People spend a great deal of time worrying about what to include in their commercial contracts to ensure that they put themselves in the best legal position possible. And rightly so - the content of your contracts is very important.
However, all too often people pay far less attention to what happens after all the drafting is done.
Unless your contracts are properly signed off and thereafter, properly managed, you risk wasting the time and effort you put into drafting them in the first place. Worse still, you could miss certain contractual deadlines or triggers, which might leave you in a disadvantageous position.
In the first of a series of articles which focus on those more "day-to-day" practical legal challenges faced by businesses, we look at some effective advice for the management of your contractual processes.
Leaving aside the issue of what a contract should actually say, any business which routinely enters into commercial contracts should be well on top of two things:
- The business should know when a contract has been entered into and should be able to quickly identify all "live" contracts at any given moment; and
- The business should be aware of its rights and obligations under those agreements and any deadlines for compliance or any triggers that might alter the way the contract operates.
If you are reading this and you are worried that you might not be completely on top of these matters, please rest assured that you will not be alone. It is common, even in very large businesses, for these points to be given far less consideration than they deserve.
Unfortunately, it is all too common for contracts to be drafted but never signed, or for contracts to be entered into but then hidden in a desk drawer and forgotten about until something goes wrong.
Contracts should be seen as working documents and should be referred to regularly, in order to inform the parties as to how their relationship will be managed.
How can I avoid any issues?
None of the advice presented below is particularly complex, but the day-to-day realities of running a business often mean that we are too busy to step back and look at the processes we follow to check that they are fit for purpose.
In the face of increasing demands on our time, a lot of us do not give sufficient thought to how we manage our contracts. However there are some simple and inexpensive steps that can be taken to help you get a handle on things.
- Have a policy for contract management and appoint one person to ensure that this policy is properly implemented. Avoid the temptation to make this policy too long or any more detailed than it needs to be. The simpler the policy is, the more likely it is to be remembered by people throughout the business and the more likely it is to be adhered to.
- Have a policy setting out who can negotiate contracts and who can sign contracts on behalf of the business - this may be different people for different types of contract or different financial levels of contract.
- Ensure all draft contracts are marked "draft" and "subject to contract" until they are signed. This will help to prevent anybody claiming that a draft contract has been agreed until it is signed.
- It is advisable not to start performance of an agreement until a signed contract is in place. Otherwise there will be significant ambiguity about which terms govern the arrangement and you might be held to terms that you are not happy to accept.
- Using a simple report system, ensure you can monitor the progress of all draft contracts from the initial draft, all the way through to signature. Do not remove any contracts from this report until they have been signed. This should help you to spot any draft contracts that are making slow progress through negotiations or any drafts which have been agreed but have not yet been signed. Without this report, it is all too easy to send agreed drafts to the other party for signature, never to receive anything back and to forget all about it.
- Maintain a central bank of contracts. It should form part of your contract management policy that a copy of every signed contract is sent to the person in charge of the central bank of contracts. This will help to ensure that you always have a copy of a contract readily available when you need to refer to it.
- Throughout the drafting process and again once the contract is signed, take time to work through the agreement with the relevant person in the business that will "own" the performance of the contract. Ensure that they fully understand their rights and obligations under the agreement. This will help to ensure the smooth running of the arrangement and will flag any potential issues early.
- It is important that contracts are detailed and fully comprehensive, but this can often make them unwieldy and difficult documents to use as a point of reference for the day to day management of the relationship between the parties. Instead, invest time once the agreement is signed to pick out key rights, obligations and other clauses, so that you can refer to these quickly and easily.
- Set reminders for any key deadlines contained in the agreement. This can be done easily in your computer calendar - set alerts to appear on your system ahead of key deadlines. If a decision needs to be made by a certain time (for example, whether to exercise a break clause by a certain date) ensure that the alert you set will give you time to consult with the relevant business area and communicate your decision to the other party before the deadline passes.
A contract generally contains a record of what the parties hope to achieve from their commercial relationship. Regularly returning to the contract and making certain that everything it requires is acted upon not only makes sense legally, it helps to ensure that the arrangement between the parties is as successful as everyone hoped at the outset and can help lay the foundations for a successful business relationship.