Commercial contracts are sometimes considered to be one of the trickiest legal areas to deal with, particularly for business owners and managers who do not have a legal background. However, a significant proportion of contract litigation arises from entirely avoidable situations. By following the practical guidance below, businesses can reduce the prospect of costly litigation.
The first principle is not to agree to do the unachievable. In negotiation there is often the temptation to over-promise and believe the project plan can be modified after contract signature. Put simply, if you cannot do what you have agreed, you are in breach of contract. In a recent case, EDS found itself in this situation after contracting with BSkyB to install a new customer management system. BSkyB subsequently sued EDS and the outcome was a settlement with BSkyB for over £300 million. We recommend you include a member of the delivery team in negotiations to ensure that any commitments made can be achieved.
It is a common maxim that once the negotiations are over, the contract will go in the drawer. Whilst you may not wish to keep the contract in the forefront of the relationship, you should review it once it has been signed and brief the teams that will deliver on your commitments. If you are a customer and performance is poor, make sure you follow the rules in the contract, if any, to give you access to any service credits, termination or damages claims. A failure to follow simple principles can mean that you remain stuck with a poor contract and limited remedies.
Also, diarise any key dates, for example dates upon which you are entitled to increase prices, or expiry dates. Don’t rely upon the other party letting you know of such dates if it does not favour them. If you have negotiated any particular benefits, ensure that you take advantage of these otherwise the time spent in negotiation will have been wasted. If performance is not satisfactory, check the contract to see what remedies are available. At the very least, upon each occasion poor performance is repeated, document this in a letter to the other party. Collectively such letters will help create a body of evidence to support termination and a damages claim.
Finally, whilst negotiating and signing the original contract is likely to have been a controlled process, variations to the agreement are often ad hoc. This can lead to a party not being aware of the current status of the contract, or perhaps key principles are renegotiated by junior staff.
When you agree a variation to an existing contract, keep this variation with the original contract. It sounds obvious, but it is well worth the effort to avoid the embarrassment of the other party pulling out a variation that has been signed by you, which you had forgotten! Never agree anything verbally – always record in writing what has been agreed; and introduce a formal process to ensure that even minor variations are signed off by senior staff.
To contact Matthew Hattersley, Commerical Partner, please call 0113 336 3351.
This article was featured in The Yorkshire Post - 24 August 2010.