Negotiating contracts – what not to forget

Successfully negotiating commercial contracts with suppliers, customers, and other parties can significantly impact on a business’ prosperity and future opportunities.

When drafting and negotiating a contract it is important to accurately reflect the key commercial elements, such as the price and service levels, in the terms of the contract. It is also crucial that the finer details and ‘small print’ terms are carefully considered alongside these headline commercial terms. Not checking these could cause serious legal and commercial issues further down the line.

Below we have listed some top tips for you to consider when reviewing a business-to-business contract (contracts with consumers can differ slightly, depending on the nature of the deal):

1. Fitness for a particular purpose

A contract may state that any goods supplied by you or supplied to you are fit for a particular purpose. Where this is the case, the particular purpose for which goods are supplied should be accurate, carefully considered and clearly communicated to avoid ambiguity as to what that “purpose” might be.

2. Warranties

A warranty is a promise given by either party which could relate to a variety of things including performance. It is important to be aware of what warranties you are giving and what warranties you are receiving. A breach of a warranty could entitle the other party to either terminate the contract and/or sue for damages. Often warranties are provided to say a particular product will be fit for purpose for a period of [12] months after delivery.

3. Intellectual property rights

Intellectual property rights that are created or arise during a contract could be retained by the creating party or assigned to the other party. The intention for ownership of any intellectual property rights after their creation should be clear and you should be aware that if you assign intellectual property rights to the other party, you may be deprived from using and exploiting them in the future. In software development agreements, often the developer will want to retain the intellectual property in any source code they develop, however, a customer may argue that as the software has been developed specifically for the customer, the rights in the source code should also be transferred to the customer.

4. Limitation of liability

Parties will, no doubt, wish to limit their liability to one another in relation to such things as performance or quality. It is important to ensure that the limitations are not one sided leaving you exposed to an uncapped liability or constrained by a very low limit on the other party’s liability. Furthermore you should also consider excluding your liability for any indirect losses (such as loss of profit, loss of business, loss of goodwill) because accepting liability for these could expose you to a wider claim for damages.

5. Termination

The termination rights of both parties should be considered. For example, does the other party have a right to terminate for convenience i.e. at any time during the contract for no particular reason or, would you like to have this right? How much notice are you required to give or would you like to receive from the other party. If you are being provided with services that are crucial for the running of the business, you may wish to impose a longer notice period on the supplier.

Please note that the above list is non-exhaustive and there are likely to be other factors you should consider when renewing or negotiating a contract. It is important to consider each term of the contract carefully to minimise the commercial or legal risk for to your business.

Should you require any support with reviewing a contract, please get in touch with the Commercial Team who would be happy to assist.