A popular belief about contracts (of any type):
Boilerplate language. Legalese. Lawyer mumbo-jumbo. Most of the language doesn't mean anything or have impact in the "real-world" of business - the commercial terms are the essence of the deal. Focus on rate / payment terms / delivery / length of contract and that's all you need. The rest is "standard" - get it done, get it signed!
WRONG.
As the first in a series of upcoming blogs relating to contract terms and what they REALLY mean, here are some down and dirty tips to consider PRIOR to negotiating or signing a contract of any type:
1) In discussions, even preliminary, "feel it out" type discussions, is there any chance that confidential or proprietary intellectual property information will be disclosed? If yes, then STOP all discussions and get a signed Confidentiality Agreement in place. Why? You need to protect the intellectual property and confidential information owned by your company. If you willingly disclose confidential information without an agreement, it is no longer confidential. If intellectual property is not protected by a patent, then such information may be free for use by the recipient. Why give away unknowingly your company's assets?
2) Do you have the "right" players? To achieve your mutual goals, have you assembled the proper people? If you have the correct people, have you ensured that they have the proper legal authority to bind their company in contract and for the type of contract that you require?
3) What is the commercial leverage - bargaining positions of the parties? How can the leverage or lack of leverage impact the negotiations of a contract? Can this be strategically corrected by "volleying" the first draft of an agreement? Can historic contracts be used as precedent? Can potential future business be used as an additional incentive? Is there a creative way of structuring the deal to level the playing field?
4) What are the tasks to be accomplished? Are you buying or selling products? Services? Are you engaging in development activities, or could you be? What is the timing? How will it be marketed and sold? How will liabilities be assumed between the parties? The answers to these questions will dictate what type of contract that you need as well as the critical contents of the contract.
5) What are possible complications? Is there an international presence that could mean expensive litigation if a dispute arose? Is the product going to be covered by express warranties, and those implied under the law? Could it's use or misuse be dangerous to the public? Is it technically challenging to manufacture? Will there be numerous players utilized in the manufacture or assembly? What if the services are critical and they are not completed in time?
6) If it all goes badly, how can your company get out? Are there alternative sources? What would exit expenses look like and how will the expenditure affect profitability, launch or your internal budget? Does it impact your company's obligations to customers and are there financial consequences? Does the company have the ability to get its money back? Can you negotiate a deposit that can be forfeited or secure a letter of credit that can be drawn upon? Can you negotiate indemnity from a party to the agreement (where they would make your company "whole" for all expenses related to their wrongdoing)?
It is important to consider many questions like those highlighted above and discuss them not only with your commercial team, but with your lawyer. Careful pre-contractual consideration and planning will result in better negotiations and, more importantly, commercially and legally stronger contracts. Protect your company by being pro-active!
