Return on investment can be one of those annoying phrases that people use when they are trying to impress. It can also be one of those phrases that your financial backers and accountants talk about when they are looking at your turnover, gross and net profit, and your planned investment strategy.
But you hardly ever hear your average commercial solicitors talk about value and your return on investment when discussing your business contracts. You should. At Harper James, our commercial lawyers see contracting as an investment; not just of time and money, but the commercial relationship it is designed to facilitate so they need to add value. Otherwise, you may as well rehash a competitor’s contract or download a generic one from the internet.
In this article our commercial solicitors look at how you can improve your commercial contracts; whether that is at the negotiation, drafting, or review stage, to better protect your business and maximise the value of your commercial relationships.
Contents:
Why your business needs commercial contracts
Whether you are operating out of a back bedroom, you are a start-up, SME, third generation OMB, planning on a listing, or expanding your business into the UK market, you need a suite of commercial contracts. Relying on handshakes, verbal agreements, how you have always done things, or quick email exchanges is a recipe for disaster.
Commercial contract dispute litigation is expensive. Put the costs aside for a minute, and there are other risks; it is time-consuming, distracting, and can create reputational damage. Furthermore, despite employing the best commercial litigation solicitors, you cannot guarantee the outcome of court proceedings. That’s the negative reason why your business needs commercial contracts.
On the positive front, your business needs commercial contracts as without the financial security they provide you probably will not invest the time and money necessary to develop your product or services or expand into new markets.
Commercial contracts are sector and industry-specific
In an age where everything is available at the touch of a button, including your commercial lawyers, it is tempting to assume that any commercial contract available on the internet to download will do. That’s a false economy as even within the same sector your business needs may be very different. For example, what you may want in a high-end exclusive retail brand commercial contract may be rather different from the fast fashion end of the market.
You cannot assume that your business needs are the same as your competitors and therefore rely on the same contracts. For example, you may be sourcing your raw material from overseas and therefore need to focus on currency and trade and customs issues in your contracts. Alternatively, if you are purchasing for a specific market, you may need to refer to industry-specific regulations or standards in your manufacturing agreement or specific delivery or payment terms that you have negotiated.
Investing in negotiation
We are all led to believe that speed is best but when it comes to a return on investment in commercial contracts careful negotiation, and a willingness to walk away from the negotiation table for a while, can be more productive in the long run.
With every situation, you have to assess whether the time invested in negotiation will produce a return on investment. With rapidly rising inflation you may be best getting on with the contract and fixing the product price. With a SaaS contract, there may be little room to negotiate from the standard SaaS agreement. If you are a franchisor creating a franchise agreement it is imperative to get it right as your whole franchise chain may be based on your franchise agreement.
It is a question of knowing when it is worth spending time on a contract negotiation or review as whilst you may not have had much bargaining power at the time you signed the contract you may do so when you come to review it, either because of a change in your size and market status, the economy, or other factors. That’s why return on investment on commercial contracts is something you need to work on during the life of the contract to continue to get the best out of your contracts.
For more reading on contract negotiation and reviewing your contracts take a look at:
For start-ups and SMEs, taking a more proactive approach to commercial contracts may involve a review of who negotiates your contracts, who has the authority to contract, who has the authority to sign off, if there is a named employee responsible for contract management and review or an annual contract review meeting to brainstorm. Sometimes it can take a business consultant or your commercial solicitor to look afresh at what you are doing and to ask questions about your return on investment to produce change.
Drafting a commercial contract
Any commercial contract contains what are referred to as boilerplate clauses or standard terms. The crucial point is that your suite of commercial contracts needs to be tailored to how your business operates and to tie in your contracts so they work together in your business interests.
Examples of bespoke terms include ones on:
- Product or service specification
- Delivery
- Payment terms
- Penalties for breach of contract
- The contract term – fixed or auto-renewal
- Termination clauses
- Variation
For more information on boilerplate clauses take a look at Boilerplate clauses in commercial contracts (and what they mean).
For a detailed look at the advantages of auto-renewing contracts have a read of UK auto-renewal contracts: acceptable and unfair terms.
Drafting a commercial contract is a bit like completing a jigsaw; all the pieces need to fit together. For example:
- Do you want to include a price escalation clause? If so, what formula do you want to use to increase the product or unit price? How does the price escalation clause fit with the termination provisions? Can a consumer terminate by choice at any point in the contract or are they restricted to termination by a specified notice period when an annual or self-renewing contract is due for renewal? What should the notice period be? Too long a notice period may deter potential consumers but too short a period may affect your cash flow
- In a manufacturing agreement, do you require the manufacturer to have insurance for a minimum specified sum? If so, does the contract provide you with a right to inspect the policy? When does legal ownership of the goods transfer hands so they become your insurable risk?
- What are your remedies for a breach of contract? If there is a contract dispute is there an agreement over your choice of commercial contract dispute resolution and is it the best fit for the circumstances of the contract? For example, international arbitration may be the preferred dispute resolution method for a multi-jurisdiction contract or where a speedy resolution is essential or you may prefer the court in England to have jurisdiction in the event of commercial contract dispute proceedings
Time to review a commercial contract
You may not have put as much thought into your commercial contract as you perhaps should have but many issues can be resolved, before they become a problem, provided you have a system of reviewing your commercial contracts. That way you can learn from your mistakes and take advantage of developments. For example, you may be able to take advantage of UK regulation changes or the growth in the size of your company and increased bargaining power or protect yourself from inflationary price pressures by fixing prices.
Whilst you may think that formal contract reviews and the allocation of a contract manager are ‘overkill’ if you are an SME or an OMB who has never done things that way, the return on investment in savings and managing commercial contract dispute risk can more than outweigh the administrative time in managing your commercial contracts.
Further reading on the topic:
