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Part of being a small business owner is entering into a lot of contracts. When you enter into a contract, you are giving away something of value and receiving something of value in return. You would not enter into a contract that does not benefit you. As such, negotiating is key to get the best deal possible, but also to ensure that your broader business interests are adequately protected in your contractual agreements and transactions. This article will provide you with some guidance on how to negotiate a contract.

What Is a Contract?

A contract is a legally binding agreement between two or more parties. This means that it is enforceable by a court. As a result, you can recover compensation, or other types of legal remedy (such as a court order to complete a transaction or perform an obligation) if the other party does not perform their obligations.

When Should You Negotiate a Contract?

You can always negotiate a contract before entering into a transaction with another business or individual. For example, you may negotiate a contract when you are:

  • engaging another business to supply you with goods and services;
  • providing your goods and services to another business; or
  • onboarding a staff member.

As a small business, you may engage with enterprise businesses (large businesses with over 200 staff members). For example, you may supply a large supermarket with a particular product. Chances are, they will provide you with one of their standard-form contracts.

A standard-form contract is a pre-prepared contract where most of the contract terms are set in advance.

There is a common misconception that you cannot negotiate this type of contract. Usually, there will be some commercial disparity between you and the enterprise. As a result, you should negotiate any terms that do not align with your business interests and do not put you in the best position. For example, the contract may have obligations that are so onerous that the chances of you being able to adhere to those obligations are low. You will want to negotiate these obligations.

Remember, you can always negotiate a standard form contract.

What Are Commercial Terms and Contractual Clauses?

Commercial terms are usually the tangible benefits your business will receive as a result of the agreement. Contractual clauses are the clauses in the contract that achieve these commercial terms. As a result, commercial terms and contractual clauses are interdependent.

For example, your business engages a supplier to supply t-shirts to you. It may be more commercially beneficial to you to ensure that the supplier continues to supply t-shirts to you for longer periods of time. However, you may also want some flexibility in the arrangement so you can determine whether the t-shirts sell effectively. That is a commercial term that you want to achieve in the agreement which you can negotiate with your supplier. Once you have agreed upon the commercial term, you may agree to place a clause in the contract that requires your supplier to supply t-shirts to you for 12 months. You may also draft a clause in the contract that gives you the option to renew the contract for another 12 months once the contract expires.

You can negotiate both commercial terms and contractual clauses. In the example above, your supplier may want more certainty regarding your option to renew the contract. They may negotiate with you to insert a clause that requires you to renew the contract within 90 days of the contract term expiring.

Some common clauses that parties negotiate include the:

  • scope of the services provided;
  • payment/terms;
  • dispute resolution clause;
  • limitations on liability (legal responsibility); and
  • termination clauses.

What Should You Keep in Mind When Negotiating a Contract?

There are a few things to keep in mind when negotiating a contract. You should:

  • ensure that you understand all the contract clauses and their potential impact on your business. This is particularly true for clauses that impose legal responsibility or obligations upon you and clauses that limit or remove legal responsibility for the other party;
  • always be clear on your non-negotiables and what you are willing to concede before entering a negotiation;
  • be reasonable with the other side. Therefore, always listen to the other side to identify and understand their points of concern;
  • understand what is valuable for your business. Understand how the contract benefits you and ensure that it does not contain overly onerous obligations for your business. It is often more than just the total sum of money that matters; and
  • reach a beneficial agreement for you and the other party or parties to the contract. The end goal of a negotiation is not about winning or losing.

Key Takeaways

When you enter into a contract, it is always important to review the entire contract to ensure that the terms are fair for your business. As such, finding the right deal means negotiating with the other side. When entering into a negotiation, remember:

  • the commercial terms you want to achieve through contractual clauses;
  • to be reasonable with the other party when negotiating and seek to understand their needs and objectives; and
  • to be clear on your non-negotiables and what you are willing to concede.

The process of negotiating can be a challenging task. If you have questions about negotiating your contracts, get in touch LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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