I would like to share with you eight basic yet powerful tips that can help even a beginner conduct a more solid contract review and negotiation. While these tips are by no means comprehensive, following them can save you a lot of headaches and expensive mistakes.
- Read the contract. Every single word. Make sure you understand it. While this may seem obvious, it is amazing how many people sign serious contracts without reading them fully, let alone understanding them. You could be signing away your first born baby without realizing it.
- Ask questions if you do not understand something. Often times, we are afraid to ask questions because we do not want to look foolish. Go with the "no question is a dumb question" mentality and it will serve you well. More importantly, sometimes clauses are thrown into contracts that either do not actually make sense, or are not specific enough for the meaning to be fully clear to either you or to a court. In this case your question should lead to a revised and improved clause.
- A contract should represent a "meeting of the minds." A contract lays out how two parties understand their relationship. If a contract says something, but the counterparty does not realize it, then having it written down is only partially helpful. Just as important as making sure you understand the contract, is making sure that your counterparty understands it so that they are aware of what is expected of them, and what they have agreed to.
- Sometimes more important than the terms of the contract themselves is the understanding that you gain of your counterparty during the negotiation. Are they patient? How sophisticated are their answers to your questions? Do they seem tricky, or straightforward? Is this someone that you can trust and that you want to deal with in the future with potentially a lot of your company's assets at stake?
- In line with the last point, be very wary of someone who is trying to push you to sign the dotted line too quickly, without legitimate reason. There is a really good chance that they are trying to do something tricky. If someone wants to rush you, it's okay to step back and assert that you will need to take a certain amount of time. Any reasonable business person would accept that, barring a legitimate reason to rush. They may, however, offer you concessions or a better deal for moving faster.
- You would never sign a blank check. Sometimes when you sign a contract, the way it is written makes it like signing a blank check. Be extra vigilant of any clauses governing the limits of your financial liability- and if there aren't any such clauses, be even more wary! As an entrepreneur who needs to control the company budget very closely, I have it written in my engagement letter with my lawyer that we will not pay any fees that have not been explicitly agreed to in writing in advance. These "letters" are contracts by the way, even if they use a friendlier word for them!
- Also be particularly aware of the exits allowed for in the contract. What is your recourse if there is a breach of contract, or if you are just unhappy with the relationship? Can you end it and what are the ramifications for doing so?
- Remember that a contract is only as good as it is enforceable. Here are three issues you could face with enforceability of contracts:
- If you write a contract which is in contradiction to the law, then the contract will not help you and could hurt you quite a bit (this fact earns lawyers much of their salaries).
- Weak rule of law in the country of either party to the contract, which is an issue particularly in emerging market environments. In such an environment, you should view a contract as important in so much as establishing the rules of the game, which if broken means that appropriate ramifications should take place. However, you should absolutely not assume that the contract will be respected, and you should strategize accordingly. The degree to which this is a concern depends on the country, and getting expert advice on your specific situation would be prudent.
- "Shallow pockets," i.e. limited financial resources, of a party to defend themselves if there is a breach of contract. If the other party knows that a company is in such a situation, they may come to the conclusion that it is less likely to be able to enforce the contract in court, and they may take advantage of the situation. The unfortunate reality for almost everyone (maybe not the lawyer!) is that it costs a pretty penny to pay a good lawyer through lengthy court procedures.
One service that SH International provides is the commercial reviews of contracts and expert negotiation assistance in the emerging markets context. Contracts within the emerging markets environment take on a completely different dimension, in great part due to the enforceability issue outlined above. The strategies that you need to employ, and the issues that you need to be diligent about, are quite different and of critical importance. You will still need a lawyer to make sure that your contract is in line with all applicable laws and regulations, but we can help structure a deal from a commercial perspective to maximize the success and profitability of the endeavor, while also minimizing risks.