5 most negotiated terms and clauses in a contract

The negotiation landscape is evolving rapidly, the same as businesses today are. The pressure for greater honesty, transparency and integrity is growing. Today, executive management is exhibiting far greater interest in commercial and contract management skills.

A poorly negotiated contracting often results in agreements that offer little guidance to implementation teams. IACCM, in the year 2018, released the most negotiated terms after studying over 2100 organizations. The research demonstrates the importance of negotiators understanding the issues that drive particular industries or cultures and taking these into account as they draft and negotiate agreements. Let's take a look at some of these terms:

1. Limitation of Liability

All businesses want to safeguard their fiscal health, mitigate risk and insulate themselves from damages and liabilities. A prudently crafted and negotiated limitation of liability clause is the primary tool to create a safety net. It explicitly defines the obligations of the parties and shields them in case things don't go quite as planned. It is always recommended to include liability caps that help limit potential liability to a fixed or calculable amount.

2. Indemnification

For better or for worse, one of the most contentious terms in any contract negotiation tends to be the indemnity clause. How the contracting parties allocate risk is often a subject that demands extensive negotiations. It may often be a last-minute, back-and-forth item pushed by counsel for both parties and commonly not understood by clients in its entirety. Therefore, it becomes vital to break down the parts of the provisions of the indemnity clause to understand and explain the responsibilities and benefits early on in the process.

3. Warranties

At its core, negotiations regarding representations and warranties are an exercise in risk allocation. Often buyers and sellers are not aligned to this section and often demand that changes be made to it. The seller wants to reduce the scope of representations and warranties as much as possible to decrease the potential for inaccuracy and claims of breach, and the buyer wants the broadest set possible to insulate itself and allocate risk to the seller.

4. Service withdrawals/terminations

Business needs and relationships change, with time, even the best deals go bad. There could be several reasons for it, or even through no fault of either party, a contract may have simply outlived its usefulness. For these reasons, the termination clause takes an important seat when it comes to contract negotiations. It becomes even more difficult with business-to-business services. Often businesses might be stuck with an expensive contract or bad service for years. Termination clauses that focus on the failure to perform are usually complex, more often than not, bad service does not technically violate the terms. Therefore, it becomes important to negotiate to include a termination for convenience clause whenever possible so you can leave if you need to.

5. Data Protection

Today, data use is the basis of strategic analytic capabilities. The ability to use customer data can significantly impact how a company is valued and how it performs. With the rise of machine learning and AI, the ability to train models based on customer data and reuse those models across customers is a vital strategic capability. At the same time, customers may often refuse to hand over their data due to privacy and litigation concerns. It is important to examine what it takes to win the contract and maintain a long-term strategic capability; negotiators must plan accordingly and negotiate with customers who are hesitant to share their data.

New rules, old paradigm

Business today is increasingly digital, COVID-19 has accelerated the pace of digitization. Companies today are more services-based and driven by intangible assets; this includes rights to exploit intellectual property, from logos to patents to copyrights. Businesses are moving to more collaborative business models designed to create value and not simply exchange value.

The fact that Businesses today still negotiate the same clauses as far back as a decade demonstrates a clear lack of progress—or attention to business reality. Contractors are still focused on asset protection, rather than focusing on and tackling topics that may actually weaken contract performance.