A clear contract can help you get paid on time. It can guarantee performance levels and, if things go wrong, it could save your organisation unrecoverable legal expenses, assets, reputational damage and a good deal of time spent on a costly dispute.
So here are 10 top tips for safe, sound and profitable contractual relationships.
- Choose your words wisely
A contract doesn’t have to be in writing or be signed. For a binding contract, one party must accept another’s offer, which can happen in an email exchange, phone call or meeting, so be careful what you say.
- Be clear on consideration
For a valid contract, you need consideration - in other words each party needs to give something to the other. That’s usually in the form of money, goods or services, but it may be in the form of promises to act in a particular way or allow certain things to happen. Where there isn’t consideration, say where only one party is accepting obligations, a deed can be used. A deed is binding without consideration, and a lawyer can check the right formalities have been met.
- Check terms are clear
A written contract will help reduce uncertainty over the applicable terms. You need to make sure the terms are accurately described and understood by each party. You also need to look out for statements made in negotiations – they can be contractual so might allow termination or a claim against you if they are untrue. If you’re dealing with consumers, additional requirements apply for making contracts transparent and easy to follow.
- Cover your back
Think about what could go wrong for each party and what the consequences would be. Are there limitations on liability and are they appropriate? Is there a financial cap on liability? Are certain losses excluded? Do you have insurance and have you checked your policy terms to make sure you are covered? A dispute over a contract with no caps, exclusions and insurance could be far more expensive than it might otherwise be.
- Know who you’re dealing with
Is the identity of the other party clear? Is it a sole trader, a partnership or a company? If it’s a group of companies, are you sure the contract is with the right group company?
- Make sure you get paid
Can the other party meet the payment obligations? Complete credit checks and review company accounts before you contract. Also consider whether you need a guarantee from a parent company or shareholder. If you’re supplying goods or services, asking for money up-front may be a good idea too.
- Watch out for indemnities
These are basically promises by one party to compensate the other for losses where, for example, the indemnifying party breaches the contract or a particular event occurs. Before you agree to give an indemnity, you need to understand exactly what you are promising and the risks involved.
- Know where your exits are
If you need to ‘get out’ of a contract, you need to know how and when you can terminate. Be careful you’re not tied in for longer than expected. Beware of onerous fees or liabilities for terminating and look out for contracts which only allow termination on a particular day. Are termination rights and fixed terms clearly set out? Should any obligations continue to apply after termination or expiry?
- Establish your terms
Contracting on the other party’s terms can cause problems if you have lots of suppliers or customers, each with their own terms. It’s often difficult to manage and the risk of breach is higher. Even if the other party offers no terms, are you sure your own terms apply? That’s easier to determine in a signed written contract, but if you’re contracting based on an order form, or by email or phone using your standard terms, you need to make sure your standard terms are incorporated into the contract. For example, terms on the back of an invoice won’t be valid – you need to incorporate them when the contract is made.
- Have the last word
If your client or supplier insists on accepting the offer subject to their own terms, and you don’t reject this, you may find their terms apply instead of yours. Whoever “fires the last shot” wins and if you get it wrong even the most carefully drafted terms may be irrelevant.