Top 5 tips when negotiating contracts.
Whatever your business, contracts are a necessary part of your life.
If you’re negotiating commercial terms with a supplier, distributor, customer or third party, here’s our tips for what to look out for:
- Define the scope, specifications and expectations clearly. An agreement doesn’t need to be complex or overly legal, but it does need to be precise and, where possible, deliverables should be measurable against objective goals (such as specifications, KPIs, time periods, etc). This way each person knows what is expected of them and what they will receive and by when.
- What warranties are being given? Warranties are a promise or assurance that something is true and can be relied upon. They are important terms, and if they are breached the other party could terminate the Agreement. If you give a warranty, make sure it’s true and you can do it. Also only warrant things that are within your control.
- Are you providing an indemnity? Indemnities are generally the most negotiated part of any contract. It is where a party takes on the obligation to pay for loss or damage suffered by the other party … and in some cases this could be huge. If you have to provide an indemnity, stick to things within your control, or things that may never happen.
- What’s your liability? Three words …. ‘cap your liability’. This is particularly important where indemnities are given. Ideally your liability cap will cover all claims arising out of the agreement. However, if some types of loss are excluded from the cap, make sure the amount is manageable or limited to the amount recovered under any insurance policy.
- What happens on termination? It is not always ‘happily ever after’ when an agreement comes to an end, so it’s best to agree upfront (when you’re still on speaking terms) what each party will be entitled to when the dust settles. Who owns or has rights to any IP developed during the term of the Agreement? What happens to goods ordered and in transit? Are you entitled to a fee if the contract is terminated before the end of the term? Or would you prefer that both parties walk away with no further liability or obligation to each other?