Contract Negotiation Tips

 

11 May 2017
Posted by Suzy Wood

So you’ve found what looks like an awesome deal. You’ve done a bit of preliminary due diligence on the other side and you’re confident the two of you would make a good team (and you’ve read our blog on contract signing tips).

Now comes the part you might’ve been dreading: the paperwork!

In this blog, part two of our contract law series, we look at what happens once you receive the contract, and why it’s important to stand your ground in the all-important negotiation phase of the deal.

Don’t assume the long form contract conforms with the heads of agreement

In many commercial deals, the parties will first reach in-principle agreement on the main commercial terms. This preliminary agreement will sometimes be in a series of emails or phone calls, or sometimes drawn up more formally in a “heads of agreement” (or “HOA”).

The idea is that the long form contract will match the commercial terms contained in the HOA, but you should never assume that this is actually the case. The person who prepared the agreement might not have had access to the HOA, or things might’ve been missed, or (more sinisterly) the other side might be hoping that you don’t pick up on their omissions!

Remember that heads of agreement are usually considered by the law to be mere “agreements to agree” and are often unenforceable in their own right. So it’s critical that everything that is in your HOA is carried over into the long form!

You should make a list of everything that was informally agreed between the parties and carefully review the long form, ticking off each item as it appears.

Don’t be scared to negotiate! Consider the use of a special conditions schedule

It can be intimidating, especially when dealing with bigger businesses, to ask for changes to a contract or to get a lawyer involved.  However, this will probably earn the respect of the other side, and give you the chance of getting a better deal for yourself.

Most businesses are open to negotiation. If they are not, you need to ask if they’re really the right kind of business to be working with.

If a business has more pragmatic reasons for not wanting to change the text of an agreement (for example, if it’s a standard form and they’re super busy), another great option is to ask for a schedule of ‘special conditions’ that override anything in the body of a contract.  Make sure you include a statement like ‘These special conditions are binding, form part of this agreement and override the terms set out in the main agreement in the event of any inconsistency’.  Special conditions can be written in ‘layman’s terms’: meaning you do not need a lawyer to draft them.

If it’s important, get it in the contract

It can be tempting to think “The other side said XYZ when we discussed this point, so I can hold them to it”.

Actually, many commercial contracts contain an “entire agreement” clause which says that the contract covers the whole agreement and no emails, text messages or conversations can be referred to in an effort to introduce further terms. Even in the absence of this kind of clause, contract law principles can make it very difficult for you to rely on representations made by the other side to incorporate new terms into the contract.

If the other side is prepared to say something in an email or over the phone, they should be prepared to put it in the contract itself, and you shouldn’t be shy about asking for this.

Ask the other side to track their changes

Nothing is guaranteed to give you a headache like trying to compare two documents side by side during negotiations. With each draft of the agreement, ask the other party to do you the courtesy of showing their changes using the “tracked changes” function in Microsoft Word, so that you can cut down on review time.

Double-check the final draft before signing

Make sure the version you sign matches the last agreed version and incorporates all the changes.

Some kinds of agreements allow the parties to simply exchange scanned versions (“counterparts”) without both signatures needing to be on the same physical page. Others require the original to be signed by both parties. Check the signing provisions of the agreement to be sure.

We strongly recommend you keep a scanned copy of the final, and forward a copy to any lawyer you had helping you with negotiations. It would be a nightmare to lose the original and have nothing to back you up!

We would also recommend that each page is numbered, and that the final physical version (once scanned) is stapled, so that there will be evidence of any tampering, and so that nobody can argue that pages were inserted at a later date.

And there you have it – five simple steps to set you well on the path to being a killer commercial negotiator!  But if and when the time comes to lawyer up, we would love to hear from you. Contact us for a quote by emailing hello@studiolegal.com.au or call (03) 9521 2128.

DISCLAIMER

The information in this article is of a general nature. It does not constitute formal legal advice, and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter.