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 must ensure its commercial contracts remain fit for purpose and best protect the business. Our commercial solicitors look at how and when to refine your contracts in this article.
Contents:
Why should you refine a commercial contract?
If you are a first-time entrepreneur, you may think refining commercial contracts wastes your valuable time, staff resources, and unnecessary expenditure on legal fees. Even some long-established business owners believe that if a commercial contract appears to be working, then why create work for your business and your commercial solicitors? 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 unforeseen events may impact a contract. 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, this should trigger a check of the terms of your contracts and a try to 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 rather than continue to be frustrated by a problematic contractual clause. You may find that the other party to the contract also finds the clause difficult or is happy to refine it 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, 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 to get your new brand known and impact 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 the verbal agreement must be 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 and, if so, the precise amendment.
- Use of a review or break clause – The wording of the review clause must be carefully checked to ensure that you can refine the contract and renegotiate terms before the contract expires.
- 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. Terminating 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 is a key dates diary, so you know when contracts expire or when a break clause is due. When inserting key dates, give yourself time to take legal advice, renegotiate and change terms, or 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 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 managing 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 a contract in place, you don’t want to get 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 be terminated. 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 advice isn’t necessarily cascaded down to the person negotiating the new contract or 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 the 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 means taking a holistic approach to them. When you are thinking about renegotiating a contract to refine its terms, you must consider the impact of refining that contract on your other contracts. For example, if you change your supply contracts to provide a supply time of 48 hours rather than 24 hours, can you 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 can negotiate better contractual terms with your purchasers and suppliers. The reality is that when it comes to 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, no matter the size of your organisation. It is best to focus on refining those contracts with 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 refining the contract will reap rewards for you once you 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 from the refined contract. 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, changes in working practices, or supply issues. Hence, it is best to understand that contract negotiation and refining a contract isn’t a one-off. It should happen regularly, whether your business is an SME or multinational, to ensure that you are getting the best contractual terms and 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 is part of a process sometimes referred to as contract lifecycle management. If you are a start-up, that term may sound grandiose for the number and complexity of the contracts your business has entered into in its first year 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.
