I wrote an article a little earlier in the year urging businesses and individuals not to forget their commercial contracts. Once set up, for a commercial contract to retain its value, you need to give it regular attention. If your business is evolving, growing and changing, then you need to make sure that your contracts are doing the same.
A Common Scenario
I’m sure you can imagine the scenario. You meet with a client at the beginning of your relationship. You carve out a fruitful working arrangement covering how you can help them, or how they can service you. Then you capture it in a commercial contract and away you go.
The relationship works, it keeps ticking over, until this smooth, blissful journey hits a bump in the road. Then when you revisit your contract to check the terms of your relationship you see that what’s written down doesn’t describe how you work or cover you sufficiently in the event of a disagreement.
How it Happens
In many cases, both parties will sign up to a fixed-term contract in the first instance, which they will agree should become a rolling contract unless they encounter any obvious problems. In these circumstances, it’s not uncommon for years to slip by from the drafting of the initial contract to the next time a business has cause to revisit it.
As time passes, all sorts of things can change. The scope of what’s provided in the relationship is a key one. Perhaps you started off as a supplier who has grown into a consultant. Or the workload has increased or decreased, with the time and human resource spent on the job altering to take account of this. Costs of materials or services can rise and fall. New laws governing your sector can change how you operate with knock-on implications for your commercial relationships (the recent changes to the General Data Protection Regulation (GDPR) are a good example of this, and one that affected many businesses).
The problem is that as business relationships develop and these changes naturally occur, they are not reflected in the commercial contract. They often tend just to be agreed between the parties on the fly, informally by email, or in conversation.
While this works at the time it obviously causes problems in cases of disagreement or dispute. If this leads to legal action, either one or both parties have to locate old correspondence or recall half-remembered conversations to make their legal case. Not a firm basis for a successful legal resolution or a healthy future relationship.
Businesses need to remember to take a more formal approach to an evolving commercial relationship and to get any material changes to their working relationship down in writing. There are a number of ways to do this.
Draft an addendum
If the change is small, the contract itself doesn’t necessarily need to be torn up and rewritten. Drafting an addendum that specifically and concisely captures the new element is enough. It can be a simple job for your commercial lawyer and can save you a lot of work, uncertainty and potential loss of business in future.
Redraft the contract
If there are many or significant changes, then sitting down with your lawyer and the other party and redrafting the contract can sometimes be the better option. It gives both parties the certainty they need to continue a productive and trusting relationship. This can also be a good opportunity to open up negotiations on any other elements of the contract you might want to change.
Insert a review clause
Adding a clause to the contract stipulating that regular reviews should take place can be useful in making sure it gets regular attention. This is particularly suitable in relationships where prices or costs are involved and will likely increase over time.
Use a Framework Agreement
If you know that you’re going into a long-term commercial relationship from day one, the best option is to put a Framework Agreement in place. Broadly speaking, as its name suggests, this is an overarching agreement recognising that the two parties have agreed to work together but where some elements or details are yet to be decided.
Once these have been established, they are added in the form of a Scope of Work which defines the relationship in more specific terms, for example, on payments, costs, deliverables and deadlines. If and when these change, the Scope of Work can be altered accordingly without revisiting or redrafting the Framework Agreement.
The standard terms would still govern the relationship, but this approach leaves room to be flexible and agile and also help maintain momentum. Parties can also agree to review the Scope of Works at set intervals (annually, biannually etc) to make sure it stays relevant.
Keeping your commercial contracts up to date is easy if you pay regular attention to them. Don’t let them slide off your radar and you won’t get an unpleasant surprise in the future.
We help our clients by performing a ‘traffic light review’ on their contracts – an analysis that allows them to make an informed decision on what to negotiate over. This service is available as part of our Club Legal offering or as a standalone service. To find out more, please get in touch, we’d love to help.