Negotiating an Agreement – Pitfalls to avoid
We all form contracts every day. Not all contracts need to be in writing (though some, such as some land contracts, do). When you buy a loaf of bread from your local shop, you offer to purchase it, the offer is accepted by the baker, you pay them your money and acquire your loaf. Congratulations, you have successfully entered into and performed a contract.
Of course no-one would normally require to put this sort of contract in writing. But what about if you open a baker’s shop and want to buy a thousand loaves a week from your supplier, who may offer you discounts for bulk purchase, and stipulate terms for payment? These sorts of agreements can go badly wrong if you don’t have the terms of the contract written down.
So what are some of the things to bear in mind when you are in business and negotiating a contract?
Who are you negotiating with?
Does the person representing the other party have the authority to negotiate with you? There have been cases where the person negotiating has no right to do so – this can affect the validity of your commercial agreement.
Should your negotiations be kept confidential?
If you are negotiating about a sensitive matter – for example to sell your business to a competitor where you don’t want your rivals to know what you are doing – then, ensure that a confidentiality agreement is signed before starting negotiations. A confidentiality agreement (also known as a non-disclosure agreement or NDA) should be signed before giving away any business sensitive information. The agreement should stipulate that information disclosed during negotiations:
- Is confidential.
- Should only be used for a stated purpose.
- Should not be shown to anyone else.
- Should be returned or destroyed if the deal does not go ahead.
Are you sharing business sensitive information?
- Take legal advice before handing over any business sensitive information. It can be unlawful to hand over certain types of information, such as personal data about customers or employees.
- A confidentiality agreement may give some protection, but it must be signed before anything is handed over.
- Consider whether the other party actually needs the information or whether they are simply on a fishing expedition, trying to find out more about you for their own purposes.
Do not exaggerate or mislead the other party
If you exaggerate or mislead the other party during negotiations, even if you don’t men to but have been careless in providing information, then the contract may be undone and compensation may payable.
Be careful if you offer or accept inducements
The Bribery Act 2010 is very wide in its application, particularly if you are dealing with a government or public office.
The penalties for committing an offence can be very significant. For example, even failing to prevent bribery can lead to an unlimited fine.
Might the other party try to poach your employees or customers?
If the other party has access to your business’ customers or employees, consider asking them to sign a non-poaching (or non-solicitation) agreement. This stops one party from approaching, for example, the employees, customers or clients of the other party.
Take care before signing any pre-contractual agreements
- If a business is negotiating a big or complex deal, it may be asked to sign a summary of the main terms before the main contract is agreed. This document can be called heads of terms, a term sheet or a memorandum of understanding.
- Take legal advice before signing any pre-contractual agreement. Even if the agreement is not meant to be legally binding, it may create legal obligations. In any event, it can create strong moral obligations which can affect a business’ negotiating position later on.
Do not enter into a contract by mistake
- As we said above, a contract does not need to be signed and in writing to be binding. For example, a business can enter into a binding contract over the phone or by e-mail. Starting to perform aspects of the contract may also indicate acceptance of the last terms offered.
- To help clarify that negotiations are still ongoing, mark all correspondence “subject to contract” or “not legally binding”, until you are sure you are ready to sign up
Good fences make good neighbours, and good contracts can make good business for you. We are happy to advise on your contracts, and assist with negotiationsGeneral