Contracts are the beating heart of international business.
A well-written, clearly understood contract can secure your business for the foreseeable future. A badly written or misunderstood contract can be nothing less than a catastrophe—potentially cheating your business out of what it deserves or burying it beneath the weight of obligation and litigation.
With the stakes so high, it’s natural to be nervous about negotiating contract, especially if it’s your first time. Luckily, you’re not alone. At Export Development Canada (EDC), international commerce is what we do. Here are some questions you need to ask before negotiating a contract of any size.
What do I want from this contract?
Obvious question, right? But without having a clear idea of your tactical objectives for the contract and your overall strategic objectives as an organization, it’ll be almost impossible to negotiate a contract that does everything you want it to do. Bottom line: The better job you do of determining what you want to achieve, the better your odds are of achieving it.
Of course, not all goals are created equal. Some of your objectives will likely be more important—or at least more urgent— than others and that’s probably the same for your counterparties, too. Maybe one or two of your goals are must-haves, while the others are nice-to-haves. It’s critical to have a firm understanding of which one is which, so your must-have objectives are met by the end of the negotiation. The last thing you want is to be left with a binding agreement that doesn’t fulfill your needs.
Many negotiations experts use the “SMART” system to outline their goals. SMART stands for specific, measurable, attainable, relevant, and timely (in this case, timely means accomplishing your goals within a specific timeframe). If your contract goals meet each of those criteria before you begin the negotiating process, you’ll be in solid shape.
TIP: The most direct way to ensure that your most important priorities are addressed is to begin the contract negotiation with those goals at or near the start of the agenda. Simply put, your top goals come first.
What are my alternatives?
Sometimes, despite your best efforts, you won’t meet all of your top goals in a negotiation. That’s when it may be time for Plan B: Alternative options to get all of your must-haves. These replacement solutions allow you to walk away if the initial negotiation comes up short.
Think about buying a house. Maybe there’s one house, in particular, you really like. You’ve done your homework and feel optimistic that your offer will be accepted. But as a backup plan, you have a few other listings in your back pocket, and refuse to move out of your current home until a deal is done. By having alternative solutions, you won’t be stuck without a place to live if the negotiation falls through for any reason.
If you’re unable to come up with a plausible alternative for a goal, be prepared to sacrifice other objectives to get what you want.
When should I compromise?
Most contract negotiations have compromise baked in. Unless one party holds all the cards, neither party is going to get everything they want just how they want it. But you can improve your odds by doing your best to identify the other party’s must-haves and using that evaluation as a basis for your negotiation strategy. By getting a clear idea of where the other party is willing to bend—and where they’ll probably stand firm—you’ll have a strong hand before you even sit down at the table.
TIP: Successful negotiators ask questions a lot more often than they make demands. If your negotiating partner seems to be unexpectedly rigid about an issue, ask them why. A dialogue always yields better results than an argument.
How can I find out what the other party wants?
The obvious answer is still the best: Do your research. It’s nearly impossible to do too much research about a business (and about the people you’ll be dealing with). Even if a particular set of findings is years old or seemingly irrelevant to the present negotiation, it can help form a more complete picture of who you’re dealing with, what they want and what makes them tick.
The party that has the most information often has the greatest amount of leverage. And, who knows, your research might even reveal that you have more in common with the other party than you thought. Any personal connection—children of a similar age, a shared hobby, mutual love of sushi—could make a difference.
TIP: One place to start is with EDC Company InSight. It’s a free service we provide to all Canadians to provide detailed, validated information about myriad companies, which you can rely on, as well as steps you can follow for your due diligence. If you can’t find the company you’re looking for, Company InSight will find it for you.
How can I make sure the contract is clear?
This isn’t as hard as it may sound because everyone involved in the negotiation want a well-defined contract with clearly understood obligations. To achieve this, spell out everything as clearly as possible, including:
- Specific dates
- Deliverables (what each party is expected to deliver)
- Amount of compensation
- Form of compensation
Potential risks (these can include everything from unforeseen delays and costs to employee injury) and what’s expected of each party if one or several of these risks do crop up
Naturally, these are just some of the basic requirements. You know the specifics of your own needs and situation, so don’t be afraid to listen to your instincts when mapping out the contract. If any part of the contract seems vague, poorly written, or not what was agreed to, speak up. Now is the time to hammer out these issues—later will be too late. Above all, you don’t want to regret signing a contract you didn’t fully understand. And be sure to consult legal counsel before signing any contract of any size: A few legal fees now may save you a world of headaches and expenses down the road.
TIP: If you’re negotiating anything to do with international shipping, get to know the Incoterms. Incoterms are internationally recognized codes used by shippers around the world to easily understand shipping costs, risks and obligations. Check out EDC’s free guide to Incoterms for everything you’re likely to need.
Where can I find out more?
Embarking on contract negotiations can be nerve-wracking. The stakes are high and a mistake could be costly to you and your business. But it’s a challenge you’ll need to face if you’re going to reach the goals you’ve set for yourself.
We’re here to help. Here are some free resources to build a greater understanding of how to negotiate contracts and be confident that you’ve made a good deal. Note: You’ll need a MyEDC account to access most of them.
What is MyEDC?
MyEDC is a free service we provide to all Canadians. We’ve gathered the resources, services and tools you need to protect and grow your business—all in one spot—to help you get clear answers, make smart moves and succeed anywhere in the world.
You can find out more about MyEDC here. If you’re running a business in Canada, we can help you grow your business and expand into international markets. MyEDC is one of the best avenues for us to support your business.
Note: The contents of this article are intended to be used for general information purposes only and are not to be construed as legal advice. Please consult a legal representative for advice on your specific circumstances.
This 2021 webinar will help you learn some of the best techniques for creating successful contracts that will protect your business in the international marketplace, straight from veteran businesspeople.
Understanding basic contract terms is a must. Our trade advisory board has put together a thorough guide to help you navigate all the contract terms you’re likely to need as well as the risks you’ll have to manage.
Our partners at the International Forum for Trade Training (FITT) set the global standard in training and certification for trade. This free module about contracts will teach you the rules you’ll need to follow, the terms you can use and the common pitfalls you should avoid.
This guide contains comprehensive, up-to-date legal information on a wide array of contracting topics, from making good-faith commitments to your obligations under international law. You’ll need a LexisNexis membership to view this guide, but you can sign up for a free trial with no obligation.