Choosing Suppliers

How to avoid contractual issues

7 min read

16 November 2018

Deputy Editor, Real Business

A contract is a binding agreement between two or more parties, defining the expectations of each participant. This legally enforceable arrangement should make doing business easier – however underlying issues can lead to disputes. Here are four tips to avoid getting in trouble.

According to DAS UK Group research, the top legal issues businesses face involve late payments and contract disputes.

Disputes in business are an unpleasant fact of life. But when issues with contracts are involved, arguments can escalate. If the situation isn’t resolved quickly it can lead to legal action, which consumes cash flow and valuable time.

Here’s how you can avoid the worst case scenario with suppliers further down the line by getting the contract right from the get-go.

1. Don’t rush the contract process

We’re all under pressure to complete work. This often spurs people to roll past elements they deem “simple” in favour of more important tasks.

Those perceived simple tasks are equally as significant. This is especially true of contracts – people sign contracts so every day we forget the magnitude of these decisions, but you need to know what you’re signing on behalf of your business.

They are complex by nature and demand attention as crucial points can be missed.

Talking more about the subject, solicitor David Walker explains: “If you’re presented with a contract and are being pressured into signing it, take a step back and ask why.

“You should always read and understand the terms of any contract you sign up to because you will be bound by them.

“With B2B contracts especially, there are less protections against contracts that you subsequently find are unfair or not what you expected.”

Tip: What is important to you may not be important to a supplier, and vice versa. Think before leaping and do not be afraid to take your time.

2. Finish creating the contract – never leave it at a verbal agreement

When the contract process has started, it can be tempting to start work and finalise the deal later.

Remember that until a proper contract is in place, nothing is certain.

“So many times I’ve seen an agreement reached, a handshake on the deal and despite the very best intentions of the parties, a proper written contract is never signed,” Walker says. “This is risky.”

Misunderstandings can arise and when the relationship starts to break down, you have very little to fall back on. A contract is a chance to be specific on the requirements of both parties, and it’s pertinent you take advantage of this.

“The terms of what was agreed is one party’s word against the other and this can make it even more difficult to resolve a dispute.”

There are also times, where verbal agreements aren’t seen as legally binding. Take intellectual property (IP), for example.

“If the agreement involves the creation of IP and ownership of this IP is to be transferred from the creator to the client, the contract must be in writing” Walker explains.

Tip: Get a deal fleshed out in writing.

3. Reach a balanced conclusion

The best way to prevent contractual disputes is to ensure both parties are happy with stipulations.

It starts the partnership on a positive note, and makes both parties more willing to talk things through if the situation turns sour.

More importantly, Walker adds, it’s worth balancing risk and reward.

“When preparing contracts, I’m mindful of the commercial reality of the situation. Sometimes you need a long contract covering every eventuality but other times a simple one pager is all that is needed.

“Whilst not rushing the agreement, it’s often more important to get the contract signed than obsessing over every single detail.”

This is where standard terms and conditions can be of benefit. All the work preparing the contract is done in advance and in most cases they will be signed without any changes being made.

“If changes are needed,” Walker explains, “they are usually minor amendments which shouldn’t take too long to agree.

“Generally, standard terms and conditions tend to be more balanced between the parties and not heavily biased in favour of one party or the other.

“This is because you want them to be agreed and signed with very little (if any) further negotiations.”

Tip: Sometimes following a standard template is the best course of action.

4. Allow for change

What your company initially sets out to achieve could change over time – and with it, what you require from suppliers.

Adding scope to the contract for change could help you in the long-run. If there are exception provisions, for example early termination of the agreement, everyone is aware of this from day one and you can avoid hard feelings.

However one of the key elements of a legally binding contract is that there must be a high level of certainty. So be certain it’s the supplier for you before signing the dotted line – that they can adapt to your needs if required, and that you can terminate the contract if absolutely necessary.

“The realities of business is that things often do change,” Walker says. “When this happens, you may need to change the terms of the contract.

“For example, if more work is involved than expected you may need to increase your fees.

“With experience, you should be able to predict when there is likely to be uncertainty and then you can add a process into the contract for agreeing changes.”

Tip: Use previous dealings with suppliers to your advantage.

No company wants to be involved with contractual disputes. They can ruin reputations, permanently damage relationships and wreak havoc with your finance.

However, taking the care to understand your own and the supplier’s needs will benefit all parties involved.