Contracts underpin every aspect of business and are a critical element for any successful business relationship. However, the true benefits of contracts are only understood when the contracts are properly drafted and clearly outline the rights and obligations of each party whilst facilitating a framework of cooperation and exchange. A problem which plagues contracts and often leads to a breakdown in negotiations is when parties to the negotiation adopt a hardened attitude and are unwilling to compromise on contractual clauses. This often leads to a complete breakdown in the relationship between the parties, erodes trust, and can amount to wasted costs and time with nothing to show for it.
It is important to note that not all contracts are equal, and contracting parties have different degrees of bargaining power. The larger and more established a supplier or customer is, the less likely they are to accept a high number of amendments to their terms and conditions. Essentially, the well-established suppliers or customers adopt a stance of "we will only entertain extremely limited amendments" without even considering the counterparty's operational requirements for such amendments. Such amendments may be required for commercial or operational reasons. This contracting position is the antithesis of equitable contracts.
In this article, we seek to argue that both suppliers and customers of information technology ("IT") services should consider reviewing their negotiation methodology and contractual positions to allow for a more equitable approach to contracting to the extent that the customer's or suppliers' operating model permits this. Due to the time sensitivity for integration and deployment of IT services, contracting parties should engage in negotiations with a spirit of compromise to reach the end goal of final signature. Since IT contracts typically involve various stages of deployment, including user acceptance testing, production, and go-live, it is recommended that contracting parties do not adopt unrelenting contractual positions. Instead, they should determine their risk appetite and identify the issues they are willing to compromise on and identify the ones on which they cannot compromise. Through this process, contracting parties will be able to conclude contracts that give effect to the parties' intention and lead to a contract which is more fair and representative of both parties' commercial and legal interests.
An equitable contract is one where the parties engage in meaningful negotiations to ensure that they are able to compromise on contractual clauses, which would otherwise lead to the breakdown of the negotiations between the parties. The outcome is certainly a lot more appealing than termination of negotiations and wasted commercial and legal expenses.
We recommend that the following principles be adopted by contracting parties to ensure equity in both negotiations and the drafted contract:
- Transparency: Equitable contracts are transparent and clear, ensuring that the contracting parties fully understand the terms and conditions. Contracting parties should avoid vagueness, ambiguity, or acting in bad faith as this would lead to misunderstandings or an unfair advantage in favour of one of the parties;
- Reasonable terms: The contractual terms should be reasonable and proportionate to the nature of the agreement and the services or goods being contracted for. Terms which are unnecessarily one-sided or onerous should be avoided by the parties;
- Fair bargaining: In equitable contracts, parties engage in fair and open negotiations, and neither side exerts undue pressure, coercion, or exploitation to secure the agreement. There should be a genuine effort to reach a mutually beneficial understanding; and
- Good faith: All parties should act in good faith throughout the duration of the agreement. This means that the contracting parties should not behave in a manner that undermines the purpose of the contract, even if such party technically adheres to its terms.
The benefits of adopting an equitable approach to contracting includes:
- Balancing contractual bargaining power,
- Enhancing cooperation and trust,
- Reducing contractual disputes, and
- Reducing the time dedicated to negotiating and drafting the contract.
These benefits will reduce the number of issues requiring escalation and can serve to reduce the overall time required for execution of the contract.
ENS's Technology, Media, and Telecommunications Team can assist you in negotiating your IT transactional contracts with vendors to ensure that your contracts are equitable and fair whilst maintaining your commercial and legal interests.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
