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Negotiating an agreement prepared by the other party

  • by M Prem
  • in Contracts

A well negotiated contract is the way to secure a mutually beneficial outcome and avoid dispute with minimal trade-off.

A written contract is a great way to protect a business relationship. It outlines the terms of the agreement in plain black and white so there is no confusion and no misunderstandings. The parties to the contract are bound by promise (undertaking) and duty (obligation) as stated in the contract. The contract will stipulate what the consequences are of not fulfilling or failing to deliver as promised.

One-sided agreements

When preparing an agreement you establish the basic rights, duties and obligations of each party, with the intention of developing a balanced agreement, whether unilateral or bilateral. However, very often one party may be of superior power or influence or the drafter, for whatever reason, may prepare a contract that favours one party over the other. One party, for example, may be indemnified against loss but not the other, or only one party may be entitled to terminate the agreement. In such instances only one party has the benefit of protection and the other party is exposed to loss of income, claims for damages or trapped in an interminable relationship that simply does not work.

How does one ensure that the agreement prepared by the other party is fair, reasonable and unbiased in either party’s favour? The objective is to ensure a mutually beneficial outcome and avoid dispute with minimal trade-off. This is achieved through negotiation; a well negotiated contract secures the business owner’s position, so he/she can focus on profit-making activities.

Basic negotiation techniques

Applying a few simple negotiation techniques may prevent future disputes and loss of income. Read and understand the contract and ensure that the agreement is clear and understandable; remove any ambiguity and get help interpreting content if you are unclear on terms. This includes interpretation of commercial and transactional terms or legal aspects.

Understanding basic legal requirements or principles will help guide you to ask the right questions, such as —

  • Does the other party have the capacity (ability) to enter into the agreement? A minor, for example will not have capacity and it is important to establish whether the person signing on behalf of an entity (company or CC) is authorised to do so.
  • Are there any specific laws that apply? This may be the case when selling or buying land/property, dealing with long leases or ante-nuptial contracts. Does the contract contain any illegal elements that is contrary to any law or society and, if so, is the agreement enforceable?
  • Do you understand clearly how to terminate or exit the contract and under what circumstances are you entitled to do so. If a material breach is grounds for terminating the contract, what exactly comprises a material breach?
  • Determine and record what the significant dates or events are and the consequences of non-compliance.

As you would for any negotiation, prepare and agree on the major elements before contract preparation commences. This will avoid high costs, time delays and manage expectations. Be clear on your objectives and among the detailed and complicated provisions, ensure that your objectives have not been lost. Establish concessions and trade-offs at the outset as this can be a powerful tool to ensure you get what you want. Most importantly, don’t be afraid to ask for the change and if you don’t receive the change request, don’t be afraid to walk away from a dubious contract.

Proceed with caution

Consider the following scenarios and provisions of a contract you are executing to determine whether there is a differential bargaining power or other influences which may result in a biased contract.

  • Understand the termination and breach clauses (who may terminate and for what reason).
  • Determine whether one party is entitled to independence in decision-making but the other party still controls various aspects of the relationship, such as an independent contractor or supplier of services required to report daily to a manager.
  • Consider onerous requirements for release of payment such as submission of security documentation or guarantees in terms of loan or supply of goods agreement.
  • Identify all major risks to your business such as time delays on replacing damaged goods. Mitigate such risks by checking all time references, such as a 7-day notice to replenish stock or 48-hour delivery and amend these clauses to suit both parties.
  • Identify when risk and ownership passes. Ownership of goods can pass on first or full payment, however risk should only pass when the goods are in your control, i.e. within your property and under your insurance cover.
  • Warranties, indemnities and representations must be considered carefully. A warranty is an undertaking or promise; an indemnity is a protection against loss and a representation is a portrayal that something is a certain way. Each of these elements is connected as it creates an obligation by one party to the other. If for any reason you are unable to honour a promise or cannot afford to cover a claim for loss, you may be faced with a potential loss of future income.
  • Limitation of liability and disclaimers should apply to both parties equally. However, if applied to one party only the party carries the burden of loss if there are any claims whether direct or indirect.
  • Protection of intellectual property and similar provisions should apply to protect ownership, right and title to any new or unique product, service, process or know-how, including any future enhancements.

Any form of bias, one-sided or unbalanced agreement favouring one party over the other to gain advantage, rarely results in creating benefits for either one or both parties. Such agreements may result in disputes or a breakdown in trust and the eventual demise of the relationship and may destroy businesses. To prevent abominable and catastrophic consequences to your business apply simple techniques to preparing, negotiating and executing balanced agreements that demonstrate trust and a foundation for long term relationships.

 

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