Minimise your business risks - review your contracts and terms of business

Posted: Tuesday, 21 August 2012 @ 10:00

Having read my colleague Sue Mann’s blog last week (New customer or supplier? How to manage your risks), I realised I might be missing an opportunity to advise clients who ought to be reviewing their standard contract terms or their terms of business.

As someone who tends to work with businesses that either don’t have adequate written contracts in place, or are using the terms of a contract to try and obtain reparations from a third party, I am pretty familiar with some of the confusion in this area. Not all business people realise that a series of email exchanges may bind them legally. A lot are not really aware of the clauses for the termination of a contract between themselves and a supplier or customer. And many think they don’t need a legally binding contract if the values are quite low, without perhaps realising the knock-on effects in terms of liability that may accrue if, for example, your component part is used in a much larger scale product or project.

This set me thinking and I asked Sue for her advice on when I should be advising my clients to rethink their commercial agreements, rewrite their standard terms of business or review their contracts for the supply of services. Here are her top 3 suggestions.

Three reasons you MUST review your contracts:

  1. Business growth
    This is perhaps the most obvious reason you would need to make sure your contracts reflect your business activity. As you grow, you are likely to have more customers, more suppliers, more employees, more disputes and generally more risks. You’re also likely to have higher value sales, perhaps a more complex sales process and you may sell through multiple channels.

    To take a simple example: a web development company designing and hosting websites. To start with, you might create fairly straight-forward brochure sites for small and start-up businesses. Your terms of business do little more than explain your payment terms, as that is your main priority - to do the work and get paid.

    Over time your expertise grows, you develop bespoke software, employ an in-house designer and start to do more complicated e-commerce sites which generate significant income for your clients. Your clients tell you that without their websites their businesses would fail. They rely on sites being online 24/7 and expect compensation if service standards are not met. You start to work with larger companies who refuse to accept your standard terms of business and instead want you to sign up to their contract for services.

    By this stage you need to be clear about things like copyright and intellectual property of the sites that you develop, as well as the software that the sites use. You need to ensure you have clauses in your contracts to limit your liability should a client’s website break legislative rules, and you will want to make sure that project scoping and planning documents are included in the contract negotiation stage, to avoid a situation where you don’t get paid for work done.

    A bigger business is generally a more complex business, and complexity means greater risk. Your contracts and terms of business are designed to minimise your risks, so do review them as you grow.

  2. Your sales process changes
    When a commercial solicitor writes a contract for a client or prepares a set of terms of business (usually called Terms and Conditions) they will need to know all about how your business operates and very specifically how you make your sales.

    The trap I’ve seen many business owners fall into is to assume that their terms of business, written years ago when all sales were being made by the business owner, face-to-face with the customer, are still appropriate when they are now selling through a telephone sales force and online with customers they no longer know personally.

    In law there is something known as ‘offer and acceptance’ – which basically defines the point at which a legally binding sale is made. This can be very different across different sales channels, especially on the internet where specific rules apply. Your sales people may be creating legally binding sales without your knowledge that you could be held to.

  3. You’re asked to sign a new contract or agreement
    If you are asked to sign a new agreement with a major supplier, you really should be looking at your own contract or terms of business. You may be taking on new liabilities, or there may be terms around payment or warranties for example, which you now need to pass on to your customers.

    A change to payment terms alone can have a devastating effect on the cash flow of your business unless you are able to dovetail supplier payment expectations with your customer contract terms.

    So, firstly, do take advice on the terms of any contract or agreement you are asked to sign and also ask for advice on the impact this agreement might make on your own terms of business.

Thanks Sue, that’s certainly equipped me with something to talk to clients about and hopefully provided a few pointers for readers of this blog.

Gary Cousins
Business Solicitor

Blog by Gary Cousins
Gary has been providing legal advice to shareholders, directors and business owners for over 25 years. Specialising in dispute resolution Gary is based in Birmingham with clients throughout the UK and overseas. View profile
Call Gary on +44 (0)121 778 3212 or by email
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.

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