Dueling Contracts: Third-Party Contracts or Standard Company Template?
Imagine this: you're negotiating a business deal, and things are going really well. Both sides agree on what is expected, and the relationship is off to a great start. But, then the contract negotiations begin, and questions arise around whose contract will be used.
Both of you have your own preferred contract agreements, and, of course, want to base your working relationship on your contract. But, you also want to wrap the deal as expeditiously as possible without too much resistance or damage to your burgeoning relationship. You think, "What's the harm in using their contract instead of mine?"
Possibly nothing, and possibly everything. Both methods have merit, for sure. But what is the ideal practice? Let's break it down:
Using Your Standard Company Contract Templates
First and foremost, using a standard company template creates less work for your legal team since they are already familiar with the terms, what's important to you, where you're willing to negotiate and what your fallback provisions are.
Also, if you have a contract management system, your templates are already prepared. With a simple click of a button and the completion of a form, the agreement can be assembled and emailed to your counterparty for review and signature. Workflows for tasks and approval processes are in place and the overall process is much more efficient and expeditious.
From a negotiation perspective, you're more likely to get more favorable terms if you start with your own template, as opposed to starting with the other party's. Your standard terms and conditions are clearly stated and the other party will likely only request changes which are material to them.
Using Third-Party Contracts
Despite the advantages of using your template, there are instances where using third-party contracts are preferable – or, when you, simply, will not have a choice.
The most obvious situation is when you don't have your own standard templates or contract playbook or you're in process of assembling an effective legal team to review and define your standard contracts and terms and conditions.
Another occasion is when you don't have experience in a particular industry – likely as a customer of this industry. For example, if your company's area of focus is manufacturing, and this is your first foray into buying software, you're best served by utilizing your vendor's template as it will address the terms and conditions which are important to the software industry. These vendors (the good ones, anyway) have fulfilled many such contracts before and have direct experience on what needs to be addressed from a contractual perspective.
Then, of course, there are situations where you simply will not have a choice. Your vendor or customer has internal mandates regarding the templates and simply will not do business with you, otherwise. In these cases, closely review their contract and make all suggestions which are important to your company. Your standard contract template and your contract playbook can still be leveraged to expeditiously source the language that's important for you.
In both cases, it's important to remain flexible. Neither party should blindly and arbitrarily adhere to their standard template. Tim Cummins, CEO of IACCM, specifically speaks to this his blog post regarding the dangers of inflexible templates. "To work well," Tim notes, "standards must operate within an intelligent management system which ensures they are appropriate to business goals." Both parties must be ready to adapt their contract templates to individual circumstances and market changes.
In these instances, a contract playbook becomes key. Contract playbooks not only provide pre-approved alternative language suggestions for efficient negotiation, but they also highlight important contract clauses which can be easily sourced to the other party for inclusion in their template.
The Final Word
The choice is clear-cut: if you can manage it, always use standard company contracts. And, even better, leverage a contract management solution.
Standard templates are your best option for a speedy and advantageous contract negotiation. But, be realistic in your approach, and put in place a systematic process to review and update your templates with the latest clauses. Store them in a place that is easily accessible so that those who need to use them – do. And, for those situations where flexibility will be necessary – whether for your contract template or for third-party paper – build up your contract playbook so that you can readily source language clauses which are important to you or options which make the other party's standard template more palatable.
Jasmin Steely is COO of Contracts 365. Jasmin has spent the last 15 years of her career helping software companies