Contract negotiations between a business and its suppliers can be complex and often confusing. It’s important that all persons involved in the negotiations fully understand every aspect of the process so that the end agreement is legally sound.
Natalie Lewis, a solicitor for the corporate and commercial team at MLP Law, discusses some of the major pitfalls that negotiators should avoid when settling a contract.
When Phones4U experienced a major collapse and eventually entered into administration, in late 2014, much of the blame was put onto a breakdown in supplier relationship and next-generation contracts not being negotiated correctly. Negotiating the business and legal terms of a contract can be complicated and there are many ways in which negotiators can fail to secure a water-tight agreement. With this in mind, it’s vital that every member involved in these types of negotiations is aware of the pitfalls and difficulties they need to avoid.
Who should be negotiating?
It’s important to remember that all representatives from either party should have the authority to negotiate and enter into contracts on their companies’ behalf. If someone has not been given this authority, the other party may not be bound by them.
Keeping things confidential
Before starting any negotiations decide whether confidentiality is important. If negotiations need to be kept private, make sure a confidentiality agreement is signed before giving away any sensitive information. This is usually called a non-disclosure agreement or NDA.
A simple contractual obligation giving legal, evidential and practical advantages to negotiations is created when a written agreement is signed. Agreements can help focus on what needs to be disclosed, how it should be disclosed and when. It can also help with supporting a claim.
An agreement should specify that all information revealed in negotiations should be confidential, not revealed to anyone else and only used for the known purpose. It should also state that all information should be returned or destroyed, if the deal does not go ahead.
Sharing sensitive information
Before handing over any sensitive information it’s vital to take legal advice so that unlawful mistakes can be evaded. Handing over certain types of information such as personal data about employees and customers can be illegal and lead to complications.
Some protection may be given by a confidentiality agreement, but again, this must be signed before any information is exchanged.
It is possible to withhold information and hand it over at a later stage in the transaction or at the time the contract is entered into. In addition, the information could be anonymised before handing anything over.
Don’t use bribes or inducements
Never accept or offer bribes or inducements. A number of offences are set out in The Bribery Act 2010 including being bribed, attempting to bribe and even failing to prevent bribery. Businesses can face major penalties, such as unlimited fines, if these rules are ignored.
Don’t mislead the other party
If any party is misled during contract negotiations, the contract may be undone and compensation may be payable. Therefore, it’s important to make sure you distinguish between expressions of opinion and factual claims. Even if pre-contractual negotiations are excluded they can sometimes still be relied upon.
Sign a non-poaching agreement
In order to prevent the other party from approaching employees, customers or clients of your business consider asking them to sign a non-poaching (or non-solicitation) agreement. Like a confidentiality agreement, it has legal, evidential and practical advantages.
It can also cover non-compete provisions. This is when one party agrees not to go into direct competition with another party by starting a similar business.
Take care with pre-contractual agreements
Before the main contract is agreed a business may be asked to sign a summary of the main terms, especially if the deal being negotiated is particularly complex or larger in scale. This document can be referred to as a head of terms, term sheet or memorandum of understanding.
Remember to seek legal advice before signing any pre-contractual agreement. These types of agreements can create strong moral and legal obligations, even if they don’t propose to be legally binding.
When is a contract binding?
A contract does not need to be in writing or even signed for it to be legally binding. For instance, a business can enter into a binding contract over the phone or by email. The formation of a completed contract is absolute when the four basic elements are satisfied. This includes the offer, acceptance, consideration and intention to create legal relations.
In many commercial circumstances there is a rebuttable presumption that the parties intend their agreement to be legally binding. Clear evidence must be provided if the party wishes to rebut this presumption. You can clarify that negotiations are still ongoing by marking all correspondence as ‘not legally binding’ or ‘subject to contract’.
For more information, please visit www.mlplaw.co.uk