Contract Negotiations – Pitfalls to Avoid

In this article we consider some of the major pitfalls and issues that may arise 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, 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 shown only to those who need to know (possibly named individuals only) within the receiving organisation.

• Should be returned or destroyed if the deal does not go ahead.

The organisation receiving confidential information should check that the NDA does not go further than is needed.

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, or data relating to sensitive areas such as defence. If information is highly sensitive its disclosure should be approved at the highest level in the disclosing organisation.

• A confidentiality agreement may give some protection, but it must be signed before anything is handed over. Consider to whom information is to be disclosed in the recipient organisation.

• 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 misleads the other party during negotiations, the contract may be undone and compensation may 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 asking them to sign a non-poaching (or non-solicitation) agreement. This forbids a party to approach, for example, the employees, customers or clients of the other party. However, it can be hard to enforce.

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.

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. 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”.

Points to consider in international situations

• In some countries decision-making authority is reserved to the highest levels in the company. In such cases, consider carefully the authority of the other side’s negotiator. What seems agreed may, in fact, be subject to the CEO’s approval.

• Consider anti-corruption legislation in the country or countries concerned. Failure to comply may not only attract fines but can lead to the withdrawal of permissions and stop the business trading in that country. In some countries individuals involved in corruption, or who should have prevented it, may also be liable to prison terms.

• Consider local business culture and practice in relation to contract and commercial matters. In many countries written contracts count for much less than they do in the UK. Pre-contract promises or actions may be relied on and, in practice, treated as binding despite the absence of a written contract.  If handled wrongly, such situations can render a particular country closed to a business for years.

This article just provides an overview of the law in this area. Our specialist solicitors in the corporate and contracts department at Chadwick Lawrence would be delighted to discuss matters with you for a complete understanding of how the above may affect your particular circumstances.