Just about every business lawyer will negotiate commercial contracts on behalf of their clients. This can be daunting for a new lawyer, particularly because the client will frequently know more about what needs to be in these contracts than they do.

This article aims to demystify the process, providing practical tips and insights to empower new lawyers and attorneys new to business law to negotiate and counsel on commercial contracts with confidence and competence.

What is a Commercial Contract?

Commercial contracts govern transactions made in the ordinary course of business (at least for one party). These contracts can encompass a wide array of business dealings, such as sales and leases of goods, provision of services, licensing of intellectual property, and often some combination of all three.

Preparing Yourself to Negotiate a Commercial Contract

The adage "failing to prepare is preparing to fail" holds particularly true in contract negotiation. Meticulous preparation is the cornerstone of successful negotiation. It involves:

• Thorough Research: Gain a deep understanding of the client's business objectives, the industry landscape, and the counterparty's background. This knowledge will enable you to identify potential risks and opportunities, and tailor your negotiation strategy accordingly.

• Document Review: Scrutinize the contract draft meticulously, paying close attention to key clauses such as payment terms, warranties, indemnification, limitation of liability, intellectual property ownership, termination provisions, and dispute resolution mechanisms. Identify any ambiguities or inconsistencies that could lead to future disputes.

• Client Consultation: Engage in open and transparent communication with the client. Ensure you have a clear understanding of the mechanics of the deal, as well as of the client’s priorities, concerns, and desired outcomes. This will empower you to represent their interests effectively during the negotiation.

Key Clauses to Negotiate

While every contract is unique, certain clauses warrant particular attention during negotiation. These include:

• Payment Terms: Negotiate favorable payment terms for your client, including the timing and method of payment, any penalties for late payment, and potential discounts for early payment or bulk orders.

• Warranties: Ensure the contract includes appropriate warranties and representations regarding the goods or services being provided. Negotiate the duration of warranties, the remedies available for breach, and any limitations or exclusions.

• Indemnification: Carefully review indemnification clauses, which allocate responsibility for losses or damages between the parties. Negotiate the scope of indemnification, any limitations or exclusions, and the procedures for asserting indemnification claims. If intellectual property is an important part of the business relationship, it may be wise to have a separate provision for such violations.

• Limitation of Liability: Negotiate limitations on the liability of each party for certain types of damages, such as consequential or indirect damages. Consider setting caps on the total liability amount, such as the amount paid under the contract for the period in which your client is in default. These limitations generally do not apply to intellectual property violations.

• Intellectual Property Ownership: Clearly define ownership and usage rights for any intellectual property involved in the transaction. Address issues such as licensing, royalties, and the handling of jointly developed intellectual property. Pay particular attention to ownership and licensing in the instance of nonpayment.

• Termination and Automatic Renewal Provisions: Negotiate clear and reasonable termination and automatic renewal provisions, outlining the circumstances under which either party can terminate the contract, and any associated consequences such as notice periods, termination fees, and the handling of outstanding obligations.

• Dispute Resolution: Consider including a dispute resolution clause that outlines the process for resolving any disagreements that may arise during the contract's life span. Forum and governing law matter – as does the decision to require mediation between senior officers prior to filings or to require arbitration.

• Security Interests: If the contract involves the extension of credit or the provision of goods or services on a secured basis, negotiate the terms of any security interests, including the collateral, the perfection of the security interest, and the enforcement rights of the secured party.

The UCC and Commercial Contracts

The Uniform Commercial Code (UCC) is a comprehensive set of laws governing commercial transactions in the United States. Several articles of the UCC are particularly relevant to commercial contract negotiation:

• Article 2 (Sales): Governs contracts for the sale of goods, addressing issues such as offer and acceptance, warranties, remedies for breach, and risk of loss.

• Article 2A (Leases): Governs contracts for the lease of goods, covering similar issues as Article 2 but tailored to the unique aspects of leasing arrangements.

• Article 7 (Warehouse Receipts, Bills of Lading and Other Documents of Title): Governs documents of title, which represent ownership or control of goods in transit or storage.

• Article 9 (Secured Transactions): Governs transactions where a creditor takes a security interest in personal property to secure the repayment of a debt.

Note: Articles 2 and 2A apply when the “predominant purpose” of the contract is for the sale or lease of goods, even if the contract also includes the provision of services or licensing of intellectual property.

Familiarize yourself with the relevant UCC articles when negotiating contracts involving the sale or lease of goods, documents of title, or secured transactions. Understanding the UCC's default rules and provisions can help you negotiate more effectively and protect your client's interests. For example, if a particular statute in the UCC is favorable to your client, then you may not want to include a related contract provision.

The Impact of Bargaining Power

The dynamics of a negotiation can shift significantly depending on the relative bargaining power of the parties involved. In situations where your client has limited bargaining power, your role may evolve from a negotiator to a counselor. This means you need to:

• give a thorough explanation by providing a clear and comprehensive explanation of the contract terms, highlighting potential risks and benefits;

• offer an impact analysis: assess the potential impact of the agreement on the client's business operations and long-term goals;

• search for alternative options or strategies that may improve the client's position; and

• give realistic expectations: manage the client's expectations and help them make informed decisions based on a realistic assessment of the situation.

Conclusion: Complex but Rewarding

Commercial contract negotiation is a complex but rewarding endeavor for new lawyers. By mastering the fundamentals, honing their negotiation skills, and avoiding common pitfalls, new lawyers can navigate this challenging terrain with confidence and achieve successful outcomes for their clients. Remember, negotiation is not merely about winning or losing; it's about finding mutually beneficial solutions that foster long-term business relationships.

This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section webpages to learn more about the benefits of section membership.