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Six legal issues to address when negotiating contracts


Large businesses that are used to negotiating contracts on a day-to-day basis will no doubt be familiar with the legal pitfalls involved.

They may have dedicated procurement departments handling negotiations and teams of contract lawyers poring over the fine details of any legal documentation.

But for SMEs, contract negotiations can sometimes seem daunting, particularly for businesses where the management team is less experienced. Here’s a quick guide to the main legal issues you need to be aware of when negotiating contracts with other businesses.

Be clear about confidentiality

Some negotiations are more sensitive than others, so all parties should be clear at the outset about information that should be kept confidential. A confidentiality agreement (sometimes known as a non-disclosure agreement) 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 anyone else
  • Should be returned or destroyed if the deal does not go ahead

Ensure you’re not disclosing business sensitive information

Take legal advice before handing over any business sensitive information. For example, it can be unlawful to hand over certain types of information, such as personal data about customers or employees.

A confidentiality agreement may give some protection, but it must be signed before anything is handed over. Consider whether the other party actually needs the information or whether they are simply trying to extract information that might give them a commercial advantage.

If 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 the employees, customers or clients of the other party.

Beware bribery in all its forms

This almost goes without saying, but these days it’s no longer just a case of ‘Thou shalt not offer or accept bribes’. Under the Bribery Act 2010 a person or business could be committing a serious offence by failing to prevent bribery and can potentially face unlimited fines. This creates grey areas, such as where the company supplying your goods and services uses contractors and subcontractors.

The Ministry of Justice’s guidance says you only have to perform due diligence on those who actually supply goods or services to you. Organisations are not liable as long as they tried their best to prevent bribery. This means having strong systems in place discouraging bad behaviour. These could include providing anti-bribery training to staff, carrying out risk assessments for certain markets, or checking the people’s backgrounds.

Do not exaggerate or mislead

Contract negotiations are often tense affairs where the pressure to seal the deal can create a temptation to overstate your business capabilities or performance. However, if a business exaggerates or misleads the other party during negotiations, the contract may be rendered invalid with the wronged party entitled to compensation.

Take advice before signing any pre-contractual agreements

It’s not uncommon for businesses negotiating a contract to be asked to sign a summary of the main terms of the deal before the main contract is agreed, particularly during large or complex deals. This document is often referred to as a heads of terms or a memorandum of understanding.

It’s vital that you take legal advice before signing any pre-contractual agreement. Even if the agreement is not meant to be legally binding, it may create legal obligations that affect a business’ negotiating position.

Beware the risk of entering into a contract by mistake

Contrary to popular belief, a contract does not need to be signed and in writing to be binding. For example, a business can enter into a binding contract 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, businesses may mark correspondence “subject to contract” or “not legally binding”.

As always, we recommend speaking to your professional advisers to ensure you have the right documentation in place, along with robust systems and procedures to help your contract negotiations run more smoothly.

For more information on contract law, or any other commercial legal matter, contact Harrison Drury on 01772 258321. 

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