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Life of a contract

15 May 2015

Life of a contract - read more

There are many issues to be aware of after a contract has been signed

In this Article – the final one in a series of three relating to the negotiation and management of contracts – the key issues to be aware of once an agreement has been reached are outlined.

For the first two articles in this series, see the January and February issues of Governance and Compliance magazine.

After signing the contract

Tempting as it may be to put the contract in a drawer as soon as it is signed and never think about it again, there is still work to be done.

The first step is to identify which departments of your business need to understand the contract in order to ensure you comply with its terms. With a basic supply contract, this may simply involve alerting your finance team to expect invoices from the new supplier and provide them with details of the agreed pricing.

For more sophisticated contracts, further actions may be required. For example, it may be that you are required to provide a certain level of cooperation in order to enable the counterparty to carry out its obligations; if so, the relevant managers within your business will need to know what is required of them.

Alternatively, if your business is on the supply side, then you will need to communicate the relevant requirements of the contract (for example, timing and frequency of delivery of the goods or services, delivery locations and other relevant details) to the appropriate operational teams.

Simply circulating a copy of the contract to the relevant managers or staff within the business is unlikely to be particularly effective, unless it is accompanied by a summary of the key points and, if appropriate, face-to-face training sessions to ensure that the requirements of the contract are clearly understood and implemented in practice. It is also important to establish clear escalation channels so that any problems can be resolved as early as possible, ideally without needing to resort to the more formal dispute resolution procedures discussed below.

Varying the contract

Occasionally, the process described above will highlight errors or omissions that require variations to be made to the contract. If this happens, it is important to ensure that the variations are made correctly so that they are legally binding and effective.

Firstly check what the contract says about variations and follow any procedures which are stipulated. If no procedures are stipulated, document the variations by a formal exchange of letters, signed and dated by both parties, which clearly specify the variations being made by reference to specific clauses.

Check whether the provisions being varied will have any consequential effects on other parts of the contract, which may also require amendment, and ensure that there is adequate ‘consideration’ – for example, the need for each party to promise something of value in return for the other’s obligations. Without this, the variation may not be enforceable. If in doubt, the safest approach is to include an obligation to pay a small sum (this could be just £1) in return for the other party’s agreement to the variations. Alternatively the document can be executed and delivered as a deed (which does not require consideration), although the signing formalities for deeds are more onerous than for normal contracts. Once executed, the variation needs to be filed with the original contract so that all the relevant contractual documentation is kept together.

Contract management

A comprehensive contract will typically contain contract management and escalation provisions. These usually suggest the appointment by each party of a contract representative to act as the focal point for day-to-day issues arising, and for resolving them in regular contract management meetings with their opposite number. Any serious issues which cannot be resolved amicably by the contract representatives are typically escalated to senior managers. Their names or roles will be stipulated in the contract and will be allowed a fixed period of time to resolve the dispute before the parties resort to court action and/or another form of external dispute resolution stipulated in the contract, for example mediation or arbitration.

Termination and renewal

It may be advisable to keep a contracts ‘calendar’ with accurate details of the termination and renewal dates. This is particularly important if the contract contains automatic renewal provisions and you wish to avoid being bound into it for longer than necessary.

Be aware that the wording of termination or renewal clauses can sometimes be misleading. For instance, a clause that allows termination ‘at any time subject to three months’ written notice ending on any anniversary of the agreement’, may give the impression that you can bring the contract to an end with three months’ notice at a time of your choosing. In fact, what it means is that the contract can only be terminated once a year by serving notice on the day that is three months prior to the anniversary date.

Performance measurement

In the case of higher value, long term or business-critical contracts, customers may wish to carry out sophisticated performance measurement or benchmarking exercises where the supplier’s performance or pricing is assessed against the specifications outlined in the contract.

This could include the gathering of objective information regarding product or service delivery, feedback from users about the service, and benchmarking the supplier’s services and pricing against its competitors. Although these exercises can be time consuming and expensive, they can be a useful way of holding suppliers to account, ensuring that they perform their contractual obligations and continue to provide value for money.

Into the breach

Although it is important for a contract to clearly define the obligations of each party, if you have concerns over the counter-party’s performance, reaching for the contract at the first sign of trouble may not always be the most productive approach and can be inflammatory. It may therefore be preferable, at least in the first instance, to try to resolve issues through informal discussions, holding the more formal contractual remedies in reserve in case these discussions prove unsuccessful.

However, even with careful contract management, disputes are sometimes unavoidable. Where this happens, care must be taken to protect your position. Some key points to bear in mind include:

  • Document preservation: Many businesses only keep certain documents and other communications, such as emails, for a relatively short period. This means that, by the time a dispute has arisen, older documents and correspondence relevant to the dispute may be destroyed. If a dispute arises, you should therefore act quickly to suspend normal document destruction policies. This is especially important if it becomes apparent that litigation is a real possibility, as the courts will unsurprisingly take a dim view of negligent or purposeful destruction of potentially relevant evidence. The courts will also expect you to retain not only those documents that you think will assist your case, but also those that may not.
  • Termination: Particular care is needed if you want to terminate a contract based on an alleged breach by the other party. For example, if the other party fails to deliver a consignment of goods by the agreed date, you may believe this entitles you to terminate. However, the breach may not be sufficient grounds to justify bringing the contract to an end and there may also be a remedy period. If you were to press ahead with termination, this could itself be a repudiatory breach of contract, opening the door to an action against you for wrongful termination. It is therefore essential to review the breach and termination provisions of the contract carefully and seek legal advice where necessary.
  • Claim periods and notices: Although the statutory time limit for bringing a claim for breach of contract is six years, it is important to check the contract for any time limits, claim periods and notice requirements, which may override this. Some contracts will stipulate that if notice of a breach is not served within a certain timeframe and in a particular way, then you will lose your rights of action.
  • Alternative dispute resolution: Do not assume that you can always go straight to court to resolve a dispute. The contract may require the parties to pursue an alternative dispute resolution (ADR) procedure, such as mediation, before bringing court proceedings. It may also be the case that the contract stipulates that disputes are to be resolved by arbitration or expert determination rather than through the courts.
  • Before you go to court: Even if the contract says nothing about ADR, court rules require you to consider whether the dispute can be resolved by procedures such as mediation before bringing court proceedings. They also require you to write a ‘letter before claim’ to the other party clearly explaining the basis for your claim and identifying the essential documents on which you rely. Failure to do so may lead to costs and timing consequences.
  • Seeking advice: Even if you think your business is the wronged party in the dispute, it should be apparent from the points above that there is a real danger of undermining the strength of your case by not following the correct procedures. Seeking legal advice at an early stage can often help to avoid potentially costly errors.

The most successful contracts are those where you never need to invoke any dispute resolution mechanisms. This can be helped by having a well-drafted contract from the outset, so that both parties clearly understand what is required of them, and then working to ensure that the contract is managed and monitored effectively during its lifetime.

Although it may sometimes be tempting to cut corners, time and effort invested in drafting and managing your contracts usually pays off in the long run.

Tom Purton is a partner at Travers Smith LLP

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