Q: When to contract? A: As soon as possible!

07 Apr 2016
The early stage of new business discussions is often a delicate time. The emphasis, as it should be, is on keeping things positive and exploring the potential in a new relationship.

However, all too often those initial discussions lead to further discussions. Perhaps confidential information is shared and then work starts without the parties having any terms or contract in place. It’s remarkably common that the contractual process lags reality by some distance. At some stage, someone will raise the need for a contract and that’s often when the problems start.  The work is partly completed, or in some cases almost finished, but the parties have no contract. A contract is tabled but is rejected and the parties are left to try to negotiate themselves out of a testing situation. Money or services might be withheld and the relationship is now very different.

All too often, we are contacted by companies desperately trying to find a way of rectifying the situation where they have invested heavily without any contractual framework and have found themselves unable to agree fundamental aspects of the proposed business relationship. This almost always leads to a total breakdown in that business relationship. If software issues are involved, the developer of the software retains the intellectual property rights in the software and the party commissioning the software is consigned either to swallow otherwise unacceptable commercial terms or else wave goodbye to their investment – leaving the software developer owning software which is the brainchild of the commissioning party.

There are ways out of that kind of problem but the real trick is not to get into that situation in the first place.  As a bare minimum, a non-disclosure agreement (NDA) should be executed as early as possible in the process in order to protect the confidential information disclosed in pre-contractual or early-stage discussions. If needed, the NDA can be structured to cover key intellectual property issues and it can also apply if or when work starts.

The NDA should be followed up quickly by the tabling of contractual terms, either in full or in the form of heads of terms (i.e. a brief, plain-English list of the key aspects of the relationship, legal and commercial).  The preference is for full contractual terms, as heads of terms are typically non-binding in nature. However, heads of terms can be very useful and can act as a lighter and more palatable means of setting out the contractual framework. They can also act as an effective early warning system, flagging up areas of potential dispute or fundamental disagreement.  If those issues arise and prove impossible to get around, them it’s best to shake hands and walk away at this early stage – hopefully with no harm done. On the positive side, if all the key points are agreed in the heads of terms, you probably have a good basis for going forward with confidence.  You will also have a good framework for drafting contractual terms, which should help speed the contractual process.

The key point is to address the fundamental contractual issues as early as possible in the discussions. Find out early if you have a good basis for investing your valuable time, effort and money in a project. Don’t wait until you’re too far down the road and have made investments which you simply can’t recover. Involve lawyers early in this process and cover off the important legal issues, which you can then combine with your commercial key points into a document which allows you to set out your position clearly. Following that process will keep things businesslike and help you avoid wasted time and investment.