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Protecting yourself from unfavorable contracts

Many business people view contracts as being mutually beneficial, however, there may be circumstances under which a contract leaves one side at a distinct disadvantage.

Often a contract is agreed after thorough negotiation with much forethought. Yet, negotiation and implementation are vastly different experiences. New negotiators can often overlook these areas:

Assumptions

Any assumption could be wrong and a wrong assumption can adversely affect the strategy you use negotiating a contract. Many new negotiators do not know when they have made a fundamental and wrong assumption. It is this human failing that is the basis for many contractual oversights.

Costs

Costs are easy to underestimate. Many variables such as supply chain delays, fluctuations in material costs or an unstable labor market can increase costs. Here, the contract language is critical.

For example, if your costs and numbers are referred to as “estimates,” there may be room for price adjustment, but if the contract price is fixed without regard to variable costs, the price may be binding.

Indemnities

Indemnification clauses should be closely reviewed provisions in any contract because of the potential for adverse risk allocation. However, indemnity provisions can be difficult to parse and if not carefully negotiated and fully understood, they may not protect you from liability to an irresponsible party.

If a party with indemnity rights becomes a costly risk, this can leave you in a difficult position.

Goals

While most contracts have clear goals, such as the sale of property or selling a business, others can be less clear. Business partnerships, such as joint ventures or even simple coordination on projects, may have unclear objectives. This can leave companies at difficult crossroads when unanticipated events occur or near the end of the relationship.

Thorough, anticipatory contract drafting

The best approach to potentially difficult contract situations is to ensure that you negotiate the most favorable possible contract. Proper negotiation and contract review is a skill that many businesses require, but it is difficult for businesses to cultivate this skill internally. A skilled legal professional with significant experience in commercial contracts can be an asset to you, allowing you to avoid oversights.

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