or on notice?

• 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 reflecting the investment the non-terminating party has made in the contract?

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? If so, clear, comprehensive and strictly monitored contract provisions governing such use will be needed to avoid possible brand damage.

• 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.

Points to consider in international situations

• Price: in what currency is it to be paid? If the currency is volatile consider hedging against any exchange rate exposure. Is there likely to be an exchange control issue in remitting payment from the country concerned?

• Payment: Consider a using letter of credit or payment guarantee. Conduct credit searches on payers and guarantors and obtain bank and commercial references where possible.

• Ensure compliance with applicable laws both in the UK and the country where the contract will be performed, including anti-corruption measures and laws specific to the subject-matter of the contract.

• Consider which mechanism is most appropriate for resolving disputes. Consider specifying arbitration (private, neutral, internationally enforceable) rather than immediate recourse to the courts of another country.

This article just provides an overview of the law in this area. Our specialist solicitors in the corporate and contracts department at Chadwick Lawrence would be delighted to discuss matters with you for a complete understanding of how the above may affect your particular circumstances.