What is a contract?
A contract is an agreement two or more parties enter into with the intention of creating binding legal obligations.
What are the requirements of a contract?
For a contract to be considered valid and binding in South Africa, the following requirements must be met:
- There must be a meeting of minds between the contracting parties.
- The parties must have seriously intended the agreement to create binding legal obligations.
- The parties must have the capacity to contract.
- The agreement must have certain and definite terms.
- The necessary formalities must be observed.
- The agreement must be lawful.
- The contractual obligations must be possible of performance.
What are the characteristics of a contract?
A contract has certain characteristic features.
- A contract is a juristic act, i.e. a contract has legal implications.
- A contract is necessarily bilateral or even multilateral. It cannot be unilateral.
- A contract entails undertakings or forbearances, on one or both or several sides, to tender certain performances, i.e. to give, to do or not to do. Alternatively, it may be a warranty that a certain state of affairs exists.
- A contract usually entails reciprocity, in that one party's performance is promised in exchange for the performance of the other party.
- The contracting parties are required to conduct their relationship in good faith (bona fides).
Types of Contracts
Specific types of contracts include:
Sale
Lease
Employment
Consultancy
Independent Contractor
Partnerships
Agency
Surety
Indemnity
Cession
Procurement
Licensing
Sponsorship
Confidentiality
Arbitration
Restraint of Trade
Pre-incorporation
Services
Mzaidume Consulting has extensive expertise and experience in the negotiation, drafting, vetting and management of contracts.
A. Contract Negotiation
Contract negotiation is the process of give and take the parties go through to reach an agreement. In a typical contract negotiation, each party compromises on some issues in order to get what it really wants. Or, as it is often said, "You don't get what you deserve; you get what you negotiate."
Some of the tried-and-true negotiation strategies include:
- Break the negotiation into parts
Some negotiations disintegrate because the parties take an "all or nothing" approach, in which the other party must agree to all of their terms in order to move forward. A good way past this type of roadblock is to break the negotiations into sections ("compartmentalize") and reach an agreement on each part separately. This makes it feel as if you are reaching a series of solutions -- and making progress -- rather than battling one big war.
- The "I'm only asking for what's fair" approach
This approach emphasizes that one party's requests are simply in line with industry standards or current market prices. This strategy relieves you of the obligation to justify your terms or spend time negotiating for them. If you emphasize that you are asking only for standard deal terms, the burden shifts to the other party to convince you that you should make an exception in this case (and to make that exception worth your while by offering concessions elsewhere).
- The Getting to ‘Yes’approach.
To reach agreement (to get to "yes") the negotiating parties must separate the people from the issues (that is, remove the emotion from the equation), look beyond the negotiating parties to see who or what is the real interest or influence affecting each party, generate options to create a problem-solving environment, and neutralize conflict by sticking to objective and easy-to-justify principles of fairness.
- Take control
Controlling the location, timing, topics, and pace of negotiation (sometimes called "controlling the agenda") may create an advantage. By controlling the negotiations, you get to decide which topics are discussed and in what order. Sometimes, parties use a passive approach to take control -- for example, by seeming to act as the moderator for the negotiations or by offering to "summarize" where things stand (in a letter or brief statement at the start of a negotiating session). No matter how the reins are seized, the party that frames the issues generally has more control over how those issues are eventually resolved.
- Prioritize, prioritize, prioritize
Contract negotiations typically focus on revenue and risks. But clearly, some revenues and risks are more important than others. When one negotiates, one needs to know what his/her top priorities are -- usually the business or money-making opportunity offered by the deal -- and how his/her other priorities rank below that. This will help one keep his/her eyes on the prize and avoid getting bogged down in issues that are not as important to one.
- The "offer-concession" strategy
One needs to make sure the other side leaves the negotiation feeling they've made a good deal. The offers one makes should always leave one with enough room to make acceptable concessions to the other side. Meet the other side halfway. This means one should not start negotiations by revealing one’s absolute bottom line. If one leaves himself/herself room to negotiate, the other party will feel that they've won something. One will often be surprised to find that the other party is willing to give more than one would have been willing to accept.
- Question rather than demand
If the other party is taking a hard line on certain issues, one should ask why. Questions open up the discussion; arguments often close communication down.
- Find points of agreement and end on a positive note.
This upbeat approach requires that one to find opportunities to say, "You're right about that," or "I agree." However small these points of agreement may be, they help set a collaborative tone. At the same time, if negotiations are spread over a series of meetings, one should always attempt to end each one positively. This too, goes a long way to establishing a collaborative tone that is more likely to be conducive to progress and result in an agreement.
- Do your research
The party with more information usually has more leverage. For example, if one knows that the people who put an offer on one’s house have already sold their own house and must move quickly, that gives one more leverage -- and some extra bargaining chips. One may be able to insist on a higher price, particularly if one is willing to allow them to close the deal fast. Sometimes, even personal information about the parties may affect one’s ability to create a more collaborative atmosphere ("Hey, I'm racing in that triathlon, too.")
- Dealing with burnouts and ultimatums
If the other party resorts to threats ("Agree to these terms or there is no deal") or wages a war of attrition by dragging out the negotiations, one will have to decide what the underlying deal is really worth to one. If the ultimate prize is so valuable that one is willing to accept the other party's ultimatum or put up with endless haggling, that's fine. Similarly, if the other party has all the power (for example, it's the only known buyer for your product), then one may have to grin and bear it for a while. If not, however, the best strategy is often to walk away from the negotiations. If the other party really needs the deal, it may re-evaluate its tactics and return to the table. If not, one can move on to more productive negotiations with someone else.
- Use facts, not feelings
Successful negotiators separate business from personal, facts from feelings. They avoid letting an unpleasant personality or style drag down the negotiations. They also avoid making the negotiations seem personal by using language such as "I believe" or "I think," focusing instead on statements of fact ("If we pay this price, both parties to the venture will be at risk.")
Source: http://www.nolo.com
B. Drafting of Contracts
Contracts need to be in language that is plain, use the right words, in the right way, to effectively define the agreement between the parties. This ensures that the correct contractual requirements of the parties are met and their interests are protected. At the same time, they serve to avoid exposure to legal, business and other risks; to costly and unnecessary litigation; and to unintended and often perverse consequences. In most cases, all of this is easier said than done and persons who negotiate, draft and vet written agreements often have an incredibly challenging responsibility.
C. Vetting of Contracts
Before signing a contract, it is important for each party to read the clauses of a contract and to satisfy themselves that they understand the meaning and implications of each provision in the contract, to make sure that their rights are protected and to have clarity regarding the duties that they are assuming.
D. Contract Management
Contract management is becoming a core competency critical to an organization’s competitive advantage. Recent studies have shown that organizations with established and mature contract management processes are able to generate substantial savings and have a distinct competitive advantage over their competitors.
Despite this, many organisations do not have clear contract management practices or roles and responsibilities, with supply chain relationships being managed in an ad hoc and sporadic fashion. Best in class contract management arrangements involve the continuous evolution of the contract, building and sustaining excellence within client-supplier relationships and an ongoing assessment of whether the terms of the contract and service delivery mechanisms are right for both parties.