Purchase Contracts: Best Practices for Buyers and Sellers

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way."

It is ironic that Charles Dickens’ famous words from “A Tale of Two Cities”, written over 150 years ago, could so accurately describe so many conversations taking place today when company leaders try to make sense of broken business deals, uncollected revenues, rejected sub-standard or nonconforming shipments, or unwanted litigation situations. This is especially troubling in times of economic crisis when every piece of business counts.

Every company is at some time both a buyer and seller of goods and services. Negotiating and signing clear and balanced purchase contracts is the most effective way to protect your company’s reputation, revenues, markets and customer relationships. The market is the most effective teacher of “best practices”, and if you learn from the mistakes of others, you will be wiser and wealthier. Preparing a good purchase contract should embody that old saying of “an ounce of prevention is worth a pound of cure.”

Investing time and expertise in a good purchase contract is one of the most important revenue-generating tools to avoid liabilities, future trade disputes, uncollected accounts receivables, reputation-damaging publicity, and claims of breach of contract and poor quality control. These can be easily avoided with a small dose of preventive attention in advance.

Whether acting as a buyer or a seller, the same basic common sense rules apply to protect your business. They boil down to a few basic principles:

  1. Ensure that the purchase/sale contract is clear about ALL the major terms and conditions without any room for different interpretations
  2. Ensure that the purchase/sale contract is clear about the responsibilities and obligations of ALL the parties without any room for different interpretations
  3. Ensure that the purchase/sale contract reflects the realities as understood by ALL parties without any room for different interpretations
  4. Ensure that ALL payment, legal title and delivery terms are reasonable and stated clearly
  5. Ensure that the purchase/sale contract is enforceable against ALL the real parties in interest and provides for dispute resolution mechanisms that practically work
  6. Build in practical communication and resolution mechanisms to solve problems before costly litigation/arbitration

Below we share some of the “best practices” that should be included in the basic form agreements for every company, even before specific “tailoring” to special needs. These should be useful to help navigate an increasingly complicated and competitive trade, investment and business environment.

1. Sign a Non-Disclosure Agreement (NDA) Before Discussions

Sign an NDA at the beginning of discussions to prevent unlawful use of trade secrets and/or confidential information (e.g. sales, design, or customer information) by other parties.

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