The life of a contract - smooth ride or bumps in the road?

The life of a contract - smooth ride or bumps in the road?

The life of a contract - smooth ride or bumps in the road?

When entering into contracts one hopes for a smooth ride, but sometimes it turns into a bumpy one! In this article, we signpost common problem areas to help you navigate around, or avoid, some of the larger potholes that businesses can encounter.

 

The paperwork

You would be surprised how often we come across contracts that are not signed or are incomplete, with missing dates or schedules. Not having a properly executed contract does not mean that a contract doesn't exist, but it may be much harder to rely on its provisions if the other party is arguing it was never agreed. This also applies to variations, which either have not been fully documented, or need to be in writing and signed by both parties to be valid under the terms of the contract itself.

This can also be a problem if you are working on the basis that your standard terms apply. To avoid any issues, standard terms should always be clearly accepted by the other party by being signed, or agreed by email, or by an "I agree" online acceptance mechanism. Parties often get into difficulties where both sides are seeking to incorporate their own standard terms - the so called "battle of the forms". It can frequently be unclear whose terms apply, which may mean that neither set does.

The product

Problems can arise where there is a lack of clarity over what goods or services are being purchased. Typically this is because the definitions of the goods or services are vague, especially with more complex services such as IT. Customers should engage with suppliers to iron out details before the contract is entered into; what is inside and outside of the scope?

Managing performance

Some services need oversight so customers can ensure any problems are corrected. It can be helpful to include provisions around service levels and remedies, such as pre-defined service credits payable by suppliers to customers if service levels are not met. Careful thought should be given to the mechanisms used to measure performance - does it work in practice and is it straightforward enough to not add unnecessary administration and expense?

Termination

Contract expiry dates should be carefully monitored to avoid issues with auto-renewal provisions and long notice periods. If you believe a contract ends on its stated expiry date, double check to ensure that the term doesn't automatically extend for a further period unless notice to terminate is given in a particular way/at a particular time.

You may be able to terminate a contract if the other party has breached its terms. However, you should check the contractual termination rights carefully to ensure you can terminate and the process to follow. There is often a right to terminate for "material breach", but what does this mean?

Caution is needed if there are multiple potential grounds for termination. In a recent case, one party was unable to claim "loss of bargain" damages because it had terminated the contract in sole reliance on a contractual right to terminate for insolvency, not because of the other party's breach. It is important to identify and select the correct ground of termination and clearly communicate it to the other party.

Brexit...

Finally, we can't possibly talk about bumps in the road without mentioning Brexit, which has the potential to affect many commercial contracts. It may cause delays and/or make some contractual arrangements no longer commercially viable for one or more of the parties.

A solution to the uncertainty for some contracting parties has been to include material adverse change clauses that give renegotiation or termination rights. In each case, you should consider the circumstances and the outcome you are trying to achieve. Customers in particular should make sure they understand the effect of Brexit clauses proposed by suppliers.

 

This article first featured in our summer 2019 edition of Business Bridge.

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