Jennifer Scott and Thomas King, our Corporate & Commercial team, consider when businesses should review their contracts and why doing so regularly reduces risk and exposure to unnecessary liability.
Contracts are central to the way most businesses operate, but too often they are revisited only once a problem has already arisen. Reviewing contracts early and often allows businesses to spot and correct any issues before they arise.
Our Corporate & Commercial team regularly advise businesses on commercial contracts and the practical steps that can be taken to manage contractual risk. A proactive review can help to ensure that contracts remain clear, up to date and aligned with how the business operates.
Before entering into a significant new contract
The best time to identify and address contractual risk is before the contract is signed. This is particularly important where an agreement is:
- high value;
- involves the processing of personal data;
- involves intellectual property;
- could carry reputational risk; and/or
- is for a key service.
It is not uncommon for commercial contracts to be drafted heavily in favour of the other party. It is therefore well worth conducting a focused review to identify unclear obligations or missing protections and points which may be worth negotiating before signature to ensure the terms are reasonable, and to ensure that the limitation of any liability is suitable for the business.
When standard terms have not been updated recently
Standard terms and conditions should be reviewed regularly to make sure they continue to reflect both current business practices as well as any recent updates in the law. This includes updating contracts where changes have been made to how the business operates, for example, changes to delivery methods, services moving to online only or the business selling to consumers as well as to other businesses.
Regular reviews are also key to ensure that the terms reflect recent updates in the law, regulations and recommended practices, which if missed, can leave a business vulnerable to substantial risk that could otherwise be avoided.
When payment or cash-flow issues arise
Late payment remains a common issue for many SMEs and written contracts are an important way to help avoid overdue payments and unfair payment terms. Businesses should consider whether their contracts clearly state when invoices can be issued, when payment is due, if interest incurs and what happens if payment is late (such as, whether work can be suspended or if goods can be recovered).
Where a contract includes terms relating to a credit limit, these terms should be reviewed regularly in periods of wider economic uncertainty to ensure the limits align with the parties’ commercial needs.
When the business changes or grows
Contracts need to be reviewed as the business expands. Accordingly, the terms should be reviewed when the business:
- Contracts with larger customers;
- Appoints new suppliers;
- Moves or expands to new locations;
- Launches new products or services; or
- Enters into new collaborations.
Reviewing terms regularly helps to ensure all contracts are up to date and uniform across the growing business which is key to risk management.
Before renewal, termination or renegotiation
Many contracts renew automatically unless notice is served by a particular deadline. Businesses should diarise renewal dates and review key agreements well in advance to allow time for renegotiation or termination.
Reviewing contracts early allows time to assess whether the contract remains commercially worthwhile and whether the terms are up to date with legislation and current practices.
When a dispute is emerging
If a dispute arises, an early contract review can clarify each party’s position. The contract may contain various notice requirements and other clauses which outline how a dispute is to be dealt with. Understanding these provisions at an early stage can help a business preserve its commercial position and maintain commercial relationships, avoiding costly resource draining disputes.
How we can help
If you are entering into a new commercial arrangement, updating your standard terms or simply want reassurance that your existing contracts still work for your business, our Corporate & Commercial team would be pleased to help. We take the time to understand your commercial priorities and provide clear, practical advice on drafting, reviewing and negotiating contracts, helping you ensure the agreements are satisfactory.
We can also provide in-house training on contract management and advise on matters such as implementing contract review policies which set out when and how a business should seek assistance. We also provide related services such as trade mark and intellectual property advice, as well as data protection advice and audits.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
