"Do we need a contract?" We at Sequoia Legal hear this question often. We understand that negotiating a contract can be a daunting task and that it can seem easier to operate without formal written contracts. While this approach is simpler and cheaper in the short term, it can cost you big in the long run. No one enters into a contract expecting to sue the other party, but disputes are a reality of commercial life. Negotiating a written contract with a counterparty is the best way to set the expectations of the relationship and to avoid or minimize frustrating issues and costly disputes down the road.
Sequoia Legal is here to help with our Contract Negotiation Series. In this first installment, we will walk you through what you should know when entering into a contract negotiation.
Things You Should Know When Entering Into a Contract Negotiation
What Is Your Goal?
This may seem silly obvious to some, but it’s important to enter any contract negotiation with a clear idea of what you want the contract to accomplish. For example, is it a one-off purchase order or are you establishing a long-term course of dealing with a counterparty that is material to your business? This is not a legal question, but a commercial one. However, having a clear understanding of the commercial goal is critical in determining the approach to contract negotiation.
Who Is The Other Party?
Before entering into any kind of contract, you should do some research (or due diligence) into the other party. Maybe your company has contracted with this party before, in which case you should review your prior dealings with this company If you have not had prior dealings, you should look into the company’s reputation.
In some cases, you may want to do a credit check, or a litigation check to see if they are involved in multiple lawsuits or ask for references for the other party. If you have had prior dealings with this party, you should reflect on those prior dealings. Were there aspects of the prior contract or relationship that were problematic? Will this contract be performed by the same people? How did prior negotiations go, if any? Were you satisfied with the performance of the other party? These considerations are significant as they can highlight the need for additional contractual provisions or more detailed procedures to avoid issues or streamline the contracting process.
What Happens If Things Go Wrong?
Preparing for the worst possible outcome is one of the main purposes of a contract and a major part of any commercial lawyer’s job. We understand this outlook is not always fun to consider, especially if you have a good relationship with the other party, but it is a vital consideration that needs to be reflected in your contract.
What happens if the other party fails to perform? What happens if you fail to perform? What happens if there is another COVID-19 outbreak or comparable emergency that halts performance negotiations. Having a clear written contract covering these topics will prevent ambiguity down the road and is in the interest of all involved parties.
Do You Have Room to Negotiate The Contract?
Some businesses do not review their contracts in detail or otherwise negotiate the terms of their contracts. While large, well-established businesses typically have more leverage in contract negotiations, it is important to review contracts in detail and consider negotiating certain critical contractual terms.
While context is important, smaller businesses are usually able to negotiate certain legal terms. For example, indemnification is often a heavily negotiated contractual term, and you can protect yourself or limit your potential liability by pushing for changes to indemnification language.
This introduction is designed to help you prepare for contract negotiations. We at Sequoia Legal are here to assist you with your commercial and corporate legal needs. Contact us if you have any questions or require any assistance.