Contract Negotiation: How to Protect Your Business
Read this article to learn about contract negotiation, your guide to closing the deal and protecting your business.
It’s exciting entering a new partnership or venture and most of us want to get started immediately. However, there are many reasons why it’s critical to make sure that you have a contract in place. It’s also important to have a ‘executed’ contract in place – signed by ‘both’ parties.
Why? Because the devil is in the detail (or the legal fine print). Lawyers are great at removing any form of greyness from an agreement.
While you and your new found business partner might agree to the majority of terms at a high level, you may disagree or choose to ignore minor details. These details can have long-lasting implications. This is particularly true where the contract does not provide for certain situations. For example, should one party chose to walk away from the agreement or take an action that isn’t in the spirit of the agreement. Both parties are much better positioned for success when the contract reflects the intent of the agreement. This helps to achieve a fair and reasonable outcome should the agreement end.
Our LawPath Legal Specialist Damin Murdock, Principal Lawyer at MurdockCheng offered his advice:
“A well drafted contract will ensure all of the parties involved are on the same page from the start. Accordingly, if you have a well drafted contract and there is a dispute, one party may be unable to issue a claim against you because it has already been well spelt out in the contract, or maybe the contract includes a dispute resolution clause preventing a dispute from proceeding any further.”
In this article we’ll share some areas for consideration when entering into a Partnership Agreement.
Agreeing to the duration or term of the agreement and the renewal options
How long do you propose the partnership to last? Is it a one year term and the contract ceases? Or do you want a first right to renew the agreement before it expires? If so how long will you need to determine the renewal rights? Will your business partner be dealing exclusively with you (not your competitor) during the term of the agreement? If you’ve invested a great deal of time and effort into the partnership, would you want the other party to be able to speak with your competitor before the end of the term or your agreement? Negotiating a contract that takes these questions into account is a great step towards protecting your business.
What are the benefits each business will get out of the deal?
Within the agreement, has each party fully represented what they will do and what they will receive as part of the agreement? Detailing the benefits helps each party to confirm what is part of the deal and more importantly, what is not. Be specific and measured. If it’s a service agreement detail the minimum agreed quotas or service level agreement.
If it’s a services agreement then I’d suggest structuring it so that it contains the legal elements of the agreement (becoming the master agreement) and a work order or statement of work refers to the project or program of work to be undertaken.
Is your business protected?
What if the deal goes bad? If you’ve spent considerable expense entering into the arrangement, is the exit term sufficient that you can return your investment (i.e. have you built in a lengthy exit clause to ensure you can recoup your investment?).
Alternatively, if the other party is damaging your brand and/or reputation, then can you terminate your agreement quickly? Is your business protected in the scenario where your business becomes liable, how and can you quantify some of the possible scenarios? Will your brand and intellectual property be protected and what rights does the other party have to use your brand during the agreement and/or cease use on termination?
If any ‘contra’ goods and services are being exchanged within the benefits of the agreement, there may be GST implications. It’s a good idea to ensure a lawyer reviews agreements of this nature. No one likes a visit from the ATO years later auditing your business and seeking GST back-payments!
Always best to have clear terms agreed between parties upfront. This makes for a much more efficient use of time and resources – and faster turn around of the contract.
More complex agreements will likely result in increased negotiation between the parties. Take some time to draft up a list of priorities with the things that you need to have to make the deal worthwhile. Areas that you’d be willing to compromise on to get the deal across the line should also be considered. Then gameplay it – what do you know your business partner needs to make the deal worthwhile and how can you come to an agreement with mutual benefits for both parties to maximise your agreement?
Also, I’d suggest that you give some consideration as to what becomes a ‘deal breaker’ situation and at what point you consider walking away from the negotiation.
It’s such a momentous achievement when you’ve closed the big deal and popped the champagne, but make sure you start off your partnership on the front foot, with the right structures and contract in place. Having these tough and seemingly needless conversations about potential worst case scenarios that may arise during the partnership can do a world of good for all parties involved in the long run. Don’t hesitate to ask one of our businesses lawyers if you need assistance.