INTRODUCTION

A simple handshake solidified deals when communities were small and people knew one another in business circles and in social settings. Breaking the terms of a contract resulted in social and professional ostracism. Over the years, business relationships have grown too large and complex to base a contract on a simple handshake, hence the need for a well-written contract.

A contract serves many purposes, some obvious, such as defining the product or service to be delivered. A less obvious reason is offering applicable terms and conditions that, if negotiated properly, address many unforeseen problems that could arise. These terms and conditions serve to protect the parties, by apportioning liability through indemnification provisions, for example, and flowing down appropriate statutes and regulations.

Keep in mind that the United States and most other countries legally recognize the terms and conditions negotiated and codified in a contract signed by two or more parties. Hence, while the rights and obligations called out in the contract make up the terms of the agreement and are subject to the limits imposed by relevant statutes, these terms and conditions potentially nullify any rights that seller and buyer normally enjoy under the Uniform Commercial Code (UCC) or Common Law. These terms and conditions are generally written in favor of the party who drafts the contract. After all, it is in the drafter’s best interest to mitigate risk by writing carefully worded terms and conditions. For example, buyer might include a liquidated damages provision written with their interests in mind. Liquidated damages are the monetary amount of damages owed to the other party when a contract is breached.

Early in my career as a contracts administrator, I was assigned a major contract supplying a variety of services to a naval base. One of the services provided was trash abatement. The liquidated damages provision read as follows:

Contractor shall ensure that trash and debris will not accumulate against the compound’s fence; contractor shall pay buyer liquidated damages in the amount of 5 percent of contractor’s daily fixed cost associated with this effort for each calendar day that the trash remains against the fence.

This provision did not allow seller a grace period to clean-up the debris prior to enforcement of the monetary damages. The naval base was located in the desert where high winds were prevalent. The contracting officer’s technical representative (COTR) would walk the grounds at 5:00 a.m. after a night of strong winds documenting the amount of debris collected at the bottom of the fence, then proceed to invoke the liquidated damages provision. In this instance, buyer’s liquidated damages provision was written in their favor; enforcement of this provision meant lower profit margins for my employer. That example is minor in comparison with monetary damages that may culminate when a contract turns bad and buyer seeks compensatory damages for serious issues, such as day-today slips in completing a major construction project.

As exemplified above, it is necessary to mitigate risk associated with contractual terms and conditions to protect the interests—particularly the financial interests—of seller. While these risks are usually equitably arbitrated through legal remedies found in either the UCC (when selling goods and services) or Common Law (when working services contracts), remember that the terms and conditions incorporated into the contract potentially nullify any rights that seller would otherwise enjoy under these laws. Accordingly, it is to seller’s advantage to mitigate potential risks associated with doing business with buyer by applying the simple risk transfer techniques found in this book.

Prior to getting into the main topic of this book—the review and negotiation of terms and conditions—the reader should become acquainted with offer and acceptance, as these terms play a vital role in the negotiation process.

A contract is formed when one party (buyer)—the entity procuring the goods or services—makes an offer, which is accepted by the other party (seller)—the entity providing the goods or services. A contract is formed once seller accepts buyer’s offer. It is important to understand that upon consent, seller accepts a contract including its terms and conditions. It is also important to recognize that commencement of work constitutes acceptance of a contract.

Seller should not assume that an offer remains open indefinitely. A general rule is that buyer may revoke an offer at any time prior to seller’s acceptance. In the event that buyer terminates an offer, seller no longer has the legal authority to accept the offer. Therefore, any contractual relationship that may have taken place is no longer binding.

Agreement is often reached after several rounds of negotiations. Seller will commonly respond to buyer’s initial offer with a counteroffer. A counteroffer is defined as an offer made by a seller who has rejected a prior offer. The counteroffer constitutes a rejection of buyer’s terms and conditions or a portion thereof. This terminates buyer’s power to accept the contract, provided that buyer does not agree to the changes made by seller. Buyer then typically proceeds to counter seller’s offer. This is commonly referred to as the “battle of the forms.” The battle of the forms concludes when both parties reach agreement on the terms of the contract.

When time is critical, buyer may authorize seller to proceed with the work without finalizing the contract, with the understanding that those terms and conditions in question will be negotiated at a later date. This should be in writing to ensure that both parties fully understand the terms of the agreement.

Another option is to conditionally accept the contract. When conditionally accepting a contract, make sure that seller’s intention is clearly stated in writing by annotating what the conditional acceptance entails. As assurance that a letter does not get separated from the contract, it is advisable to include a disclaimer in the contract under seller’s signature similar to the following example, “Seller’s acceptance is predicated on Seller’s comments and exceptions noted in reference letter number 080108005 dated January 10, 2008.”

If the contract was originally signed by buyer, consider including the following disclaimer under seller’s signature:

Seller’s acceptance is predicated on seller’s comments and exceptions noted in reference letter [insert assigned letter number] dated [insert date of letter]. Buyer’s silence on seller’s counteroffer and/or authorization to commence with work is considered by seller as buyer’s acceptance of the terms and conditions as amended herein.

Seller should follow this up with a telephone conversation with buyer to ensure that they are in agreement, and then annotate the files accordingly.

With this very basic understanding of offer and acceptance, we may dive into the gist of the book: recognizing, evaluating, and negotiating onerous terms and conditions. We begin with payment terms.