Key Commercial Contracts
A key contract represents a substantial level of risk and reward for your business and can remain in effect for a substantial period of time. The very viability of your business may depend upon not getting it wrong.
Many people (including some lawyers) seem to think that producing a suitable contract to record the terms of a high-value long-term business arrangement between two parties – be it agency, sub-contracting, distribution, long-term supply of goods or services, franchising, intellectual property licensing, or consortium or similar joint venture arrangements – is just a question of the lawyers finding the right precedent, pressing a button and then filling in a few blanks.
Whilst it’s true that you can produce very long and (to the layman) very impressive documents easily in this way, the chances are high that these agreements will not properly reflect what the parties have agreed or the key commercial terms properly.
These documents are critical to your business. They need to be properly tailored to your circumstances by a good commercial lawyer who understands your business and the commercial purpose and key points of the arrangements to be documented.
In addition to the matters set out here in respect of Terms and Conditions generally, consider whether your Commercial Contracts:
- Are with a party or parties who can’t afford to pay you/aren’t properly resourced to deliver their obligations to you under the contract. You may need to consider parent company guarantees, joining in other group companies as contracting parties or seeking personal guarantees from involved individuals. Or even just walking away. If, for example, a sub-contractor is not properly resourced and, if they fail to do their job, that would expose you to excessive risk under your main contract.
- Properly reflect all the commercial terms. You should make sure that your lawyer is advised of any specific arrangements made as regards matters like payment, delivery, term and termination, specification, minimum volumes, key people, exclusivity, obligations of each party etc. so these can be properly reflected in the drafts.
- Are drafted in a one-sided way in favour of the other party. Many legal precedents are drafted heavily in favour of one side or another and if producing a document for one side, that side’s lawyer will inevitably produce a draft accordingly (which will usually require significant amendment before it’s commercially acceptable to the other).
- Allow for early termination without cause or if the contract becomes loss-making. A supplier will often want a guaranteed minimum return per annum to enter into a long-term agreement if it is to be exclusive in some way or commits the supplier to keeping resources available to fulfil it. If the minimum value is not received the options are for the supplier to be able to demand any shortfall is paid up, or (more friendly to the customer) to allow the supplier to terminate early and walk away.
- Have any in-built price adjustment or change control mechanisms. Built in price adjustment is suitable for supply contracts where raw material or other costs of supply (external to the supplier) may vary over time and the parties need a mechanism to reflect this in the price. Also many supply contracts provide for an automatic annual RPI increase. Be careful of contracts (as a customer) that seek to allow the supplier to unilaterally increase prices to whatever they want unless this only happens when the contract is automatically renewed at the end of a period and the customer is given an option to terminate if this is done. Change control is the agreed variation of the services to be provided – often seen for example in supply of bespoke software contracts – this may also lead to a renegotiation of the price. Change control clauses set out the mechanism and timescales for agreeing this. They are not to be confused with ‘change of control’ clauses – which provide for early termination by one party if the other is taken over. These change of control clauses can be seen (for example) in almost all banking facility documents but they also find their way into lots of contracts where they are not really appropriate – and there they should be qualified so that the terminating party can only terminate for change of control if it’s reasonable to do so – for example if key people leave or the other party is acquired by a competitor of the party seeking termination.
- Protect your confidential information and intellectual property. This can get very tricky when software or other copyright work is being supplied and it’s in-part based on pre-existing (or ‘core’) IPR and know-how of the supplier and in part created specifically for the customer – although to some extent when software is being created both parties should be attuned to their respective rights for ongoing use and licensing to others at the end of the agreement. But it’s also important in terms of brand-name protection and ownership in e.g. distribution, agency and manufacturing agreements. Data Protection is another area where it’s becoming more and more critical to make sure each party’s responsibilities are made clear and can be absolutely vital if future marketing use of customer data by one of the parties is commercially important to them.
- Restrict your or the other party’s ability to provide similar goods or services to others (either at all or on better terms) or to ‘poach’ the staff of the other. Exclusivity is often a key commercial point, but parties can’t just agree whatever restrictions they want in this area as there may also be restraint of trade and/or competition law concerns which strike down restrictions which go beyond what is necessary and legitimate in the circumstances.
- Have properly drafted limitations and exclusions of liability (including indirect and consequential losses and overall damages cap). This is a very technical area and terms such as ‘indirect’ and ‘consequential’ don’t carry their ordinary English language meanings here. The Unfair Contract Terms Act and, if dealing with consumers, many other statutory restrictions, may apply to what limitation/exclusions can be included. It’s also important to consider the insurances available to the parties to cover such claims.
- You should also watch out for any indemnities which are contained in agreements drafted by others as these will usually avoid being excluded/limited by any limitation provisions.