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Why you should regularly update your commercial contracts

Many business owners think that once they have negotiated a commercial contract, that is it. But whether you are a start-up or multinational, every business can learn from their commercial contracts and refine them to make sure they 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 that refining commercial contracts is a waste of your valuable time or your 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 solicitors? However, commercial solicitors advise that refining your commercial contracts makes both practical and financial sense because:  

  • Events happen – no-one could have foreseen a global pandemic on the scale of COVID-19 or the requirement to lockdown both the UK population and some sectors of the economy. Likewise, while Brexit was planned, many could not fully predict the economic fallout for UK companies until the end of the Withdrawal Agreement and the curtailment of the transition period on the 31 December 2020. There are many other events that 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 twelve 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 twelve 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 cover 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 contractual clause that is causing problems for your company. 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 change to the contract, because the wording of the original commercial contract wasn't working for your business, then it’s important that those verbal agreements are 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 the contract should be tweaked to best meet your business needs and, as importantly, to minimise 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 particular 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 prior to 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. Use of termination provisions in the commercial contract are 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 twelve 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 a 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 on 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 contract. 
  • Legal advice – once you have put a contract in place, you don’t want to be getting legal advice on a frequent basis 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 on refining your contract. 
  • Training – commercial solicitors tend to find that if specialist legal advice is taken on a commercial contract, or on refining the contractual terms, that 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 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 just spending more on your transportation costs than your competitors resulting in increased overheads and no significant gain in terms of market share? 
  • Joining up the contracts – this means taking a holistic approach to your contracts, as when you are thinking about renegotiating a contract to refine its terms, it is essential that you look at the impact of any refining of 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 that 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 contract, 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 prospect 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 contract being refined by agreement, even if 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 contract that you do have, or is there a compromise so that 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 a 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 is lost and unprofitable time, but remember any savings will soon justify spending resources on refining your commercial contracts.   

Refining contracts is 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 that 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 that 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. 


What next?

For help with reviewing your commercial contracts, call us on 0800 689 1700, email us at enquiries@hjsolicitors.co.uk or fill out the form below and we’ll get back to you within 24 hours.

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