Commercial Contracts: Negotiating out of problems

May 6, 2020

 How to develop a strategic approach to problems?

When issues arise in respect of contracts, before rushing into any decisions and potentially worsening both your commercial and legal position as a business you must always consider both the terms of the contract and all of the surrounding circumstances to help devise a strategy to minimise risk.

Whilst it’s great when businesses are able to have commercial discussions and reach amicable resolutions to issues, there are certain things businesses need to be doing during after those conversations have taken place, to ensure that they don’t prejudice their legal and contractual position.

In addition, gaining a clear understanding of the terms of the contract and your legal position can be useful to inform the way you approach negotiations. You may go into them very differently if you are in a very strong legal position.

What do you need to be aware of?

We have often seen clients negotiate their way out of the problems but in doing so they disadvantage their contractual position.

Under your contract you will have accrued rights and liabilities and by not enforcing those rights or even by reaching a settlement with the other party you may inadvertently waive and therefore give up a legal right (especially contractual right). Therefore you need to consider carefully how you approach problems and how you solve them and the language used, as in some cases you will need to reserve you contractual position.

Many contracts include a provision which states how and when parties waive rights but when undertaking commercial negotiations, we recommend expressly stating that all rights are reserved by you during those negotiations, particularly if there has been an alleged breach of contract by the other party.

In addition, if you are trying to negotiate changes to a contract as a result of issues which have arisen, then use of the phrase “subject to contract” in communications can be important to minimise the risk of inadvertently entering into a binding arrangement without meaning to.

If you are making offers to settle disputes, you may wish to consider use of the phrase “without prejudice” which can have certain benefits if a dispute ever went to court. This phrase will only have the intended result of certain conditions are met.

Sadly none of these phrases will conclusive have the intended result in all scenarios but they are useful to use at the right time to minimise risk of the adverse consequences described above.

As mentioned above, before entering into any commercial negotiations we recommend looking at the terms of your contract. What you might find is that remedies are only available if you submit certain notices or comply with certain deadlines. These can easily be missed or overlooked as a result of undertaking commercial discussions. It is important therefore that you are aware at the outset of any relevant deadlines and contractual requirements to ensure these aren’t missed as rights and remedies may not be available as a result.

Finally, your contract may actually prescribe a procedure which must be followed when looking to resolve disputes. If a party then doesn’t not follow that procedure, they themselves may be in breach of contract. This is another reason why it is important to review the terms of the contract at the outset.

Should you document solutions you reach commercially?

If you reach a solution with your counterparty and this is not documented correctly in line with the contract terms not only may there be no proof of what has been agreed but it might be unenforceable as it might not constitute a valid variation under the terms of your contract. Many contracts now specify what procedure must be followed for a variation to be valid and so this process will need to be carefully followed for an enforceable variation to come into legal effect.

How can we help?

For strategic advice on commercial contracts and advice on how to negotiate, please contact the commercial team at Herrington Carmichael LLP using the details provided below.

Please contact Mark Chapman on 01276 686 222 or Cesare McArdle on 0118 977 4045.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter. 

By Mark Chapman

Partner,  Corporate & Commercial Law

By Cesare McArdle

Senior Solicitor,  Corporate & Commercial Law

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