Business development · 23 July 2018

A definitive contract review checklist every business owner needs to read

Whatever the contract, it must be clear what both parties are obliged to do

Our small business legal expert, and founder of Grid Law, David Walker, offers company owners a step-by-step contract review checklist to clarify the various clauses and phrases likely to appear.

It seems to have come as quite a shock to people that you don’t have to play fair when negotiating a contract. As explained last week, you have every right to strike a deal that’s entirely in your favour. This is fine when you’re in control, but most small business owners are forced to accept unfavourable terms dictated by much larger companies.

Now, I fully accept that it won’t be cost effective to have a solicitor review every contract for you. But, with business to business contracts in particular, it’s still your responsibility to ensure you understand and accept the terms you’re signing up to.

it’s too late to try to re-negotiate them later or terminate the contract early if the relationship isnt working out how you planned. If you do, you could find yourself facing a claim for compensation due to your breach of contract.

So, what should you do?

You must read every contract before agreeing to it and look out for the following key terms. If you’re not prepared to accept them and the other party won’t compromise you have to seriously consider not signing up.

As you can appreciate, not all of these provisions will be in all contracts and I can’t possibly cover every eventuality you’re likely to come across. However, the following should give you a better understanding of what various clauses and phrases mean.

You can then assess the potential risks a contract may contain before agreeing to them, or if you feel you need to, you can take professional advice.

  1. Know who you are contracting with

It may sound obvious, but check that the parties to the contract are correct. If the party you’re contracting with is a limited company you can look up their details, for free, at Companies House. Check their name, registered office and company number.

it’s also a good idea to review their last filed accounts. If it looks like they’re in financial trouble, proceed with caution. If they’re a client they may not be able to pay you and if they’re a supplier there’s a risk the company could become insolvent before they have finished delivering their products or services to you.

  1. Who is doing what?

Whether it’s a contract for the sale of products or the delivery of a service, it must be clear what both parties are obliged to do. If the obligations are too vague, the contract may be unenforceable.

Alternatively, if it’s not clear what the other party is legally bound to do, you may never be able to prove they’re in breach of contract if they fail to deliver the service you’re expecting.

In many ways, products are easier to define than services. For example, you might simply be able to refer to the name of a product or a product number in a catalogue. If the product’s specifications are important or it’s being made to order, make sure there’s sufficient details to ensure you get exactly what you are expecting.

Services can be a little trickier to define. Are you engaging someone to complete a task or to generate a particular result? It may be easier to refer to a pitch document or a presentation which contains far more details than could be included within the contract.

This document could be annexed to the contract as a schedule. If it’s not, you may find you can’t rely on important information within it if the contract contains an entire agreement? clause (see below).

Read back over some of David’s most popular legal articles:

  1. best endeavours? or reasonable endeavours?

In the contract, a service provider may say they will use best endeavours? or reasonable endeavours? to achieve a particular result. Both phrases mean they’re working towards a result, rather than saying they will definitely achieve it.

The exact meaning of these phrases is always being debated in the courts, but best endeavours effectively means that the service provider must do everything in their power to achieve the result. Reasonable endeavours is a less onerous obligation. The service provider is only required to do what is commercially reasonable in their attempts to achieve the result.

  1. time is of the essence?

When the time for achieving a particular result is important, the contract may say that time is of the essence. If time is of the essence and a service provider misses a deadline, this could be considered serious enough for the client to terminate the contract and claim damages.

  1. Targets and guarantees

If a particular result is expected from a service, is it a target or is it guaranteed? This is an important distinction in case the service falls short of expectations. Missing a target is unlikely to be a breach of contract, but failing to achieve a guaranteed result will be.

If a guaranteed result isnt achieved what happens?

Does the service provider have to keep working towards it until it is finally achieved? Does the customer receive all or some of their money back? Should they be compensated in some other way?

Ideally, the contract will explain the consequences of failing to achieve a guaranteed result. This will help prevent disputes later and allow you to better understand the risks before signing up.

  1. Price and payment

How is the price calculated and when should it be paid? Does the price include or exclude VAT? Are there any additional fees or charges, for example delivery costs?

If this is a long-term service agreement, is there a mechanism for the price to increase over time?

What happens if payment is late? How much interest will be charged? Does the service provider have the right to suspend their services if payment isnt made on time? At what point can the contract be terminated for non-payment?

If products are being supplied, is there a retention of title? clause? This means that ownership of the products won’t pass to the purchaser until payment has been made in full.

  1. Intellectual property

If you are creating any form of intellectual property for a large business, they will usually insist on owning it. You can use this as a lever to ensure payment. They will likely want all intellectual property rights automatically assigned to them on creation. Instead, try to agree that they will only be assigned when payment has been received in full.

  1. Confidentiality

If either party (or perhaps both parties) are disclosing confidential information, there should be an obligation to keep it secret. What is and isnt considered confidential should be carefully defined in the contract, as should the purpose for which it can be used.

it’s also common to place a time limit on how long the information should be kept confidential. It could be a year, five years or until a project is complete. Sometimes, confidentiality provisions last forever.

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry, advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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