Contract negotiation and preparation tips
Updated: 6 December 2019
Here are some essential contract negotiation and preparation tips to keep handy
In a hurry? Jump ahead.
MOU for the first proposal
The first proposal might appear in a memorandum of understanding (MOU) and you’ll want to make sure that you have a statement like the one below if you haven’t received legal advice yet.
"The parties do not intend for this document to be legally binding.
Each party will seek legal advice about the terms in this MOU.
Both parties acknowledge and agree that some of the MOU terms may change accordingly".
So should you get a lawyer on board at this point?
When to get a lawyer’s help
I recommend you get a lawyer's help once there’s a firm idea of the key terms that the parties want in an agreement.
Next, you'll get to the formal legal document. So who prepares this?
Who prepares the legal document?
In some cases both parties have equal information about an area.
For example, you've both got an MOU ready.
And, in this case, it doesn't really matter who prepares the formal legal document.
The recipient can always ask their lawyer to review and make revisions on their behalf.
But in some cases, one party will have more information.
Typically, in a sale situation, the seller knows more about what's being sold so its appropriate for them to prepare the sale terms..
If you are negotiating a contract where you have different interests to the other party, then you should each have separate lawyers.
Here's a good example: you are the director of a company negotiating with the director of another company.
As both you and the other director have a duty to act in the best interests of your respective companies, you should get your own lawyer's help.
Lawyer to talk to lawyer?
It can be more personable to deal with your contact directly rather than having all correspondence go through lawyers. And, it's likely to be more cost effective as well!
So, if you prefer this method (which I know many clients do), your lawyer will draft the terms for you and you'll send them to the other party.
Now, what file format should you use (and why does it matter?) - we'll go through this next.
It is always courteous to send contract terms to the other side in a word document rather than PDF in the early stages.
Some lawyers don't afford this courtesy.
If you get a PDF for the first draft from the other party, ask for the word version or use a PDF to word converter.
You’ll only want to receive or send a PDF version of the terms when they are final, known as the execution version of the contract.
Now, it’s good practice to give the other side a time frame to get back to you if you think the other side is dragging their feet with negotiations.
And to take this a step further, within your contract you can give the other party a time frame to execute.
This can be particularly important for commercial leases; the tenant is likely to spend costs upfront for fit-out etc. In this case, you'll want an executed version of the lease returned before fit-out work starts.
Deal breakers first, always
Negotiate the deal breakers first, if they can be solved, great you can move on to the finer details.
For example, for a commercial lease, there’s no point negotiating fit-out contributions if you cannot agree on rent, rent incentives and the lease term first.
If the deal breakers aren’t resolved, you may want to walk away.
Deal breakers could be items that cost the most or are most onerous for you.
Compromise is key
Your ideal business partner will compromise, and you will too.
Watch out for red flags that might reveal future problems.
For example, a party that does not allow you to make any changes to an agreement or insisting that you pay their legal costs as well as yours.
The negotiation style of another party might be an indicator of how that other party will be in an ongoing commercial relationship.
So, if you’re talking about a 3, 5 or 10 year lease term or other long term contract, that same one-sided, take all negotiation style might carry over in other interactions so be careful.
Is it really a missed opportunity or a blessing?
If you’ve got red flags early on like an aggressive or unfair negotiation style, you might want to consider other options before you sign.
As always, get advice if you aren't sure.
I wish you every success in your ventures!