Commercial contracts are the lifeblood of any business.
They establish the terms and conditions of transactions, partnerships, and agreements that can significantly impact your company’s success. Effective contract negotiation is crucial to ensure favourable outcomes and mitigate potential risks. Here are the top five key points to consider when negotiating commercial contracts:
Clear Scope and Objectives:
The foundation of any successful contract negotiation is a clear understanding of the project’s scope and objectives. Before negotiations begin, both parties must agree on what the contract aims to achieve. This includes defining project deliverables, timelines, responsibilities, and performance metrics. Clarity in these areas helps prevent disputes and should ensure the parties properly understand their respective roles.
Pricing and Payment Terms:
Negotiating the pricing and payment terms is often a central focus in commercial contract negotiations. Both parties must agree on the cost structure, pricing models, and any potential price adjustments. Payment terms, including the frequency and method of payment, should also be clearly outlined. Other considerations also include volume discounts, early payment incentives, and responsibility for any applicable taxes, expenses or fees.
Risk Allocation and Liability:
Commercial contracts should address the allocation of risks and liabilities between the parties. Consider potential risks such as delays, non-performance, and breaches of contract, and determine who is responsible for mitigating and covering these risks. Suppliers should be looking for limitations on liability which are proportionate to the commercial gains from entering into the contract. Clear indemnification clauses, limitation of liability provisions, excluded heads of loss and dispute resolution mechanisms should be established to protect both parties’ interests.
Intellectual Property Rights:
For contracts involving intellectual property (IP), it’s essential to define the ownership, usage, and protection of IP assets. Without specific terms confirming assignment of IP to the buyer, a third party supplier who creates IP in the course of performing the contract will usually retain ownership in the IP. It is therefore essential for customers to include an assignment (not just a licence) of created IP where that is relevant. The parties should negotiate and reflect in the agreement the rights to use, modify, or transfer intellectual property, including trademarks, copyrights, patents, and trade secrets. Address issues related to confidentiality, non-disclosure, and non-compete agreements to safeguard sensitive information.
Termination and Exit Strategies:
No one enters into a contract expecting it to fail, but it’s crucial to plan for the unexpected. Include clear termination clauses that outline the conditions under which the contract can be terminated and the associated consequences. Discuss exit strategies, such as transition plans and post-termination obligations, to ensure a smooth and efficient conclusion of the agreement if necessary.
Successful commercial contract negotiation requires effective communication, a keen understanding of the business objectives, and a willingness to compromise when necessary. Collaborative negotiations often yield better results than confrontational ones, as they build trust and foster long-term relationships between parties.
We recommend that businesses are frequently mindful of the issues which are subject to most negotiation and dispute where they are not adequately reflected in the contract or the parties performance of it. If businesses carefully consider these five key points in every contract, they can protect their interests and minimise potential disputes as well as the risks.
