What are the major pitfalls to avoid in contract negotiations?
Contract negotiations – pitfalls to avoid
This business briefing highlights some of the major pitfalls that a business needs to avoid during contract negotiations.
Who is negotiating for the other party?
Does the person representing the other party have the authority to negotiate for that other party?
Should negotiations be kept confidential?
If negotiations should be kept confidential, get the other party to sign a confidentiality agreement 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 explain that the information given:
- 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.
Is the company 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.
Do not exaggerate or mislead the other party
If the business exaggerates or mislead the other party during negotiations, the contract may be undone and compensation payable.
Do not offer or accept bribes or inducements
The Bribery Act 2010 sets out the following offences:
- Bribing another person.
- Being bribed.
- Bribing a foreign public official.
- Failing to prevent bribery.
The penalties for committing an offence can be very significant. For example, failing to prevent bribery can lead to an unlimited fine.
Might the other party try to poach employees or customers?
If the other party has access to the business’ customers or employees, consider getting 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 weaken a business’ negotiating position.
Do not enter into a contract by mistake
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, if the key terms are agreed.
To help clarify that negotiations are still ongoing, mark all correspondence “subject to contract” or “not legally binding”.