Contract Negotiations: What Small Business Owners Need to Know
Legal expert Natalie Lewis lists seven pitfalls that entrepreneurs should avoid when negotiating contracts
Ensuring that contracts between a business and its suppliers are legally water tight is important for a company of any size but especially so for small enterprises and start-ups as costly and time-consuming legal battles could quickly result in closure for cashflow-restricted small firms.
Negotiating the business and legal terms of a contract can be tricky and yet it’s essential that it is carried out to protect both parties involved and it’s vital that the people involved know how to deal with all aspects of the process.
Here I have put together seven guiding steps to help you understand who and what is involved when setting up a contract with a supplier to help you avoid any potentially fatal legal fights.
Confidentiality and your business-supplier contract
For negotiations that need to be kept confidential make sure a confidentiality agreement is signed before starting. A non-disclosure agreement or NDA should be signed before giving away any sensitive information.
A written agreement creates a simple contractual obligation giving legal, evidential and practical advantages to negotiations. This agreements can later assist with supporting a claim, but can also help parties to focus on what needs to be disclosed, how it should be disclosed and when throughout the negotiation process.
The agreement should specify that all information divulged in negotiations should be confidential, only used for the stated purpose and not revealed to anyone else. It should also state that if the deal does not go ahead, all information should be returned or destroyed.
The negotiators and sensitive company information
Any representative from the other party should have the authority to negotiate and enter into contracts on their behalf. If this is not the case, the other party may not be bound by them.
It is also highly recommended to take sound legal advice before handing over any sensitive business information, so that unlawful mistakes are avoided. It can be illegal to hand over certain types of information such as personal data about employees and customers. Some protection may be provided by a confidentiality agreement. However, this must be signed before any information is exchanged.
It is possible to withhold information and disclose it at a later stage in the transaction or to hand information over at the time the contract is entered into. The information could be anonymised prior to handing over.
As the business owner it is important not to be misleading
Make sure you distinguish between factual claims and expressions of opinion. Even if you try to exclude pre-contractual negotiations they can sometimes still be relied upon. If the other party is misled during negotiations, the contract may be undone and compensation could be payable.
Don’t face business penalties – bribes and inducements
Never offer or accept bribes or inducements. 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 these rules are ignored businesses can face major penalties. For example, failing to prevent bribery can lead to an unlimited fine.
Consider poaching to ensure your company assists are safe
Think about asking the other party to sign a non-poaching (or non-solicitation) agreement in order to stop them approaching employees and customers of the business. Similar to a confidentiality agreement it has legal, evidential and practical advantages. It can also cover non-compete provisions, which is when one party agrees not to enter into competition against another party by starting up a similar profession or trade.
Pre-contractual business agreements
A business may be asked to sign a summary of the main terms before the main contract is agreed if the deal being negotiated is larger in scale or particularly complex. This document may be referred to as a term sheet, memorandum of understanding or heads of terms.
Remember, it’s advisable to take legal advice before singing any pre-contractual agreement. Even if the agreement is not proposed to be legally binding it can create strong moral and legal obligations, which can greatly affect a business’ negotiating position.
For a contract to be legally binding, it does not need to be in writing or even signed. The formation of a contract is complete when the basic four elements are satisfied; offer, acceptance, consideration and intention to create legal relations. For example, a business can enter into a binding contract over the phone or by email.
In most commercial circumstances there is a rebuttable presumption that the parties intend their agreement to be legally binding. If a party wishes to rebut this presumption they will have to produce clear evidence to that effect. By marking all correspondence as ‘subject to contract’ or ‘not legally binding’ you can help clarify that negotiations are still ongoing.
For more information on company and business contract laws, including guides and tips on other legal and legislation issues, take a look at our sister site’s advice section here.
This guide was written by Natalie Lewis, a solicitor for the corporate and commercial team at MLP law MPL law