Negotiate Contracts

A contract is a legally binding agreement between two or more parties. This means that each party can legally enforce the terms of the contract against the other parties if they fail to comply with those terms. Contract negotiations involve discussing and compromising on contract terms to reach a final, approved draft of a contract that is acceptable to all parties. Some contracts are non-negotiable, as is usually the case with leases and manufacturer warranties. However, other contracts, such as business, real estate and financial contracts, may be negotiated to reach terms satisfactory to all parties involved.

Steps

Understanding Basic Contract Principles

1. Know the required elements of a valid contract. All contracts should contain the same basic elements. Although these elements can be negotiated to some degree, your contract should thoroughly address each element. These required elements include:
   • Mutual assent refers to the agreement of the parties as to all contract provisions.
   • Consideration is a benefit or detriment to one party, exchanged for the other party’s promise to do something. It is the value bargained for by the parties. Typically, consideration involves a payment by one party to another.
   • Capacity or competency means that the parties must be legally capable of entering into contracts, which usually means that they must be over 18 years of age and mentally sound.
   • Legality refers to the fact that the contract cannot contain any illegal terms. For example, a contract will not be enforced by a court if the bargained-for promise is for one party to provide illegal drugs.
2. Research contract laws in your state. Because contracts are legally binding documents, many contract terms are regulated by state and even federal law. In some cases, even if the parties agree to a certain contract provision, that provision will not be enforceable under state law. For example, it is illegal for a landlord to force a tenant to live in uninhabitable conditions, even if both parties agree to it in the lease contract.
   • Before you begin contract negotiations, educate yourself. For example, schedule a consultation with an attorney who specializes in contract law, or search online for a legal advice site where you can verify that the terms of your contract are within the legal parameters of your state’s laws.
3. Understand that a written contract is required in some cases. While some states’ laws will uphold an oral contract as legally binding in some circumstances, some contracts must be in writing. For instance, real estate sales, contracts lasting more than one year, real estate contracts lasting more than one year, and agreements to pay another person’s debts are all contracts that are required to be in writing.

Preparing to Negotiate a Contract

1. Determine what contract provisions are negotiable. Some contracts are absolutely non-negotiable, such as an End User License Agreement (EULA), or shrink-wrap license agreement, for a product such as iTunes. If you find that a contract is non-negotiable, you must decide whether or not to agree to it as the terms of the contract exist. Other contracts may be negotiable to some extent. In this situation, you should ask the other party whether he or she is willing to negotiate some of the contract terms if you disagree with them.
2. Identify your objectives for entering into the contract. Before you attempt to negotiate a contract, you need to have a specific idea about your desired outcome. For example, if you want to extend an apartment rental lease term, then you should know exactly how long you would like the term extension to be.
3. Analyze all of the terms to be included in the contract. Before beginning negotiations, you should determine exactly where you or your company stands with respect to each of the negotiable terms.
   • Make a list of non-negotiable contract terms that you absolutely require. If you cannot reach agreement with the other party, these terms are so important to you that they will prevent you from entering into the contract.
   • Make a list of contract terms on which you are willing to compromise or negotiate. These are the terms that, in an ideal world, would be included in a final contract, but you are willing to live without them in order to secure the contract.
   • Make a list of contract terms that are unimportant to you. In other words, you have no preference as to whether these terms are included in the contract or not.
   • Do not share these lists with the other contracting parties. You will use these lists during the negotiation process, but keep them to yourself so that you don’t reveal your negotiation strategy with the other parties.
4. Determine your “bottom line” for each disputed contract term. Know the lowest or highest point you can accept and still enter into the contract. For example, assume that you are a strawberry farmer and you absolutely must get at least $100.00 for a particular shipment in order to make ends meet. In this case, your bottom line sales price would be $100.00.
5. Collect documentation to support your position on each disputed contract term. Gather any facts, figures and documents you may need to back up your negotiation points. Doing so will give you support for your position on each issue that may be persuasive to the other party to the contract.
6. Create a checklist of items to address during negotiations. You can share this checklist with the other party prior to beginning the negotiations process. When you negotiate a contract, it helps if both sides agree to this agenda before the negotiation session begins.
7. Set a timeframe within which to reach an agreement on disputed terms. There may already be a deadline in place that you’ll need to follow. For example, if a shipment of strawberries needs to be sold within three days, the sales contract must be finalized within that timeframe.
   • Prepare for the possibility that you and the other party will not be able to agree on terms within the necessary timeframe. For example, you may agree to schedule a mediation after two failed contract negotiation meetings. On the other hand, you may cease negotiating the contract altogether.
8. Build trust with the other party. This technique will help you reach an agreement faster and with less resistance and time-consuming inquiries. While you do not want to provide the other party with your negotiation strategy, you can disclose all of the facts surrounding your contract negotiation requests, provide documentation of any facts or figures you use to support your requests, communicate openly about your interests and be receptive to the other party's counter-presentations.
9. Approach the negotiations with a positive attitude. This will promote cooperation and aid both parties’ openness to mutually beneficial solutions. Remember that by signing a contract, you are entering into a relationship with another person or company. You do not want to tarnish that relationship with negativity before it even begins.

Negotiating Your Contract

1. Draft a contract. If you plan to enter into a contract and have been given the opportunity to prepare the initial document, spend some time creating the document. You will want it to look neat and professional, and not contain any illegal or nonsensical terms.
   • Since yours is the first draft, it should be your ideal contract. Include the terms that are best for you, but that are still realistic. For example, don’t include a $1.00 sales price for the strawberry shipment, since this may antagonize or insult the other party, and he or she ultimately may decide not to enter into the contract with you.
   • If you and the other party have already agreed to some terms, such as contract length or shipment quantity, be sure to include those terms in the draft contract.
   • Consider consulting with an attorney to help you draft the contract. An attorney may also be able to provide you with a ‘shell’ or ‘skeleton’ contract so you can just fill in the blanks with the information specific to your situation.
   • Purchase a blank contract from an online resource or an office supply store. Make sure the online resource is reputable (check the Better Business Bureau or other rating organization). However, remember that there is no contract that meets the requirements of the law in all 50 states. Therefore, you must alter the blank contract in order to reflect any requirements of your state’s laws.
2. Send the draft contract to the other party for review and comment. Tell the other party that this is your opening offer. Also acknowledge that you welcome counter-offers or proposed revisions to the contract that you have proposed.
   • Give the other party a deadline by which you need to receive his or her revised draft or comments on the current draft.
3. Review the other party’s revisions and comments. You may go through several rounds of revisions before you narrow down the terms that are still in dispute. Keep an open mind throughout this process, and be sure to keep your lists on hand so you can make sure you’re not agreeing to terms that are not in your best interest.
4. Prepare a counteroffer. If you cannot agree to all the terms in the draft contract, identify the terms that you will need to negotiate. You may wish to make a counteroffer that reflects your idea terms, or you may wish to compromise on some terms in order to gain leverage for others. Submit the counteroffer to the other party.
   • If you are comfortable using word processing software, ask the other party to send you the draft contract as a Microsoft Word or other word processing program document. This will enable you to redline your edits and insert comments directly into the document so that the other party can see exactly what you are proposing as a counteroffer.
   • If you prefer to handwrite your changes, print a copy of the draft contract. Then neatly write your proposed changes and comments on the same document. Having all offers and counter-offers on the same document will enable both parties to see the full picture of negotiations going forward.
5. Review the other party’s revisions and comments regarding your counteroffer. You may go through several rounds of revisions before you narrow down the terms that are still in dispute. Keep an open mind throughout this process, and be sure to keep your lists on hand so you can make sure you’re not agreeing to terms that are not in your best interest.
6. Schedule an in-person or phone negotiation. If you and the other party have been unable to compromise on final contract terms, it is time to discuss those terms directly. Determine when you and the other party are available for a discussion, and whether you will meet in person, over the phone, or via Skype, WebEx, or another online platform.
   • Negotiate disputed contract terms with the other party until you can reach a compromise. In the strawberry example, you may offer a contract for a strawberry shipment in exchange for $200.00. The other party may then offer you $50.00 per shipment. You and the other party can keep negotiating until you land on a number that is acceptable to both of you.
   • Use some of the contract terms that are less important to you as leverage to get to the terms you want. For example, suppose that you don’t care where the strawberry shipment occurs, but you know that the other party needs the shipment to be made to a particular warehouse. You can agree to make the shipment at the warehouse in exchange for a higher sales price.
   • Remain calm and composed. Negotiations can become heated, especially when the parties are discussing the contract terms that are most important to them. Keep your end goal – a finalized contract – in mind as you proceed through negotiations, and don’t let ego or pride get in the way of that goal.

Finalizing Your Contract

1. Prepare a clean version of contract for signature. Once you and the other party have finalized all of the detailed contract provisions, one of you should prepare the final version of the contract. Whether you prepare this document or receive it from the other party, take time to read through the entire contract and make sure it correctly reflects the terms to which you agreed.
   • If the contract has gone through several rounds of revisions and redlines, make sure the final version has all changes accepted and that all comments are cleared from the document.
2. Sign the contract. While not every state requires the parties’ signatures for a contract to be legally enforceable, it is always best to have all parties sign. The signature reflects each party’s agreement to the terms of the contract. If one party sues for breach of contract, it is much easier to prove the existence of the agreement if the party can show the court the signed contract.
   • The correct party must sign the contract. If a business is one of the parties to the contract, make sure the person signing on behalf of the company is authorized to do so.
   • Electronic, or digital, signatures may be permissible in place of written signatures. Check with the other party and your state laws to determine whether this is permissible for your contract.
   • It may not be necessary for both parties to sign the same document. As long as the parties sign identical documents, the two signature pages may be combined to create a single document.
3. Make copies of the signed contract. Once both parties have signed the contract, make a few copies of the signed document. Keep a copy in a safe location, and consider making a digital copy to store on your computer. The original contract also should be kept in a secure location, such as a safe deposit box, fireproof safe, or a lawyer’s office.
4. Keep track of expiration and renewal dates contained in the contract. Contracts often include information regarding when the contract terms expire, and whether and how the contract can be renewed. Keep track of these dates by putting them on your calendar, so that you can take action to terminate or renew the contract as you desire.

Tips

• If you become confused or uncertain during contract negotiations, or you suspect the other party is trying to take advantage of you, ask an attorney for assistance. Note that if both you and the other party engage attorneys, the attorneys may end up doing most of the contract negotiations themselves, while asking you for input along the way.
• If you are negotiating with a party with whom you intend to do business in the future, either extending the current contract or entering into other contracts, take that fact into consideration when negotiating. You may be able to accept a less-than ideal contract term now, in exchange for better terms in a future contract.
• A standardized law called the Uniform Commercial Code (UCC) has been adopted in some form by all states and territories to govern contracts dealing with sales and other transactions. An attorney can help you understand how the UCC may impact the terms of your contract.

Sources and Citations

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