The Basics of Contract Negotiation
A contract is a promise in exchange for value, and it is the primary legal vehicle for individuals and businesses to partition risk and liability. In order for that contract to result in the effect intended, however, both parties must understand the intent of what they agree to . Fundamental principles of contract negotiation require that:
- (1) Each party communicate its own needs and understands the needs of the other;
- (2) Each party understands the importance of recognizing the strength and weaknesses of the position of the other party; and
- (3) The role that negotiation plays in achieving a final contract that both parties can view as satisfactory.
Reasons to Use a Contract Negotiation Template
The reason to use a contract negotiation template is actually quite simple: efficiency, thoroughness and consistency across the board. When a lawyer is starting the negotiation of a contract (typical things like a supply agreement or distribution agreement), that person knows that they need to be looking at certain aspects of the agreement, but they often are going to be hard pressed to remember every single thing that needs to be checked off. Rather than re-inventing the wheel every time, we all do the smart thing and create a template that makes the process easier. Most importantly, with a contract negotiation template, you do not need to keep reinventing the wheel, but can just focus in on the specifics of the particular deal being negotiated.
Key Components of a Contract Negotiation Template
A contract negotiation template often is considered a formalized instrument for the purpose of guiding the latter stages of contract development. These templates can help assure that the proper elements are included and that the terms and conditions meet basic requirements. For example, your template might include sections dealing with terms and conditions, specific key dates, specific roles and responsibilities, and a negotiation timeline.
The Terms and Conditions
Many contract negotiation templates will include sections dedicated to specific terms that will require further explanation. These may be small separate documents containing a list of items that must be addressed in the negotiation, including items such as:
Key Dates
When do you need to develop the basic framework for the contract? When do you need to have a final document ready to present to the other party? What is the deadline for finalizing development? These and many other questions can be answered with the use of key dates, which can be included as a part of your contract negotiation template.
Responsibilities
There are often many parties involved in contract negotiation, and having a clear delineation of who is responsible for what can save time and headache later on during the negotiation process. A negotiation template can contain specific sections dedicated to these responsibilities.
Timelines
What is your negotiation timeframe? Often, there are specific deadlines associated with contract negotiations, and a simple list of these deadlines could be invaluable during the contract negotiation process. Be sure to include these deadlines in your contract negotiation template.
How to Modify a Template for Various Fields
While many contracts have common elements, certain industries or types of transactions can call for specific considerations. Employment contracts, for example, may not need to address licensing or regulatory concerns. They will likely, however, need to include payment terms and dispute resolution provisions. Likewise, a licensing agreement is unlikely to entail terms related to job duties or hours, but may require an entire section devoted to intellectual property rights. Like many other templates, contract templates offer the most value when they are carefully customized. Rather than relying on a one-size-fits-all strategy, customize the terms to better address industry needs like: The above examples are just a few of the many, many industries that benefit from customized contract templates. As businesses continue to expand and diversify, the need for contract templates that address emerging industry-wide needs will only continue to grow.
Contract Negotiation Mistakes to Avoid
Many businesses make the mistake of not drafting a comprehensive contract or relying on a verbal agreement. A poorly written or incomplete contract is often incomplete, vague, or missing entire sections. And using a standard preprinted contract can be just as risky. Vague language and missing clauses can lead to significant problems for all the parties to the agreement. At worst, a poorly written contract can lead to costly and time-consuming litigation. Here’s a closer look at some of the most common mistakes that can lead to contract disputes:
Bypassing Critical Clauses
Most verbal contracts are missing essential pieces of information, or at least poorly communicating it, which could lead to a breach later on. Having a well-written contract can avoid issues with:
Breaching Confidentiality
Often one party will learn confidential information concerning the other party. That breach of trust could be dependent on a poorly drawn contract. While both parties may have every intention of maintaining that confidentiality, unless there is a specific clause addressing the issue, it may be difficult to argue in litigation that confidentiality was implied or understood .
Overlooking Indemnification
A indemnification clause is extremely important when it comes to dealing with breaches of contract, negligence, incorrect advice, or misrepresentation. Without it, indirect damages can result in a costly situation.
Ignoring Dispute Resolution Procedures
Almost everyone expects to renegotiate certain pieces of their contract or possibly break it entirely, but unless there is a strong dispute resolution procedure in place, you could be left hanging during a disagreement. Dispute resolution procedures should be spelled out and agreed upon by all parties before any work is started to avoid a long and messy litigation process.
Courts consider a qualified contract template like having a predefined road map, which means that you will immediately have a clearer path to negotiation and end conflict. A standard contract can help avoid all those costly mistakes before they even happen, not to mention saving you a lot of time down the road.
Contract Negotiation Tools and Resources
The digital age has offered a plethora of tools that can vastly improve your contract negotiation process. Negotiation checklists are a vital start to help you keep track of what’s been agreed upon and what still needs to be finalized. Software solutions like Clawpack help legal professionals through the entire contract process by providing mining, tracking, and analysis tools.
More sophisticated tools even go so far as to offer artificial intelligence assistance to help you determine which clauses you should consider not just recommending, but requiring in your contracts. Various online service providers also offer consulting services to help you with your negotiation process.
Successful Contract Negotiation in Action
In the fast-paced, competitive business world, mastering contract negotiation can sometimes be the most critical factor for success. Many organizations have turned to negotiation templates as a basis for cyclical or repeat negotiations, and the results can be telling. Here we will talk about a selection of practical examples where contract negotiation templates were leveraged and discuss the results for the parties.
Market Research for a Fortune 500 Company
In one such case, a Fortune 500 market research company entered into a long-term agreement with a consultancy agency for the latter to provide various market research and analysis services. The agreement was divided into two separate phases; the first phase dealt with the broad outlines for future conduct of business and was essentially a ‘letter of intent’ while the second phase contained the specific details for the project at hand.
For the first phase, the company used an industry-wide template that had been slightly modified by the company to suit its needs. This template contained industry standards within which the company was relatively comfortable and did not deviate too much from the other agreement templates it had already used. As a result, although both parties spent an inordinate amount of time on the negotiations, they were able to close the deal without any major issues.
However, for the second phase , the template selected by the consultancy was brand new and contained some novel provisions that were not customary for the industry. The crucial part of the agreement was a covenant not to solicit the employees of either company for a four year period. A hallmark of the company’s strategy was to develop its employees and if the consultancy could use these developed resources without any restrictions, the entire company would be put in jeopardy.
The company refused to back down on this clause, but the consultancy refused to modify the clause. After some back and forth of trying to convince the consultancy that this provision would be detrimental to the agreement, the company refused to counter a final proposal by the consultancy and exited the negotiation.
On the face of it, the company seemed to have lost the negotiation, however a few months later, that same consultancy attempted to hire a department head from the company. The company refused to let the employee leave and utilized the resources at its disposal including its legal team to prevent the consultancy from hiring the employee. The company then offered the employee a raise to stay and a promotion to head of department. This was a clear sign to the consultancy that this particular company was hundreds of thousands of dollars and years of experience in training and developing employees behind and that it was not a good idea to cross the company in its long-term plans.
Lessons Learned
This case shows the importance of retaining experienced negotiators and attorneys that can leverage the knowledge of the industry to help an organization close a deal. It is Billable Hour’s understanding and experience that the majority of contract negotiations go off the rails because of unmarked assumptions.