Pitfalls to avoid during contract negotiations

There is often a lot to take into consideration when negotiating a contract, particularly as it will form a legally binding agreement once it has been entered into between parties.

So what should negotiating parties consider from the outset?

The first thing that ought to be considered is does the person representing the other party have the authority to negotiate for that party?

Should negotiations be kept confidential? If negotiations should be kept confidential, parties ought to ensure that a confidentiality agreement is signed prior to commencing 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 any third parties unless agreed by both parties.

Is the company sharing business sensitive information? Parties ought o take legal advice before handing over any potentially business sensitive information, in particular it can be unlawful to hand over certain types of information such as personal data about customers of employees. Consider whether the other party actually needs the information or whether they are simply on a fishing expedition.

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 a party try to poach employees or customers? If the the other party has access to the business’ customers or employees, consider asking 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 heads of terms or a memorandum of understanding before the main contract is agreed. Parties should consider taking 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 for it to be binding. For example, binding contract can be made 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”.

More Information

For more information on contract negotiations contact Agata Rumbelow in our Company Commercial Team.

This article was written by Agata Rumberlow, a Solicitor in our Company Commercial Team. This article is only intended to provide a general summary and does not constitute legal advice. Specific legal advice should be taken on each individual matter. This article is based on the law as at April 2014.