In this fast-paced corporate environment where closing contracts quickly is paramount, many businesses skip legal review to get the deal done. Unfortunately, every contract, no matter how simple it seems, can hide many small oversights that may lead to major setbacks and financial consequences. Understanding these potential pitfalls is essential for business success.
Want to ensure you’ll come prepared to the negotiating table? Here’s a list of four common contract negotiation mistakes you must be able to identify and avoid.
- Unclear Objectives
The first mistake negotiators make is entering discussion without having a clear idea what they want to achieve by signing the contract. This lack of coherence can lead to confusion and compromises that don’t align with your company’s objectives.
The solution is simple enough: before the start of the negotiations, define your organization’s priorities and primary objectives. Identify areas where you can be flexible and terms that are non-negotiable. Being aware of your key goals will help steer negotiations in the right direction, allowing for a more productive and targeted discussion.
- Indemnification Issues
The purpose of an indemnification clause is to pre-determine how potential losses will be distributed between the two parties. Many states have stringent rules on enforcing these clauses, which can lead to lawsuits over issues like negligence or willful misconduct.
In general, some clients may seek broad indemnity clauses to shift legal risk and financial liability to a service provider. If you notice that the indemnification is too one-sided, push for limiting the clause to third-party claims. Avoid agreeing to pay for the client’s costs of setting or litigating third-party claims unless you’re contractually obliged to do so.
- Lack of Research
When signing a contract with another party, it’s essential to research their legal requirements, industry benchmarks, and key processes. Not doing so puts you at a disadvantage during negotiations, which can lead to agreeing to unfavorable terms.
Conducting comprehensive research involves understanding the other party’s history, reputation, and even negotiating style. Ensure they have a good grasp of regulatory and legal prerequisites to avoid non-compliance issues. Analyze industry norms and standards to come up with correct benchmark terms and conditions.
- IP Protection
In recent history, there have been plenty of examples of knowledge theft in business partnerships. This is why both parties should focus on protecting their preexisting IP rights and limiting their exposure to infringement claims.
The best way to do this is to add clear provisions regarding IP ownership issues to the contract. Service providers should protect and retain their existing technology and processes. Clients should establish who can use existing data. Finally, both parties should clarify who has the rights to the new materials created during the partnership.