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Contracts… What are you getting into?

Posted
August 31, 2016
Business Law

As a small or medium size business owner or director, demands on your time and attention come from all directions, all of the time. Prioritising what you do is crucial to the success of the business.  So please pardon me in advance when I talk about one such demand which I don’t think gets high enough priority in the order of things.

Contracts have to be read and understood; and it really helps if you know some of the contract basics to look out for.  I am prompted to write this having just read an article in a prominent Sunday newspaper Business section on “calls for more protection” to help people get out of contracts.  It discusses signing-up to what turns out to be a dire service but then finding they cannot easily extract themselves from that position.  It talks about the all too prevalent dominance of larger companies over smaller ones.  The Federation of Small Business is concerned about it.

There are definitely issues around which small businesses feel impotent, but there are things that can be done to try to relieve it.  There are at least two sides to every contract, so if one side can “get out” easily, it likely is to the detriment of the other.  No contract is a one-way street, it’s a balance of arrangements and risks with both parties benefitting but also doing something or paying for those benefits.  And no contract is entered into unless there is a need on both sides – the difficulty really crops up when one party is in a much stronger negotiating position than the other.

So, rather than simply moan, what can be done to minimise being stuck in a contract you regret because it is so much against you?  Some things are quite simple.

  • Read it all the way through.  
  • Make sure you understand what it means, so you are aware of all the issues.
  • Assess the practical risks to you – is it a possibility you could end up in breach, and if so how much are you liable for?  What if you want to end it early for any reason? Is it just not worth the risk?
  • Do you know to what specification or standard you are agreeing to supply the goods or services to – and what terms does the law imply anyway?  And can you comply without fail?
  • Price in your risk.  A price is often the first thing agreed when actually it should be one of the last things, after the parties have agreed terms and the risk apportionment to each of them.  If you take more risk, get paid for it, for example, cover a specific insurance policy for it; or the extra cost of double-checking safeguards in your processes to minimise future problems.
  • Understand the principles of contract liability, limiting it where you can to the contract price or your profit element and to specific types of loss.
  • Understand the concept of consequential loss and why it should be defined and excluded.
  • Understand the provisions of termination. Can either of the parties terminate at any time on a notice without reason? In my view, all parties should have such rights although the notice period will be different to reflect the particular circumstances.
  • Similarly, do you understand the term/duration of the contract – does it rollover, can it be extended on the same terms (including as to price)? Do you have a say?
  • Make sure you know what you may have to pay if you are in breach or terminate.  For example, if you engage a “commercial agent”, did you know that if you terminate it other than for their breach you may have to pay additional and substantial compensation or indemnity?
  • If you sell through your website to consumers, are you aware of their cancellation and return rights?  And your duties in pointing out their rights and how they can cancel and complain?
  • Ask yourself, can I reject this contract rather than accept a high degree of risk – and then be brave enough to say no if on balance it really doesn’t work for you?

Having dealt with contracts of all sorts including values of hundreds of millions of pounds, I am still saddened by how little attention contracts on the whole get.  I have seen salesman can misrepresent things, promise the earth and make extreme statements - and even change a Company’s standard terms just to get a sale.   Too often, senior management sign a contract without reading it or (worse still) they do read it but fail to understand what it actually means, sometimes to the severe detriment of the Company.

I’m sorry, but signing a contract without a proper read and understanding and a risk/benefit/cost analysis, and then finding you are not happy with what it contains, and then complaining afterwards, is just your fault.  Far better to undertake a routine but simple risk assessment on which the decision is made to go into it, to try and negotiate it or to reject it.

At the same time, I realise it is impractical and far too costly for all contracts to be legally checked and that is why we here at stevensdrake offer a menu of services relating to contract reviews starting at a low price point, such as a basic checklist commentary on a few specific issues.  Of course we can also undertake a full negotiation service for you.  We can help you develop internal systems and checklists; train you (we have trained whole sales processing departments before) in the basics of what to look for and what things should set off alarm bells and what to do when you find those issues.

In too many instances, owner managers think that as nothing has gone wrong in the past they don’t need to spend a few hundred pounds on a contract check; but our experience shows otherwise, that firstly, they may have been really lucky not to have had their fingers burnt already; and secondly, a small investment upfront at the start can save a fortune later arising from claims and fees and even the solvency of the Company itself.

If you’d like an initial free discussion about any of these issues which may affect your business, please contact us. Don’t just moan to a Sunday paper – it’s too late by then.

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