Small Business Contracts Part I: A Different Perspective

3 Insights and a take away Contract negotiations Is not to take advantage of the other side.

Editor’s note: This is part one of a two part series.

For many business people, the prospect of entering into a contract with another party can produce feelings of impending dread and frustration. 

Dread, because contract negotiations mean having to pay legal fees; frustration, because the contract drafting process sometimes can be time consuming even to the point of intruding upon the momentum of getting a deal done. 

In this and the next several articles, I want to explore the positive, even critical role that agreements play in managing the risks of our legal relations, promoting predictability of action, and building confidence in the business relationship.

Indeed, far from being an impediment to parties’ attempting to conclude transactions, contract negotiations can help refine the understanding of the transaction by making more transparent the hidden risks of the proposed venture; clarifying the motivations and objectives of the parties, and sometimes testing their intentions.

1.  The Object of Contract Negotiations is Not to take Advantage of the other Side

One of the myths surrounding contract negotiations is that there are winners and losers; that negotiations pit the cleverness and guile of one party against that of the other party so that at the end of the day one or the other will be able to secure some power-related advantage.

Doubtless, many negotiations can be reduced to just that—a gladiatorial context.

But, while negotiations do implicate parties jockeying for position in a relationship, the negotiating process can be very constructive in revealing the risks posed to both parties in connection with entering into a transaction.

In this respect, parties to a negotiation have a common interest in understanding the true topography of their playing field so that potential problems can be anticipated and addressed.

The object, another words, is not to negotiate an agreement that provides one party or the other with an advantage in a litigation, but to make it possible for the parties to perpetuate a long-term and profitable relationship. 

Litigation is not the end to be sought, but the disaster to be avoided, and to avoid litigation and promote the potential success of a long-term business relationship requires that the parties enter into an arrangement that can protect both of them. 

A party’s negotiating style can correlate to its conduct as a partner in a business relationship. Like in the case of a first date, more likely than not, what you see is what you get.

2.  Contracts as Balance Sheets of Risk

Contracts reflect not only the intentions of the parties at a certain point in time, but the parties’ understanding concerning the potential risks of their relationship.

To identify these risks can require a period of disclosure during which each party begins to understand the other’s capacities and the risks attending their prospective performance.

Contract negotiations, therefore, should not merely focus on addressing known risks but also potential risks maybe not yet even on the horizon, but which still may be capable of being anticipated. 

Where a contract reflects a good faith assessment by both parties of what the balance of risks looks like in their relationship the more confidence the parties will have in making their venture sustainable.

Next – Number 3 and the Take away