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Commercial Contracts – B2B
Robust commercial contracts are essential for all businesses. Contracts can take many forms – some are formal signed agreements, some are terms and conditions, some by way of a letter, and others by email. Contracts can even be made orally or as a course of dealing between businesses over a period of time. Regardless of the size of your business, or the type of contracts you have, your commercial arrangements are fundamental to the success of your business.
Ensuring that your business arrangements are reflected in your contractual structure, and understanding your exposure to risks and liabilities as a business, is a key driver of success.
For contracts relating to manufacturing and supply, services, agency and distribution, collaboration, purchasing, selling, marketing or technology, the commercial arrangements need to be fit for purpose. That is why there is no “one size fits all” when it comes to contracting.
Good legal advice at an early stage can help you identify key priorities and risks to guard against. Clearly, these should be carefully considered on a case-by-case basis.
- Performance obligations – these are the who, what, where, how and when.
If clearly articulated, well drafted performance and specification requirements can protect against misunderstanding and assist hugely with managing expectations. Getting the scope right, together with related dependencies, responsibilities and assumptions is vital and can be the difference between a good working relationship and a poor one.
- Payment obligations – who pays what, how and when.
Although seemingly obvious, many contracts are unclear about how pricing and payment mechanisms work. Additionally, suppliers may want to ensure that its prices remain competitive and allow an adjustment process for factors outside of their control, such as raw materials and shipping costs.
- Limitations and exclusions of liability – these assist the parties in managing their financial exposure to the project.
Both parties to a contract face conflicting pressures to ensure that their own liability is limited, whilst requiring any limits placed on the other party to be adequate if things go wrong. Some restrictions on liability are prohibited by law and any such breach may result in the offending party’s liability being deemed unlimited.
- Term of the contract and termination rights – how long one or both parties are tied into the contract is important.
The duration of the contract and what rights the parties have to terminate should be considered. This includes whether one or both parties should have a right to terminate for convenience as well as in the event of a breach. Does the contract allow for suspension of the services for any reason? What happens at the end of the contract, such as who owns any products or deliverables?
- How variations and changes are dealt with – things change and specifying how any alterations to the contract, particularly to scope or price, will be dealt with gives greater certainty.
- What happens if things go wrong – what remedies do you have?
Other than the right to terminate if things go wrong, parties should consider other options, such as establishing a remedial plan, specifying any liquidated damages that may be payable and a dispute resolution process to follow.
Whilst making your contracts bespoke to your business is important, so is ensuring that they are responsive to economic and political realities.
Uncertainty or Times of Economic Downturn
In times of uncertainty or economic downturn, businesses should carefully consider whether their contractual arrangements meet their needs. There are many ways a business can use its commercial contracts to improve its own financial situation and avoid falling victim to the financial difficulties of its business partners. These include considering:
- Brexit provisions.
- Potential for savings by using or including provisions such as benchmarking, continuous improvement, most favoured nation, exclusivity and minimum purchase obligations.
- Renegotiating the scope or price or payment terms.
- Using termination or partial termination rights.
- Using any auditing rights.
- Entering into any guarantees from directors or a factoring agreement or taking out credit insurance.
Protecting your Brand
Your commercial contracts should be used to protect your business’ brand and reputation. Provisions to consider include:
- Anti-bribery and corruption.
- Anti-modern slavery.
- Cyber and IT security.
- Intellectual property rights.
Contracts are not static. Laws change and your contracts should change with them. Forthcoming changes which will impact on how your current contracts are drafted include:
- General Data Protection Regulation.
- Employment considerations.
Businesses should ensure that their contract forms a legally binding agreement with their other party. Clearly, an agreement signed by both parties is (usually) good evidence of this, but businesses that contract in other ways (such as by using unsigned terms and conditions) should consider:
- the “Battle of the Forms”.
- The nature of non-binding letters of intent or the status of documents labels “subject to contract”.
- What is meant by a “signature”.
To discuss any of these issues further or to speak to one of our experienced commercial lawyers about what minimum legal and commercial protections you should include in your commercial contracts, please contact Nadine Duncan.