April 10, 2024

Negotiating Contracts: When to Compromise and When to Stand Your Ground

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Every week, there is a contract—or six—that hits my desk for review. After I read it initially, I prefer to have a quick conversation with my clients to understand where the contract fits into their business and how important the relationship with the vendor/supplier/consultant or service provider is because that will inform how we approach negotiations. I also ask about the people involved because that matters too. Then we come up with a list of “have-to-haves.” What I can’t stand though, is a company on the other side that doesn’t take that approach itself and instead will go to the mat on something really petty or refuse any changes to their “form” (although this is expected when it’s a big vs. little scenario). It’s not only aggravating but certainly starts the relationship off on a sour note. No matter what the other side says or threatens (“we don’t generally agree to [fill in the blank]”), these are the things you shouldn’t “give” on and a few that you can negotiate.

Don’t “Gives”

1. Intellectual Property Rights. This should be spelled out carefully. For example, if you are using anyone’s trademarks or materials, make sure you have the right to use them during the contract term. On the other hand, if you are providing services, deal with whether what you are producing will be a “work made for hire” or not. If you are working together on something, how will you split up the rights if one of you produces something that you both intend to use? Don’t let the contract be silent on these issues.

2. Indemnity. If there is an injury (physical or otherwise), how do you determine who is responsible? Indemnity must be mutual—don’t get bullied into accepting a contract where only your business will indemnify the other. If they are supplying you with materials, ensure they are responsible if a third party says they don’t own the materials they gave you.

3. Termination. I see contracts all the time that either can’t be terminated or are terminable only by the other party. Make sure it is clear under what circumstances either party can terminate and, more importantly, what happens to any items or inventory in your possession when the contract ends.

4. Confidentiality. This is critical and should go both ways most of the time. There are exceptions, but make sure your proprietary info is protected.

5. Assignment. If you intend on selling your business at some point, make sure the contract is assignable, at least with notice.

6. Insurance. Boring, we know, but important. Depending on what’s being done in the contract, some level of insurance is likely needed.

7. Delivery. In a contract for goods, who pays for freight, and what inspection rights are needed in the agreement? Silence is not your friend here.

8. Some Form of Dispute Resolution. I always want my clients to have an opportunity to settle a dispute out of court. This one is worth fighting for.

Can Compromise

1. Choice of Law/Venue. They want you to come to their state, and you want your state’s laws. Pick a neutral location. It’s easier than going back and forth. The only exception is if you are dealing with someone overseas, you must have U.S. law (any state will do).

2. The Type of Dispute Resolution. I prefer mediation generally, but if the other side is tied to arbitration, I’m okay with that. However, in a consumer contract, make sure mandatory arbitration has the necessary safeguards.

3. Non-Solicitation/Exclusivity. This is a critical business issue, but you can definitely massage this. Keep abreast of the law on this though, because even in business contracts, non-solicitation and non-competes may be on the bubble. Stay on the lookout for updates from us on this.

4. Payment Terms. These should work for both parties. Make sure there are late fees built in, but you can discuss what that looks like.

5. Length of Contract. How long a contract should run initially and its ability to auto-renew is something you can feel safe negotiating.

6. Force Majeure. The type of events that give rise to acceptable reasons a party can’t perform can vary in the kind of services and the length of the contract. Payment obligations are always the exception here.

The Takeaway

Contracts may all look the same, but they aren’t. Negotiating them is an art form, requiring a blend of strategy, psychology, and a bit of good old-fashioned common sense. I have created a handy contract checklist that you can download here.

When in doubt though, always call your lawyer—it costs so much less to do a quick consultation than what you will ultimately pay if there is a dispute. Good luck and happy negotiating!