A client once joked with me that a good contract is one that, once signed, can be locked in a drawer and never looked at again.
Unfortunately many businesses fall into this trap and fail to extract best value from established commercial relationships.
Here's why it is important to review your contracts on a regular basis.
A contract is a commercial arrangement drawn up between parties to achieve a particular outcome.
However, business demands and pressures mean that a contract which previously satisfied a particular outcome may not do so now.
Over time, contracts may need to be reviewed to realign with business direction, to address changes in financial circumstances or to accommodate the underlying political or legal landscape.
Some things to consider:
- Is your counter-party performing to the standard expected in the contract? If not, are you aware of your contractual rights and are you exercising them?
- Is the counter-party in financial difficulties? Again, what rights and remedies do you have under your contract and are you protecting your business?
- Are there any contractual rights in your contract that arise on future dates? Have you got them diarised?
- Does your business' regulatory / legal environment mean that you need to change the way you do business?
- Do contractual payment terms or credit limits need to be reviewed?
Pitfalls of not reviewing contracts
If a business fails to review its contracts (or indeed fails to ascertain gaps where a contract ought to be in place), a number of problems can arise:
- Failing to know that a contract even exists. This exposes the business to potential breach of contract claims;
- Missing contractual deadlines. These could be performance deadlines, rights to extend or terminate contracts or, dates linked to contractual rights such as the right to increase prices. It could even befailing to notice the contract has expired;
- If you don't regularly review your contracts, there is a greater chance you will lose them or not keep all the contractual papers together. This is particularly common in long term contracts that have been varied often or in framework arrangements that have multiple subsidiary contracts underneath them. This can lead to evidential problems if you ever have to prove the terms of your contract in a court dispute. It also means a heightened risk of acting on incomplete documents or even draft documents that may have been superseded;
- Failing to exercise rights under a contract through ignorance of what the contract says.
- Failing to consider the potential outcomes of Brexit. Long term contracts currently being negotiated should build in mechanisms with as much flexibility as possible to anticipate and cater for the potential outcomes of Brexit - which might otherwise render a contract difficult to perform or even make it loss-making.
All of these issues create potentially significant risks - poor decision making, increased costs, wasted management time and effort and ultimately, litigation.
The effort that goes into reviewing and managing contracts and their performance should match that of the original negotiation.
At Brodies we have developed BOrganised, a contract management solution to help clients get the most value out of their contracts, while protecting their organisation from the pitfalls of poor contract management.
For more information, contact Andy Nolan at Brodies LLP.