6 Tips for Successfully Negotiating Small Business Contracts

Thursday, 21 June 2012 Written by Randy Papetti

 

Small BusinesS Contracts article

Tips on Lawyering Up from a Lawyer.

People generally assume that the contracts they sign are clear, contain provisions that both sides understand the same way, and that there are straightforward mechanisms to enforce the contract if one party defaults. The unfortunate reality is that people, including sophisticated entities, even lawyers, enter into contracts all the time that they do not fully understand, sometimes with disastrous consequences.

 

Perhaps much of the problem stems from the mindset people have when they enter into contracts -- i.e., they want something, the contract is viewed as a prerequisite to getting that something, so in their haste they often gloss over the fine print, the hard issues, the difficult questions, and completely excuse themselves from any intensive “what if” analysis. 


Many, many contract disputes are entirely avoidable with more work on the front end. Here are a few lessons I have gleaned as a lawyer:

1. Negotiate In Person

People who get together to prepare deal points, review drafts, talk through issues, etc., get their contracts done faster, cheaper and with a much greater mutual understanding than those who zip things back and forth on email, with the occasional phone call mixed in.

2. Use Intermediaries as Little as Possible

This can lead to problems later on, including disputes about what was really intended with respect to certain provisions of the contract. This advice is not at all that lawyers should be avoided, but no one should be surprised that problems later arise when it was lawyers who handled most of the pre-contract negotiations, who did all the drafting, and who were the ones communicating directly with each other rather than the parties whose understanding actually mattered.

3. Outline the Consequences of Breaking the Contract

That is not always possible, but it can go a long way towards discouraging breaches and simplifying any subsequent dispute. The “What Happens If You or I Breach” conversation may be uncomfortable, but it can avoid a lot of problems down the line.

4. Be Reasonable When Controlling Most of the Contract Terms

Heed the old saying that “Pigs get fat, hogs get slaughtered.” Do not include draconian provisions in your agreements -- for example, unjustifiably long and broad covenants not to compete; or provisions allowing you to unilaterally change the terms of the agreement after the contract is entered into.

5. Focus on the Less Material Terms of the Agreement

For example, salespeople often focus almost exclusively on terms concerning their commissions or other compensation. But the agreement may contain provisions dictating that the salesperson’s customers are the customer’s of the company and that the salesperson may not contact the customers for months after severing the relationship.

6. Use Lawyers Wisely

Use them for: Explaining Provisions, Suggesting Ideas, Helping to Clarify Language, and Making Sure You Have Thought Through What May Occur During the Life of the Agreement

If you own your own business, you should make the time to identify a lawyer who you can run contract issues by as needed -- such assistances is usually not very costly and can be surprisingly helpful. Lawyers can make sure you do not propose or agree to invalid provisions, help reduce ambiguity, and help you fully understand the implications of the entire agreement.

The contract must be yours, you are the one that will have to live by and with it, so attorneys should generally not handle negotiations, drafting and communications with the other side except with your direct participation. The point of all of this is that since we all agree that contracts matter, they merit closer, more thoughtful attention than many often give them.

Randy Papetti is a Partner and Practice Group Leader of Lewis and Roca's Litigation section, which includes more than 100 lawyers in five offices. His practice focuses on trial work, commercial litigation and antitrust counseling. Randy has significant experience in commercial disputes involving complex finance, economic, and accounting issues. For more information, please visit www.LRLaw.com/papetti or contact him at This email address is being protected from spambots. You need JavaScript enabled to view it.

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