Contract Negotiation Strategy

Successful contract negotiation is not simply a meeting around a completed draft agreement. It is often a multi-stage process, from quotation and letter of intent through to the final agreement. Without a clear contract strategy that facilitates contract negotiation, the risk of misunderstandings, prolonged negotiations and disputes about what the parties have actually agreed increases.

In this article, we explain how to work more structurally with contract negotiation, how a letter of intent can be used as a tool in the process, and what significance the duty of loyalty has before an agreement is in place. The aim is to provide practical support for those responsible for business transactions who need reliable contract advice, whether as a company director, commercial lead or when instructing a contract lawyer.

Letter of intent – a link between negotiation and a concluded agreement

A letter of intent, often abbreviated as LOI, can be used to structure the route towards a final agreement. It is particularly common in larger transactions, complex collaborations or where several steps need to be clarified before the parties can commit fully.

An LOI may, for example, specify:

• the objective of the negotiation;
• the key issues that need to be resolved before an agreement can be signed;
• the timetable for due diligence, internal approvals and contract negotiation;
• any exclusivity during a defined period; and
• confidentiality, information exchange and communication channels.

A central issue is what should be legally binding and what should be non-binding. Certain provisions, such as confidentiality and exclusivity, are often intended to be binding, while other provisions express the parties’ intentions without constituting a completed agreement. It is critical that the wording of the document reflects the parties’ true intention, as ambiguity may later lead to a dispute as to whether a binding agreement has arisen in relation to different terms.

A previous article examined in greater detail the distinction between preparatory documents such as letters of intent and binding agreements. That analysis can usefully be read together with this article to create a coherent strategy for contract negotiation.

A well-considered use of a letter of intent can therefore:

• clarify the parties’ roles, authority and expectations in the negotiation;
• support the internal decision-making process of both parties;
• reduce the risk that one party feels “misled” if negotiations are discontinued; and
• provide a stronger basis for a commercial lawyer or in-house legal counsel supporting the process with contract advice.

Contract strategy that facilitates contract negotiation

A contract strategy concerns how the company approaches its more important agreements methodically, not only the content of individual clauses. For contract negotiations, this means considering a number of fundamental questions before the first meeting:

• Which commercial objectives should the agreement support: revenue, risk allocation, flexibility or long-term collaboration?
• Which contractual terms are “must-haves” and where can you compromise?
• Which internal approval levels are required for different concessions in the contract negotiation?
• What information can you disclose at an early stage, and what requires confidentiality undertakings or an LOI first?

When the contract strategy is clearly defined, it becomes easier to manage the contract negotiation, whether it is conducted by operational leads or with support from a contract lawyer. This reduces the risk of spontaneous concessions and inconsistent positions from one meeting to the next.

For companies that frequently enter into similar agreements, it is sensible to work with standardised starting points: recurring allocation of liability, principles for price adjustments, service level arrangements, termination and dispute resolution. With that foundation in place, the contract advice can focus on the specific risks in the transaction at hand, rather than recreating the structure every time.

Duty of loyalty in contract negotiation

Even before an agreement has been concluded, a certain duty of loyalty exists between the parties. In the context of Swedish law, this follows, among other things, from general principles of contract law concerning care and good faith in contract negotiation, and has been developed through case law and legal doctrine. In simplified terms, the duty of loyalty means that the parties must not act recklessly or misleadingly towards each other during the negotiation phase.

The typical situation in which the duty of loyalty in contract negotiation becomes relevant is where one party continues to negotiate even though it is already clear that it does not intend to enter into an agreement.

There is no general rule prohibiting parties from discontinuing contract negotiations. On the contrary, the main principle is freedom of contract: a party is free to decide not to contract. However, if one party has, through its conduct, created justified expectations on the part of the counterparty, and the counterparty has incurred significant costs in reliance on that conduct, a disloyal withdrawal may give rise to liability for damages, known as culpa in contrahendo.

Such liability always depends on the circumstances of the individual case. Support from a contract lawyer can be valuable, not least to:

• assess how far the negotiations have in fact progressed;
• draft LOIs, term sheets or other documents that reduce the risk of uncertainty around the duty of loyalty; and
• manage documentation and communications so that expectations are controlled.

The duty of loyalty in contract negotiation is therefore not a simple “yes or no” issue, but a scale of possible obligations depending on the parties’ conduct and how the negotiation develops. For that reason, it is important to consider issues of loyalty as early as the formulation of the contract strategy.

Checklist: a contract strategy that facilitates contract negotiation

To make contract negotiation more controlled and predictable, the following checklist can provide support:

• Define the commercial objectives: Clarify internally what the agreement is intended to achieve and which risks are acceptable.
• Set a contract strategy: Determine the main principles for liability, limitations and key terms before the negotiation begins.
• Use an LOI when needed: Consider a letter of intent for larger or complex transactions, particularly where timetable, due diligence or exclusivity are important issues.
• Be clear about what is binding: State expressly in the LOI and other documentation which provisions are legally binding and which merely record the parties’ intentions.
• Manage the duty of loyalty: Avoid creating false expectations, take care with information disclosed and document important stages in the contract negotiation.
• Control internal authority: Set boundaries for which concessions may be made without further approval, so that an individual negotiator does not inadvertently alter the risk profile.
• Standardise recurring terms: Work with well-considered standard clauses for recurring commercial situations to simplify future contract negotiation.
• Bring in legal expertise at the right time: Involve a contract lawyer early in larger transactions, so that the contract strategy and legal structure work together.

A structured contract strategy that facilitates contract negotiation, combined with considered use of LOIs and awareness of the duty of loyalty, gives better control over each negotiation. It reduces the risk of legal disputes, but also of commercial surprises when the agreement is later applied.

At Morling Consulting, our contract lawyers help companies plan, structure and negotiate agreements in a way that supports the transaction while managing legal risk. Through qualified contract advice, we can support the development of contract strategy, the drafting of letters of intent and the assessment of the duty of loyalty in ongoing negotiations.