Contracts serve many purposes for the business organization. Companies memorialize agreements with employees, vendors, customers, and numerous other third-party stakeholders. Importantly, while the company certainly receives benefits from these contracts, the organization also takes on many obligations. These obligations may include the payment of money, the provision of services, and the acceptance (or transfer) of legal liability, just to name a few.
It is imperative that these obligations be accepted knowingly, not unintentionally. Otherwise, the organization can suffer harm it never even recognized as possible. Thus, the importance of contract negotiation cannot be overstated. In a sense, the company’s contracts, when viewed in their entirety, are instrumental in protecting the company’s resources. While most hope for a win-win scenario when negotiating contracts, it is essential to be aware of the effects of a wide range of contractual clauses to ensure that the company isn’t taken advantage of or inadvertently harmed. In this article we will discuss some of the terms most frequently focused on in contract negotiation.
Terms Frequently Involved in Contract Negotiation
The International Association for Contract and Commercial Management (IACCM) conducts international research each year to develop a list of terms which are most frequently negotiated in business contracts. Here is the list for 2018. World Commerce & Contracting (formerly IACCM) has since published newer editions, most recently its Most Negotiated Terms 2024 report, which again puts limitation of liability, indemnities, intellectual property and data security at the top. Below are some of the terms that made the 2018 list.
Indemnity – this is a legal concept by which one party to a contract agrees to accept responsibility for another party’s liability to a third party, by reimbursing (or indemnifying) the other party for losses they suffer to the third party. That’s a mouthful, so we’ll give an example below. And as long as we’re acting all lawyerly, we’ll go ahead and give the disclosure that you must keep in mind that this is a general discussion, and that some states limit the circumstances under which an indemnity provision can be used.
Consider Party Barn, Inc., which owns a building it allows groups to rent for special occasions. Big Daddy Data Corp. rents the building for a holiday party. The rental agreement contains an indemnity clause, in which Big Daddy agrees to indemnify Party Barn for any claims made by Big Daddy employees against Party Barn for injuries sustained at the party. During the event, Dana drinks several craft IPAs, then falls down and breaks her leg while showcasing her latest dance moves for her fellow employees. She sues Party Barn. If she prevails on her claim, Big Daddy will have to reimburse Party Barn under the indemnity provision.
Limits of Liability – parties to a contract often address potential liability to one another through a variety of contractual mechanisms. One is a limit of liability clause, which limits the amount one party can recover for certain breaches or failures, as defined by the contract. Consumers see these types of provisions in a variety of contracts. For example, a customer’s agreement with an airline typically limits the amount that the customer can recover for lost or damaged luggage, even though the actual loss may be much greater than that allowed to be recovered under the contract.
Termination – termination clauses in contracts permit a party to cancel (terminate) the contract if certain conditions are met. Sometimes the agreement requires the party terminating the contract to pay a penalty. There are usually notice provisions with which the terminating party must comply.
Price and terms of payment – it shouldn’t surprise anyone that the price of goods and services ranks high on the list of negotiated items. This includes the terms of payment, which often include whether there is a grace period, penalties for late payment, and the accrual of interest.
Scope – many contracts contain provisions concerning the “scope of the contract” or the “scope of services.” These provisions explain (hopefully) exactly what work and services are to be delivered. These clauses are especially common in construction contracts.
At ContractSafe, we’re hoping that you’ve masterfully perfected the art of contract negotiation. But even if this blog article has set off a warning bell, we can help. With our easy Google-type searches and [AI]ssistant features, you can review all of your contracts and locate those that contain any provisions you wish to review. Moreover, once you get a clause just the way you like it, it’s a snap to find and use it over and over again. There’s no better time than today to start your free trial.
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