Some business owners think once they’ve negotiated a commercial contract that’s the end of the job. It isn’t. Whether you are a start-up or multinational, every business needs to ensure its commercial contracts remain fit for purpose and best protect the business. In this article, our commercial solicitors look at how and when to refine your contracts.
Why should you refine a commercial contract?
If you are a first-time entrepreneur, you may think refining commercial contracts is a waste of your valuable time, staff resources, and unnecessary expenditure on legal fees. Even some long-established business owners take the view that if a commercial contract appears to be working, then why create work for your business and your commercial lawyers? However, commercial solicitors advise that refining your commercial contracts makes both practical and financial sense because:
- Events happen – whether it is tech advances, inflation, or the impact of conflict on global transportation none of us can accurately predict how a contract may be impacted by unforeseen events. Many events can prompt the need to refine a commercial contract. Failure to do so could mean your existing commercial contracts aren’t fit for purpose.
- Priorities change – a lot can happen in 12 months or during the life of a commercial contract. Many start-up businesses enter into contracts based on projected forecasts. They can be wholly wrong. Depending on the terms of the original commercial contract, you may be able to refine your contracts to ones that fit your business needs after 12 months or more of trading.
- Laws change – commercial solicitors will tell you that legislation changes. Your commercial contracts need to keep up with the relevant legislation and regulatory framework for the business you are in.
- Insurance changes – the push to refine your contracts may come from a change in your insurance arrangements. If your insurance coverage changes, then this should be a trigger to check the terms of your contracts and to try and refine your liabilities.
- Experience dictates – if you know that a contractual term isn’t working for your business, then it is best to refine the contract if you can do so, rather than continue to be frustrated by a problematic contractual clause. You may find that the other party to the contract is also finding the clause difficult or is happy to refine the clause as they want to keep your business.
- Competitive drivers – if you know that you need to do things differently to keep up with the competition, then you may need to revisit your commercial contracts. For example, as a start-up business, you may have negotiated an influencer marketing agreement that’s no longer fit for purpose as you need to scale up the work the influencer is undertaking for you in order to get your new brand known and to make an impact on the competition.
- Verbal changes – if you have made a verbal contractual change because the wording of the written contract wasn't working for your business, then it’s important that the verbal agreement is included in the written contract to minimise the risk of you and the other contracting party not understanding the full contractual terms. That way you minimise the risk of contractual disputes.
- Minimising legal risks and exposure – even with the best commercial law input into your commercial contracts, your business needs time to see how contracts should be tweaked to best meet your business needs and, as importantly, to reduce the risk of commercial litigation.
Can all commercial contracts be refined?
A commercial contract is a legally binding agreement between you and the other contracting party or parties. Whether you can refine a contract depends on its terms. You can refine a commercial contract by:
- Agreement with the other contracting party – the amendments to the contract should be contained in a new contract to avoid disputes over whether the contract was verbally amended or not and, if so, the precise amendment.
- Use of a review or break clause – it is important that the wording of the review clause is carefully checked to ensure you can refine the contract and renegotiate terms before the expiry of the contract.
- Use of termination of agreement clauses and a new contract – if there is no break clause you may be nearing the termination of the contract or the contract may contain a termination clause enabling you to terminate the contract without the other party first being in breach of contract. The use of termination provisions in the commercial contract is helpful when you are in a strong negotiating position to refine the contract to provide better terms. Termination clauses in commercial contracts aren’t always clear-cut.
Tips on refining contracts
Whether you have a well-established thriving business, or you are a start-up business that's been trading for 12 months, the likelihood is that you will have entered into a whole range of contracts, from sales and distribution contracts to IP licensing agreements. It can be difficult to keep on top of all your contracts. Our commercial solicitors recommend:
- A contract diary – this is a key dates diary so you know when contracts are coming up for expiry or a break clause is due. When inserting key dates, give yourself time to take legal advice and to renegotiate and change terms or to contract with a new party. If the key date entry is on the deadline, you could be scrabbling around at the last minute to secure supplies or you could be in a less advantageous position when negotiating sales prices for your products or services
- Contract allocation – it is helpful to allocate contract management to individuals within your organisation so they are personally responsible for the management of the contract. This also gives the other contracting party a key contact in your business who knows the precise terms of the contract and the implications of either party breaching the agreement
- Legal advice – once you have put a contract in place, you don’t want to be getting legal advice frequently but it’s helpful to get commercial legal advice before contracts are due to be reviewed or when the contract is due to terminate. This ensures you are aware of any changes in legislation or regulations that may affect your negotiations
- Training – commercial solicitors tend to find that if specialist legal advice is taken on a commercial contract, or on refining the contractual terms, the legal advice isn’t necessarily cascaded down to the person who is negotiating the new contract or who is managing the contract on a day-to-day basis
- Feedback – contract feedback can come from many sources; whether it is your commercial solicitor, the other contracting party, the staff member allocated the task of contract management, or knowledge gained from sight of other commercial contracts. All this feedback should be fed into your contract lifecycle management process for refining your contracts. For example, if you contract to supply goods within 24 hours of purchase is this giving you a competitive advantage over your competitors in the market who only offer a 48-hour supply turnaround, or are you spending more on transportation costs than your competitors resulting in increased overheads but no significant gain in market share?
- Joining up the contracts – this means taking a holistic approach to your contracts. When you are thinking about renegotiating a contract to refine its terms, it is essential that you look at the impact of refining that contract on your other contracts. For example, if you change your supply contracts to provide for a supply time of 48 hours rather than 24 hours, can you then renegotiate the transportation costs with the subcontractor who delivers your products for you?
- A realistic approach – if you are an entrepreneur or start-up, it can be tempting to think that once you have been trading for a short time you will be able to negotiate better contractual terms with your purchasers and suppliers. The reality is that when it comes to some types of commercial contracts, there is very little negotiation scope whether you are a PLC, multinational, or start-up. For example, negotiating anything outside the standard terms for an IP licence can be tricky whatever the size of your organisation. It is best to focus your efforts on refining those contracts where you have more prospects of achieving improved contractual terms
- Be patient – while you may want to change a number of different contracts, it may not be possible to do so all at once because either the review dates don’t coincide, or because some contracts don’t allow you to terminate the agreement by giving notice to allow you to negotiate better terms with the same or a new contracting party. It may still be worthwhile to refine the first contract knowing that you won’t get any immediate benefit in doing so, but that the refining of the contract will reap rewards for you once you are able to change other contracts
- Watch out – if you want to refine a contract and the other party agrees to the changes even though there is no break clause and you can't terminate the contract to force a review, then you need to question what the other party wants out of the contract being refined. Is the amendment the other contracting party wants so unpalatable that you are better keeping to the original contractual terms, or is there a compromise so you can get the contract refined while the other party can also secure some amendments?
- Refining contracts is an ongoing process – there will always be new laws and regulations or a change in best working practices or supply issues so it is best to understand that contract negotiation and the refining of a contract isn’t a one-off. It is something that should happen regularly whether your business is an SME or multinational to make sure that you are getting the best contractual terms and contractual protection. Time taken in refining contracts may feel as if it is lost and unprofitable time, but remember any savings will soon justify spending resources on refining your commercial contracts
Refining contracts are all part of a process that is sometimes referred to as contract lifecycle management. If you are a start-up, that term may sound a bit grandiose for the number and complexity of the contracts your business has entered into in its first year or so of trading. However, commercial solicitors say that it's best to start as you mean to go on and put the procedures in place early so your business can get the best out of each commercial contract it enters into and be proactive in refining the ones that could and should work better for you.