May 31st, 2019
Legal Talk 20: How to Analyse Contracts
You have secured your first contract. Congratulations!
But you would like me to look over it before you sign up. It is a services contract where you are providing software and services to a large corporate. The large corporate has provided you with a contract and you just need to get a legal view on it.
Okay, I say. Understand that you are wary of signing it because you don't want to sign your life away. But remember, that this is a big corporate and you have very little bargaining strength so it's important to focus on the key elements of the contract.
“But what are the key elements?” You say.
Okay, the key elements (in my humble opinion) are:
1. Money: Ensure that all the figures are right and that the payment terms mean that you get paid when you think you are going to get paid.
2. IP: Make sure that all your IP stays with you so you are not transferring all of your IP (i.e. a large part of your business) to the big corporate.
3. No Indemnities: Basically, this is a blank cheque for the corporate so if things go wrong then it gets reimbursement for all of the money that it loses (and some of this money that it loses can be quite far-fetched when it makes a claim).
4. Limit on Liability: If you are signing a contract for US$100k then ideally you want to cap your liability on the contract to US$100K. Alternatively, you can get insurance relatively cheaply which will give you a few million in cover. So, you might be pragmatic here and not even argue this point since if you are covered up to a large amount (and there is no way that any claim is really going to get to that amount anyway). You might just try to cap liability at whatever you can manage to negotiate.
“But”, you say, “the contract runs on for 30 pages. Should you go through every clause?”
Yes, you could. There will probably be quite a few nasties in there and it is good to be aware of them. But when dealing with a big corporate (particularly on your first deal) my experience is to just stick to a few changes.
“But surely I should negotiate it all?” You say.
Yes, you could do, but the big corporate may lose interest and ongoing negotiations may bring up other issues which simply prolong things and delays the deal (or break the deal altogether!).
Let me give you an example in another context. Say you were going for a job at Apple as one of their marketing people. They offer you a contract. You start to pick up every point in the employment contract that might not be in your favour and try to get them to change lots of the contract just for you - what do you think your chances of getting all of your changes agreed are? Also, if you nit-pick too much, they might well take the deal off the table entirely.
So, when dealing with the big corporate, I would suggest just taking into account points 1 to 4 above (and perhaps one or two more if the points they have made are really draconian) but not much more than that. But in terms of negotiation strategy, I would suggest doing some research, perhaps starting here: https://www.entrepreneur.com/article/248732.
Does that make sense? “Yes”, you say. “Got it.”
“But”, you say, “one question: what if my lawyer spots a lot of problems with the contract? Surely, I should bring all of these to the attention of the big corporate client?”
Well, the thing is that your lawyer needs to ensure that he has covered his back so you don't come back later on to say that he didn't tell you about something. But the thing is, your lawyer's wish to cover his back is a completely different point to you trying to get a deal done now. Sometimes you just have to be aware of the risks your lawyer points out, but live with the fact that you can't make all the changes to the contract you would like. Sometimes you might be able to deal with some of these issues practically and so in reality they are unlikely to ever happen anyway.
However, the upside of this approach is that you get the deal done and get cash in bank. Yes, issues might arise later on but this might be a better position than not actually having the deal in the first place. It's up to you whether or not you do the deal - it's not up to your lawyer.
“Got it,” you say. “This makes sense.”
I am about to go into more detail but the line goes dead. I get the feeling that you are keen to get your first big deal secured!
Look forward to hearing how things go. Always thinking about how I can help you grow your company.
Your Legal Coach
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