By Benny John | Principal, Johns Law Partners
A new contract usually arrives when everyone wants to get on with the business. The price has been negotiated, the relationship looks promising and there is pressure to start. The remaining paperwork can feel like an administrative step.
That is precisely when a little scrutiny is valuable. A commercially attractive deal can carry obligations that are expensive to perform, difficult to escape or disproportionate to the fees being earned. Before signing, the owner should understand what the business is committing to and what happens if the relationship disappoints.
For contracts governed by the law of England and Wales, these seven areas deserve particular attention.
1 When payment becomes due
A payment period tells only part of the story. Thirty days from the invoice date is a different proposition from thirty days after the customer approves the work. If approval has no deadline, the supplier may have little certainty about when it will be paid.
Agree the invoicing milestones, any deposit and the process for disputing an invoice. Consider whether undisputed amounts remain payable and whether persistent non-payment permits suspension of work. Statutory late-payment remedies may be available for qualifying commercial debts, but their application depends on the circumstances and the contractual terms.[1] Clear payment arrangements should come first.
2 What each party has promised to deliver
Broad descriptions leave room for different expectations. A commitment to provide “marketing support”, for example, says little about the work included, the number of revisions or the resources the customer must supply.
The scope should be clear enough for someone outside the original negotiations to understand. Record the deliverables, timetable and acceptance criteria, together with any assumptions on which the price depends. Include a workable process for agreeing additional work and its cost. Where a proposal, order form and standard terms sit together, establish which takes priority if they conflict.
3 Whether anyone is giving a personal guarantee
A request for a director’s signature deserves careful reading. The document may require the director to sign personally as well as on behalf of the company.
A personal guarantee can expose the guarantor’s own assets if the company does not meet the obligations covered. Examine the amount secured, whether interest and enforcement costs sit outside any limit, and the circumstances in which the guarantee ends. A sale of shares or resignation as director should never be assumed to provide a release. Anyone asked to give a guarantee should take independent advice before signing.
4 How much liability the business is accepting
Start with a plausible failure. If a service stops working, a delivery is delayed or confidential information is disclosed, what loss might follow? Then read the liability provisions against that scenario.
Check whether the cap applies to all claims together or separately to each claim, and whether particular liabilities fall outside it. An indemnity may create a separate obligation to meet specified losses; its scope and interaction with the cap need attention. Equally, exclusions may leave a customer with little recovery for the loss it is most likely to suffer. Some exclusions and limitations are subject to statutory restrictions.[2] A low contract value does not, by itself, mean low exposure.
5 How the agreement can end
Read the exit provisions while there is still enthusiasm for the arrangement. An initial twelve-month term may renew for another year unless notice is given well before the anniversary.
Check the earliest exit date, the notice required and any charges that survive termination. Where termination depends on breach, understand whether the other party must first be given time to put matters right. Practical arrangements matter too: access to records, the return of data and assistance with moving to a replacement supplier. Once signed, put renewal and notice deadlines in the diary and assign responsibility for them.
6 Who owns the work being created
Paying for a website, software or written content does not necessarily transfer copyright. Commissioned work will generally belong initially to its creator unless ownership is otherwise agreed in writing.[3]
Decide what the business needs to own and what it can sensibly use under a licence. A supplier may retain existing tools or software, but the customer needs sufficient rights to use and maintain the finished product. Check whether those rights continue after termination and allow another provider to make changes. For a business expecting investment or a sale, uncertainty over ownership can become an unwelcome due diligence issue.
7 Where a dispute would be resolved
The governing law clause identifies the law applicable to the contract. A jurisdiction clause addresses which courts will hear disputes. They perform different functions and should be reviewed together, particularly where a party is overseas.
Consider the practical cost of bringing or defending a claim in the chosen forum, and where any judgment would need to be enforced. If arbitration is proposed, understand the seat, procedural rules and likely expense. A proportionate escalation process can give senior decision-makers an opportunity to resolve a disagreement before costs mount.
There is room for commercial judgement in all of this. An owner may reasonably accept a longer payment period to secure a valuable customer, or a restricted exit right in return for better pricing. The decision should be made with a clear understanding of the commitment. Before signing, ask whether the people responsible for delivering the contract can explain what it requires and whether the business can afford the consequences if it goes wrong.
A Final Word
None of this is a substitute for a proper legal review calibrated to the specific transaction, its value and its risk profile — a five-figure services agreement and a strategic joint venture warrant very different levels of scrutiny, and proportionality is itself a matter of judgement. But a business owner who reads a contract with these seven issues specifically in mind will catch the overwhelming majority of the problems that, left unaddressed, tend to surface only when the commercial relationship has already gone wrong — which is invariably the most expensive time to discover them.
Benny John is the principal of Johns Law Partners, a London corporate and commercial law firm.
Sources
[1] GOV.UK — Late commercial payments
[2] Unfair Contract Terms Act 1977 — section 2
[3] Intellectual Property Office — Ownership of copyright works
