As a medtech business, you will need to enter into a range of commercial contracts, for example with suppliers, software developers, manufacturers, distributors and customers. Sometimes you are able to use your own terms and conditions, but often you can’t because the other party insists on using theirs. And in that case it can be hard to see the wood from the trees when it comes to negotiating the contractual terms. For larger, business–critical contracts, you may also want to engage lawyers to help ensure you are not exposed to undue risk in the contract and to make sure the contract will deliver what you want it to. However you approach contract negotiations, an understanding of the basic issues will be really helpful.
In this short article, we look at some of the key terms of commercial contracts which you should bear in mind, and provide some guidance on how to make sure you get the best from your lawyers.
What are the basic principles and terms of a commercial contract?
At the outset, you should ensure you have a clear commercial understanding with the other party as to what the basic principles and terms should be. We have set out below four principles which we believe are vital when drafting a commercial agreement.
- Duration of the contract – what is the term of the contract? Is there an option to extend the term of the contract? If so, do both parties have the right to extend it or just one party? What notice period will be required in order to request such extension and for how long can the contract be extended? As a general principle, you should be careful to ensure you do not get “locked in” to a contract that you cannot exit from relatively easily if it is not working, though you should be aware that sometimes the other party may extract a “price” for early exit in the form of compensation payments.
- Regulatory requirements – depending on the purpose of the commercial agreement, one or both parties may need to satisfy specific regulatory requirements i.e. GMP, MHRA, CQC registration. This will need to be clearly reflected in the agreement, including whether termination or suspension of a registration will trigger automatic termination of the agreement.
- Price – of course the value of the contract is vital to both parties, however you should ensure that you have agreed the contract price with the other party at the outset, otherwise this can delay finalising the commercial agreement. It is important to agree as to whether the price is fixed or variable, whether inflation applies, if there are any additional “add-ons” which can be purchased, when payment is due and how an invoice is to be issued. Also, how frequently payment is made i.e. monthly, quarterly, yearly and whether the agreement can be terminated if payment is not made within a specified time period.
- Intellectual Property – in any medtech business, protecting and exploiting your intellectual property is essential. One common scenario, for example, is to ensure that if you are working with a third-party developer who is supporting you on building your technology, you will want to ensure the contractual arrangement you have with them requires the developer to assign to you all intellectual property rights arising from the technology so that you have ownership of the IP before you go out to market. Any agreements that you enter into with third parties, including where you licence rights to your intellectual property, should clearly set out the rights being given to the other party and any benefits that you will derive from the licence, e.g. royalties or licence fees.
Four common issues faced by clients when negotiating commercial agreements and engaging with lawyers
When negotiating a commercial agreement, we have listed below four main issues commonly faced by clients and how they can be resolved.
- Being clear on what you want – it is important that you have a clear understanding of what you want the contract to say and if you are instructing lawyers to support you on negotiating the contract it is important to provide them with clear instructions. This will help ensure they can best support you to secure a good deal and it will also keep costs down.
- Instruct specialist lawyers – depending on the nature of the agreement, it may be extremely beneficial to instruct specialist lawyers so that they can advise you accordingly, based on their expertise in the sector, and help negotiate the contract (as best as possible depending on the arrangements you have agreed with the other party). That is why at Hill Dickinson we pride ourselves on being experts in the healthcare and life sciences sector. Our commercial and sector knowledge allows us to give clear and commercial advice to our clients in this field.
- Ensure you remain open minded – during the negotiation process you may end up feeling bogged down and fed up due to ongoing discussions with the other party, that is why it is important to ensure from the outset that you build a trusting and strong relationship with the other side you are partnering with. This will guarantee a swift resolution to any sticking points which will allow both parties to agree to terms they are both comfortable with.
- Securing the best deal - finally, it is important to remember that a good contract will work for the benefit of both parties, so you will need to accept some risk when negotiating the terms of the contract.