By Natalie Lewis, a solicitor for the corporate and commercial team at MLP Law
Many businesses wrongly assume that contract negotiations are only important to large corporations. The truth is that even small businesses need to make sure that all contracts are legally water tight. If a micro business loses its biggest contract, this could force a company to go under. With this in mind, I will discuss the drawbacks that business owners should avoid when negotiating contracts.
Negotiating the legal terms of a contract can be complicated if not done properly but it is vitally important that discussions take place to protect both parties involved. Regardless of the size of the business, small, medium or large, all persons involved in the negotiations should fully understand every aspect of the process so that the end agreement is legally sound.
The person representing either party should have authority to enter into negotiations on behalf of the company. If this is not the case, then the terms of the contract may not be binding.
Before passing on any sensitive information, it is important to seek legal advice as it could be unlawful to hand over certain kinds of data such as personal information about employees or clients. A confidentiality agreement may protect this information but this must be signed before anything is handed over.
Information can be withheld and then given later on in the transaction or when the contract has been finalised.
If negotiations are to be kept confidential, make sure that a confidentiality agreement is signed before negotiations even begin. This is called a Non Disclosure Agreement (NDA). This will ensure the privacy of any sensitive information that is shared during the process.
An agreement should make it clear that any information that is revealed in negotiations is to be kept confidential, not revealed to anyone else and only used for the known purpose. If the deal does not go ahead, then all information should be returned or destroyed.
The Bribery Act 2010 sets out a number of offences including being bribed yourself, bribing another person, bribing a foreign public official and even failing to prevent bribery. If a business is involved in any of these offences, it could face serious consequences. For example, ailing to prevent bribery can lead to an unlimited fine.
If the other party has access to the business’ employees or clients, 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 include provisions that require the other party to agree not to enter into competition with the company by setting up a similar business.
Do not mislead
If a company has been misled during the negotiation process then this could result in the contract being void and compensation could be payable. To avoid this from happening, all factual claims and expressions of opinion should be made clear and distinguishable.
Legally binding contracts
For a contract to be binding, it does not need to be signed in person. A business can enter into a binding contract over the phone or by email. Also, beginning to perform aspects of the contract may suggest that the business accepts the last terms that were offered.
In most commercial situations, it is usually assumed that all parties intend for the agreements to be legally binding. If negotiations are still ongoing, then all correspondence should be marked as ‘subject to contract’ or ‘not legally binding’ to make this clear.
When the contract negotiations involve a large or complex deal, a business may be required to sign a summary of the main terms. This document may be referred to as a memorandum of understanding, term sheet or heads of terms.
Before signing any pre-contractual agreements, it is advisable to seek legal advice as these agreements can create strong legal and moral obligations. Although they may not be legally binding, they can greatly affect a business’ negotiating position.