Review the contract on your terms, not when you're told

With little sign that IT businesses on private contracts want to switch to the public sector – and because it’s not straightforward to ‘go private’ if you’re already public, many one-person suppliers ought to be reviewing their standard contract clauses or their terms of business, as ‘staying put’ seems to be the order of the day.

As a legal professional who is familiar with businesses that either don’t have adequate written contracts in place, or are using the terms of a contract that is ancient or even no longer reflective of the working reality, I can put a few things straight:

  • Not all business people realise that a series of email exchanges may bind them legally
  • A lot are not really aware of the clauses for the termination of a contract between themselves and a client or agent
  • Many think they don’t need a legally binding contract if the values are quite low
  • Typically these lower value suppliers don’t realise the knock-on effects in terms of liability that may accrue if, for example, your component part is used in a much larger scale product or project.

Bearing all this in mind, when should you rethink your commercial arrangements? Why and at what stage should you consider rewriting your standard terms of business? Or is there an optimum time, outside of renewal or when the agent/client demands in pursuit of their own bias, for you to review your contract for the supply of services?

Your individual circumstances will influence the answers to these questions but, no matter what your situation, you particularly NEED to review your contract, or get a legal professional to do it on your behalf, because of:

Business growth

Aside from IR35, this is perhaps one of the most obvious reasons an independent business needs to make sure that their contracts reflect their business activity. As you grow, you are likely to have more clients, more sub-contractors, more substitutes, more disputes and generally more risks. You’re also likely to have higher value orders, perhaps a more complex sales process and you may sell through multiple channels.

Here’s an example: a web development company designing and hosting websites. To start with, you might create fairly straight forward brochure sites for small and start-up businesses. Your terms of business do little more than explain your payment terms, as that is your main priority - to do the work and get paid. Over time though, your expertise grows, you develop bespoke software, take on a designer and start to do more complicated e-commerce sites, which generate significant income for your clients. Your clients tell you that without their websites their businesses would fail. They rely on sites being online 24/7 and expect compensation if service standards are not met. You start to work with larger companies who refuse to accept your standard terms of business and instead want you to sign up to their contract for services.

By this stage you need to be clear about things like copyright and intellectual property of the sites that you develop, as well as the software that the sites use. You need to ensure you have clauses in your contracts to limit your liability should a client’s website break legislative rules, and you will want to make sure that project scoping and planning documents are included in the contract negotiation stage, to avoid a situation where you don’t get paid for work done.

A bigger business is generally a more complex business, and complexity means greater risk. Your contracts and terms of business are designed to minimise your risks, so do review them as you succeed.

Changes to how you sell/supply

When a legal expert writes a contract for a client or prepares a set of terms of business (usually called Terms and Conditions), they will need to know all about how your business operates and very specifically how you make your sales.

The trap I’ve seen many business owners fall into is to assume that their terms of business, written years ago when all sales were being made by the business owner, face-to-face with the customer, are still appropriate when they are now selling through a virtual sales force and online with customers they no longer know personally.

In law there is something known as ‘offer and acceptance’ – which basically defines the point at which a legally binding sale is made. This can be very different across different sales channels, especially on the internet where specific rules apply. Your sales people may be creating legally binding sales without your knowledge that you could be held to.

Being asked to sign a new contract/agreement

If you are asked to sign a new agreement with a major outfit, you really should be looking at your own contract or terms of business. You may be taking on new liabilities, or there may be terms around payment or warranties for example, which you now need to pass on to your other clients or agent.

A change to payment terms alone can have a devastating effect on the cash flow of your business unless you are able to dovetail supplier payment expectations with your customer contract terms.

So, firstly, do take advice on the terms of any contract or agreement you are asked to sign and also ask for advice on the impact this agreement might make on your own terms of business.

As I’ve said before, if you are unsure about the commercial terms - or cannot understand the contract, terms and conditions - you’ve signed your name to, we can help, so you don’t have to risk continually accepting without really knowing if it/they are fit for purpose.

As told to ContractorUK by Gary Cousins, co-founder of legal advisory Cousins Business Law.

Thursday 13th September 2012