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How to Negotiate Terms in a Commercial Contract as a Small Business Owner

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During many stages of a business, you may need to undergo many negotiations to get the result you want for your contract. Entering into a contract is a significant milestone for any small business owner, laying the groundwork for fruitful partnerships and transactions. However, the path to a well-crafted agreement often involves intricate negotiations. This article aims to provide insights and practical tips on negotiating terms in commercial contracts in New Zealand. 

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Why Prioritising Negotiation is Crucial 

Negotiating terms is an essential aspect of the contract formation process. It involves a mutual exchange of ideas, proposals, and considerations between parties to craft an agreement that meets both sides’ needs and expectations. 

Thorough preparation is paramount before engaging in negotiations. Define your business objectives, understand the key terms that matter most to you, and anticipate potential areas of compromise. Likewise, familiarise yourself with industry standards and legal requirements to fortify your position at the negotiating table. 

Negotiation Styles

Collaborative Negotiation This style aims for mutually beneficial outcomes by emphasising cooperation, open communication, and creative problem-solving. Ideal for preserving and building relationships, creating value, and fostering long-term partnerships.
Competitive Negotiation Focused on maximising individual gains, this style often leads to a win-lose scenario, where one party’s success may come at the expense of the other. It is suitable in resource-limited scenarios where direct competition is evident, though not the most recommended due to potential relationship strain.
Compromising Negotiation This style is centred on finding a middle ground and seeking a balanced solution, making it effective for quick resolutions. Parties must be willing to sacrifice, as not all goals may be fully achieved.

Choosing the most suitable negotiating style depends on factors like:

  • the nature of the relationship; 
  • importance of the issues at hand; and 
  • your desired outcomes. 

Successful negotiators often employ a combination of these styles, adapting their approach based on the evolving dynamics of the negotiation process.

Furthermore, effective negotiation is always built on open communication. Clearly articulate your needs, expectations, and concerns. Similarly, actively listen to the other party’s perspective. A transparent exchange of information sets the stage for a collaborative and mutually beneficial agreement. You should also approach negotiations with flexibility and creativity. Be open to alternative solutions that can address both parties’ interests. A rigid stance may delay progress, while a willingness to explore creative compromises can lead to more robust and enduring agreements.

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Identifying Key Terms

In commercial contracts, certain terms carry more weight than others. Prioritise identifying and understanding these key terms, such as:

These are the cornerstones of a contract and can significantly impact your business operations.

While negotiating, it is prudent to have legal guidance. A contract lawyer can provide invaluable insights into the legal implications of proposed terms, ensuring that your interests are protected and that the contract aligns with New Zealand’s legal standards.

Documenting Agreements

During negotiations, document the agreed-upon terms in writing. This not only ensures clarity but also serves as a reference point in case of future disputes. A well-drafted term sheet or letter of understanding can provide a roadmap for the subsequent formal contract. While term sheets are useful tools, they are often the centre of contract disputes as the parties have different opinions on whether the term sheet is binding. Be clear with all parties (and on the document) whether the terms are intended to be binding. 

Addressing Potential Pitfalls 

When engaging in negotiations, i5 is essential to anticipate and address potential pitfalls, including:

  • ambiguous language. Unclear contractual terms may lead to disputes over responsibilities. To mitigate this, you should specify roles and expectations to avoid misunderstandings;
  • hidden costs. You should clearly outline all costs involved, ensuring transparency and preventing financial surprises that could damage business relationships; and 
  • vague deliverables. A lack of clarity may result in incomplete or unsatisfactory outcomes. You should define expectations with precision to ensure successful project execution.

Additionally, be mindful of power imbalances between negotiating parties. Small business owners should confidently assert their needs and leverage unique strengths, fostering an equitable partnership.

Finalising the Contract

Once you have completed a successful negotiation, ensure the final contract is comprehensive and accurately reflects the agreed-upon terms. It is highly recommended that you engage a lawyer to review your contract before entering into an agreement to ensure the contract’s legal validity and enforceability.

Effective negotiations lay the foundation for a positive post-negotiation relationship. Cultivate open communication and transparency as you move forward with implementing the contract. Further, regularly revisit the terms to ensure they continue to align with your business goals.

Key Takeaways 

Mastering the art of negotiating terms in a commercial contract is an essential skill for small business owners in New Zealand. By approaching negotiations with preparation, open communication, and a willingness to collaborate, you can create binding contracts that best serve your interests and contribute to long-term success. Seeking legal guidance, documenting agreements, and addressing potential pitfalls are other crucial steps in navigating contract negotiations. Ultimately, a well-negotiated contract safeguards your business and fosters robust and secure partnerships.

If you need help negotiating contractual terms within your contract, LegalVision’s experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

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Helen Yu

Helen Yu

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