Utilizing Contract Negotiation and Formation

By:  Paul A. Sheridan

 

Contracts happen almost every day to everyone.  We enter into contracts with the people that we deal with on a daily basis, often without giving it much thought.  Contracts can be created with a simple conversation of a verbal offer and acceptance between two parties, with some consideration thrown in to make it enforceable.

An enforceable contract requires the following: (i) offer, (ii) acceptance, (iii) competent parties with legal capacity to contract, (iv) lawful subject matter, (v) mutuality of agreement, (vi) consideration, (vii) mutuality of obligation, and (viii), a writing if required under the Statute of Frauds.  Rather than focus on the many types of contracts or delve into the finer points of contract formation, this article will discuss the contract negotiation process to lay the groundwork for future articles exploring common contractual clauses.

Complex business contracts are usually entered into after a formal negotiation process, with the details of the terms integrated into a written instrument that is ultimately signed by the contracting parties. Negotiating and drafting any type of commercial or transactional contract, whether it be an open account agreement, construction contract, or complex corporate acquisition, is an exercise in risk allocation.  It is crucial that you read and understand the contracts that you sign, as contracts govern the terms of the agreement, and if valid, will be enforced by the courts. Changes, modifications and clarification of issues can be handled easily at the front end of a contract negotiation; however, once the contract is executed the parties are legally obligated to follow the terms of the contract. In order to allocate that risk, the individual reviewing the agreement must first be able to identify and understand the risks likely to be encountered. The ability to do this effectively, is driven not simply by a familiarity with the law, but by a fuller understanding of your business operations and the project itself.

A detailed risk identification and assessment exercise, performed early during project development, and prior to executing contracts, will identify the legal questions, business risks, and issues inherent in a project. Through the process of negotiation and the communication chains created therein, all participants are better informed at the outset of the project.   The contract will likely better serve the parties, and the odds are enhanced that the participants’ anticipated benefits and goals from the transaction will be met. As a direct result of time spent at the front end understanding the contract terms and risk allocation, everyone should benefit by the end of a project.