Crunch Proof Contracts - Successful Commercial Contracts In The Economic Downturn

Introduction

Businesses can help themselves weather the current credit crunch

by paying more careful attention to the negotiation and drafting of

their commercial agreements. In recent months, we have noticed a

significant upturn in the number of clients examining their current

contracts to look for loopholes to terminate early or reduce the

costs of the contract. Sound contract principles are more important

than ever in the current challenging economic landscape and there

are many things that businesses can do to improve the profitability

of their contracts.

Protect yourself!

Pre-contract Matters. Credit crunch or not, it

remains a fact that many organisations do not protect themselves

adequately before a contract has been concluded. For example, many

companies looking to appoint a new supplier fail to keep a

competitive tendering situation going for as long as possible and

benefiting from the competitive tension which that helps to create.

In addition, whilst many businesses will ensure that they carry out

a basic financial check on their potential partner, this is not

always replicated with regard to the technical expertise or

personnel that the other party will have at its disposal. Wherever

possible, references for a supplier should be checked thoroughly

and site visits made to their existing clients: it is amazing what

a face to face discussion about a supplier often reveals. Where a

potential supplier is a relatively small organisation, it also pays

to consider whether its performance is overly dependent on the

continued involvement of a small number of key personnel

– what would happen if key personnel were to leave or

become ill? Can a contingency plan be put in place to cover this

risk?

Unwanted contracts. As a binding legal

agreement can be agreed orally as well as in writing, there is an

increased danger that the current economic circumstances will lead

to claims that the parties have actually concluded an agreement

before formal written terms are signed. One of the best ways to

avoid this is to ensure that negotiations are clearly labelled as

"subject to contract" or another clear statement is made

to the effect that a signature or specific authorisation is needed

before an agreement can become legally binding. In recent years,

this danger has been exacerbated by the widespread adoption of

email as the principal means of day to day communications and care

is needed so that an email exchange cannot be viewed as concluding

an agreement.

Clear terms. It is clearly vital to ensure that

the terms themselves are clear and complete. If there is any

ambiguity, the position must be clarified as under English law it

is very difficult to later argue that the agreement failed to

implement the agreement between the parties: the moral is clear:

get it right first time, especially terms relating to pricing or

scope of obligations.

Maximising commercial flexibility

Term and termination. Currently, it will often

be sensible to have a shorter duration for the agreement than would

normally be the case, to avoid...