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As a business owner in a market where efficiency is more important than ever, the hours you could spend negotiating a minor clause in a contract may seem like a waste of time. In fact, many businesses feel that the contract negotiation process needs to change. This article will discuss three possible alternatives to traditional contract negotiation:

  • using a term sheet;
  • adhering to a set of contracting principles; and
  • public disclosure of your terms and conditions.

Why Use a Different Approach to Contract Negotiation?

For many business owners, reaching agreements with suppliers, employees and business partners quickly is very important. Fast turnarounds allow your business to generate revenue and allocate resources efficiently.

If you are trying to shorten the cycle time to signature, you may view contract negotiations as a frustrating hurdle. Of course, some negotiation needs to happen before you and the other party can form an agreement. However, once all parties have agreed on the key commercial details of a contract (which may take some time), you may not want to then spend even more time negotiating other contractual terms, such as:

  • indemnities;
  • limitations of liability; and
  • audit clauses. 

Parties can spend a lot of time negotiating a clause on the grounds that it does not reflect market practice. However, this may not be relevant if the scenario in question is unlikely to occur and the clause may never be triggered.

Negotiating in this way can also shift the focus away from reaching a fair and reasonable agreement to arguing over technicalities. For some legal teams, identifying a technical issue that the other side’s lawyers did not notice is a measure of success. Some lawyers will fight a technical battle over very specific interpretations of clauses.

This is why some companies prefer a different approach to contract negotiation.

Some examples of different approaches include: 

  • using a term sheet; 
  • adhering to certain contracting principles; or 
  • going for full transparency.

1. Term Sheet

The first option is to have a term sheet, which contains the key commercial details of the agreement. These details are negotiated by the parties. 

Effective term sheets are written in plain English rather than legal language, which allows parties to engage in a commercially-focused dialogue. Once the parties have agreed on the term sheet, each side’s lawyers can prepare a contract. Because most of the terms will come from the term sheet, the contract should be easier to negotiate and the parties should be able to proceed to execution quickly. 

The main issue with this option is that the term sheet is still written by one party (or their legal advisers) and therefore will likely favour that party. Also, when moving from the term sheet to the final drafting of the clause, a clause that seemed balanced or appropriate can appear unreasonable with the addition of only a few words. This could mean that negotiation re-opens. 

For example, when negotiating the term sheet, the parties may agree that the buyer will pay the seller for additional costs incurred as a result of a variation request from the buyer. When it comes to drafting the contract, the buyer might want to specify that only reasonable costs will be covered. The concept of ‘reasonable costs’ adds uncertainty for the seller, who may then want to re-open negotiations.

2. Contracting Principles

Another option to promote more effective negotiations is to adhere to a set of standards created by a third party, such as the:

  • contracting principles endorsed by the International Association for Contract & Commercial Management (IACCM); or
  • New Engineering Contract (NEC) suite of contracts in the United Kingdom. 

Parties can decide to use specific principles to govern their entire relationship or only certain aspects of their contract.

IACCM’s contracting principles set out certain standards, such as:

  • each party will be in breach if they do not comply with their applicable laws‘; and
  • the party furnishing information or materials to the other retains its intellectual property rights in such information or materials, subject to any license rights that are granted by the furnishing party‘.

These then translate into contract terms without the need for negotiation.

This can be a good solution for parties who wish to focus on deliverables and agree to a set of governing principles from the outset.    

3. Full Disclosure

Some companies go a step further and opt for full transparency. They make the templates they use for their contracts available for business partners so that counterparties knows what to expect. 

Australian software company Atlassian has gone even further than this by publishing their term sheet online for mergers and acquisitions (M&A) transactions. The rationale behind this move was to eliminate the ‘disproportionate amount of time and goodwill’ that negotiations take in an M&A transaction. Atlassian’s goal is to minimise time spent negotiating. 

How the market reacts to this full transparency approach, and whether other players will follow, remains to be seen. However, this option may be worth considering.

Key Takeaways

Contract negotiation can be a lengthy process. If the clauses being negotiated are unlikely to be triggered, it can feel like a waste of valuable time. As a result, many businesses are now looking for alternatives to traditional contract negotiation. To avoid prolonged negotiations, you could: 

  • agree on a term sheet with the key commercial details before drafting a contract;
  • adhere to a set of contracting principles; or 
  • publically disclose your standard terms and conditions.

If you have questions about contract negotiation, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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