5 Contract Negotiation Tips for Small Businesses

No matter the type of business you handle, contracts are a necessary part of your life.

You will encounter a list of commercial terms and negotiate them with a supplier, distributor, customer, or third party. Check out our top five tips for what you need to look out for when negotiating commercial contracts:

1. 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.

2. Identify the warranties provided.

Warranties are a promise or assurance that something is factual and can be relied upon. They are important terms, and if 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

3. Decide the indemnities.

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.

4. Establish termination clause in agreement.

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?

5. Determine the legal 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.

Happy negotiating! Lodestar has expert Australian business lawyers that provide commercial legal solutions. Check out Our Services to know how we can help you.

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