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10 Things to Think About When Someone Hands You a Contract

3.31.2011

Contracts are part of life for every business owner. If you are serious about your business, you will need to take a serious approach to understanding, negotiating and performing the contracts that are presented to you. Here's a list of 10 things you should consider when someone hands you a contract.

  1. Establish expectations. A contract should establish the parties' expectations for the relationship. This is just as important as the payment terms or your ability to get out of the contract. If you sign a contract that doesn't reflect your expectations, the relationship is destined for failure. For example, if you're negotiating a manufacturing agreement and you expect the total cost to include retail-ready packaging, but the manufacturer expects to charge $2.00 more per unit, you have a problem. If the parties' expectations are not aligned, you may be better off finding another manufacturer.
  2. Keep it simple and clear. Contracts in any industry can be very complex. Sometimes the complexity is necessary, but not always. If possible, try to use contracts that say what you mean in a simple, concise and clear manner, but be sure not to oversimplify. If both parties understand what the contract means, you've hit the mark.
  3. Everything is negotiable. Everything is negotiable—even terms that the other party tells you aren't negotiable. You're not likely to get everything you want, and if you push on things that are extremely important to the other party, you may lose the deal, but you will quickly learn where there's flexibility. Part of the art of negotiating is identifying the things that are important to you and the other party, and finding a middle ground. If an important point becomes non-negotiable—a "deal killer"—then you may have to walk away from the deal.
  4. Be willing to walk away. This is very important and, sometimes, it may be your only leverage in negotiating a contract. Leverage—the principle of using a small advantage or even merely a perceived advantage to gain a benefit——is critical in contract negotiations. Sometimes the only leverage you will have is the ability to walk away from a deal. If you indicate you're willingness to walk away, the other party may be more willing to negotiate terms in your favor.
  5. If you don't understand something, ask. Contracts are legal documents often drafted by lawyers and usually include confusing language or concepts. So, don't be afraid to ask a question if you don't understand what something means (remember, there are no stupid questions). If you sign a contract, it's binding whether you understand it or not. Understand what each provision means before you sign it.
  6. Use a qualified lawyer if you can. While lawyers can be expensive, they can also save you money and aggravation in the long run (and the short run). A lawyer can help you understand the contract and negotiate terms in your favor. A qualified lawyer will know your industry and which terms should be negotiated. Avoid using a friend or relative who is a lawyer, but doesn't specialize in contracts or your industry—you may end up paying for it down the road.
  7. Put all deal terms in writing. It's surprising how many times you may hear "just trust me" when you're negotiating a contract. That's a negotiating tactic—an appeal to your emotions—often used by people who don't have a legitimate negotiating position. All your important deal points should be in the contract and not left to "trust." These include: (a) the reason for entering the contract; (b) what you agree to do and what the other party agrees to do; (c) when these things are supposed to happen; (d) what the financial terms of the deal are (e.g., how and when you get paid); (e) how you get out of the deal if something goes wrong; and (f) how long the deal lasts.
  8. Don't make assumptions. Don't assume anything when drafting or negotiating a contract. Spell out all the key assumptions in the contract. For example, if you're negotiating an agreement with a marketing firm and you really want a particular person in the firm to work on your account, don't assume that the firm will assign that person to do you work. If it's important to you, specify in the contract who you want to service your account.
  9. Pay attention to "boilerplate." Boilerplate refers to the standardized, formal language in a contract that is often located at the end of the contract. Boilerplate provisions affect your legal rights and are binding when you sign the contract even if you don't read them. Be sure you read and understand these provisions, and negotiate them if you don't like what they say. Examples of boilerplate provisions are: (a) requiring the loser in a lawsuit to pay the other party's legal fees; (b) requiring a lawsuit to occur in a selected state (which may be far from where you are); (c) prohibiting transfer or assignment of the agreement; (d) specifying which state's law controls the interpretation of the agreement; and (e) requiring arbitration.
  10. Understand your business. Translating your business deal into a contract requires a good knowledge of the customs and nuances of your business. If you don't already have an intimate knowledge of how your business works and how deals are structured, talk to others who have done similar deals. If you don't know what's customary in your industry, you may not end up with the best contract.


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