The importance of reviewing contracts

News that Britain is now out of its Great Recession means that businesses will face new and different challenges to those they have experienced in the last six years. As the market changes, so too will risks, liabilities and exposures, as the business focus switches to growth.

Changes in the economy mean there have been changes in supply networks and customer demand. There have also been regulatory, environmental, statutory and technological developments. These put the spotlight on the importance of reviewing and re-evaluating contractual relationships. According to the National Institute of Economic and Social Research, the UK is now close to its pre-recession peak.

The market upturn is good news for the economy but how should businesses ensure they are using their contractual terms to their commercial advantage?

There are a number of reasons why this is an appropriate time for a business to review their contracts.

They may wish to change strategic direction or centralise spending. It may be necessary to renegotiate prices or process higher value orders or sell through multiple channels.

Business growth in an upward economy means that firms are likely to engage with more clients and sub-contractors.

A bigger business is generally a more complex business which can lead to greater risk. Low interest rates may tempt firms to take on more commercial risks. There is nothing wrong with that, provided reasonable protection is put in place. Contractual terms are there to safeguard your business as far as possible. They create clarity and therefore help minimise legal disputes. They can also help improve customer service. Standard terms must be effectively incorporated, and printing them on the reverse of invoices is not enough. A business must ensure that its terms prevail over any competing terms which the customer or supplier looks to impose.

All businesses need to ensure they have contractual clauses to limit liability but this area is heavily regulated; different controls apply to the type of liability your business is seeking to limit or exclude and whether the customer is another business or consumer. If you ignore these controls, any limit or exclusion is likely to be unenforceable.

Contracts should clearly set out payment terms and the rate of interest that will be charged if invoices are not paid on time.

It is not enough to just have this in writing though, you need to ensure that your business has proper credit control systems in place and that you are not afraid to enforce these if a gentle approach has failed.

Contracts help manage expectations by ensuring that project scoping and planning documents are included as part of the negotiation process.

A contractual review should encompass all business arrangements including customer and supplier’s terms and conditions, purchasing and outsourcing agreements, facilities management, logistics, IT support and maintenance contracts. The terms of each relationship may be documented across several separate agreements – signed or draft agreements, email correspondence, quotes, schedules, invitations to tender etc., so it is important to analyse each of those when conducting a review.

Certain contracts may also be affected by implied terms, i.e. related to the Supply of Goods and Services Acts. The value of each commercial relationship is heavily reliant on well drafted contractual arrangements but operational management of that contract and relationship will ultimately also impact on profits, especially when it comes to long term contracts. For businesses considering whether to review their contracts, now is the perfect time.

This content is correct at time of publication