44. Contract terms – did you read the contract before signing? No, m’lud, they were too long and boring!

What do good contract terms and conditions look like?

“And did you read the contract terms before you accepted them?”

“No, m’Lud, they looked very long and very boring and life felt too short.”

This defence might meet with some sympathy in a dispute over an on-line retail purchase; but in the commercial world, business men and women are expected to know exactly what they are signing-up for.  Which means having to plough through pages of contract terms that can sometimes seem pretty impenetrable.

Employing a lawyer to do it for you is too-expensive a luxury for the majority of small businesses.  But then most commercial agreements cover a lot of similar ground that will soon become familiar with a bit of experience.

How you go about agreeing terms really depends on your customer or supplier.  Investing in some legal advice when you draft your own standard terms should get you a template that will work for years to come (with a little tweaking).

Where your customer or supplier is a large business, the game changes.  Having shaken hands on the deal you are now faced with getting an agreement sorted out with their layer, in-house counsel or maybe someone in procurement.  This can be a painful process if your “adversary” is a little less commercial or flexible than you might like.

Often, when faced with their standard agreement, you will have to take a commercial view and let some things pass that in an ideal world you would want removed or changed – possibly because they are just not relevant to the work to be done.

The 7 questions to ask yourself

This does not mean you have to roll over completely.  You still have a duty to your business to make sure the terms are fair, appropriate and workable.  Apart from the obvious of making sure the agreement accurately reflects what the contract is for and at what price, key things to ask yourself include:

  • Are the terms fair?  Most terms should work both ways.  For example: if they can give one month’s notice of termination, you should be able to as well.  Indemnities for damage to property should be bi-lateral.  Contract writers naturally have the interests of one party closer to their hearts.
  • Are the terms realistic?  If you have insurance cover of £1m on a particular risk and the contract says it should be £5m, don’t ignore it.  £5m may be their default amount and £1m may be perfectly appropriate for the matter in hand.  Tell the other side you have £1m cover and see if they push back.  Don’t sign something you know is simply wrong or inappropriate.
  • Are you actually covered?  Indirect consequential loss is a favourite contractual catch-all but may be excluded from your insurance.  On a contract to supply an HR records system, the risk of consequential loss may be low.  With an on-line purchasing system it may be very high.  Be sure you can handle the risk and are covered.  If not, ask for an amendment.
  • Are the penalties proportionate?  If the liquidated damages for late delivery could put your business under and the contract is likely to be subject to delay, get the damages reduced and make sure you will only pay in the event that your business is entirely responsible for the delay.  The wording will be loose and not in your favour.  Get it tightened up.
  • Are the invoicing and payment terms workable?  Make sure there are no possible technicalities that may delay invoicing or payment.  Invoice on delivery is fine with goods but what about services?  What if formal completion is delayed by a technicality such as a final sign-off meeting which you alone cannot convene?  Don’t be a hostage to fortune – put a time limit in.

Finally, and on a practical note, make your proposed changes to an agreement in the document using “track changes”.  It’s what lawyers do and here are a couple of benefits:

  • Speed and efficiency are the obvious ones as you don’t have to try to explain the proposed changes.
  • Also, as you have made the desired changes, there can be no misinterpretation of what you want.

Clearly this does not absolve you from explaining the rationale for the changes, but if you are reasonable the other side should be too.

Reviewing contracts and other legal documents is a skill and something that the vast majority of FDs relish – and it comes naturally to them.  If you need a kick start then why not contact Tectona?

This blog has been written by Nick Lawson, Client FD, Tectona Partnership.

To find out more about contract terms and conditions or if you would like to discuss any of the other topics covered above further with Tectona Partnership, please contact Mark Nicholls on 07818 407061.

Posted in Tectona Ten - Business Planning, Tectona Ten - Compliance and Managing Risk, Tectona Ten - Managing Cash.

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