Contracts

Do you have key contracts in place?

Whether you know it or not, every business relationship or transaction creates contractual rights and obligations. It is important that your key business relationships and transactions operate consistently with the intentions of the parties involved, are properly understood by those parties and are recorded in writing. It is arguably the most damaging thing for a business to have a dispute with one of its key business partners.  The costs associated with the destruction of a relationship that may have taken years to develop, upon which your business systems may be based and upon which the very success of your business itself may depend may be crippling.

The benefit of written contracts with your key business partners is that they are more likely to result in and facilitate successful business outcomes by:

• the reduction of the potential for litigation
• cementing important business relationships
• creating clarity within the business relationship leading to confidence, trusts and certainty
• creating confidence in the growth of your business
• supporting your systems and procedures
• providing reinforcement of and support for the strategic direction of your business
• providing ease of enforceability.

This presumes, of course, that the contracts are well-written and clearly set out the terms and conditions agreed to by the relevant parties.

The failure to achieve these benefits is likely to be a significant impediment to the development of your business.

Do you keep a (digital) register of your contracts?

It is a very good idea to keep all contracts between your business entities and other parties in one central location.  These contracts are an important part of the legal structure of your business.  If you are not aware of your contractual obligations at all times, you are likely to breach those obligations.  Having your contracts accessible will increase the opportunity and likelihood of periodic review.

It is also a good idea to keep a diary of important dates such as with respect to:

• contract renewal
• contract expiry
• expiration of warranty periods
• rent renewal
• contract payments
• significant performance events.

 These days, all of these benefits, and more, can be achieved by the use of Contract Lifecyle Management software.  This software allows you to manage your contracts digitally, providing super-efficiencies and unprecedented management control.  We can assist you with the implementation and use of such software.

Do you have contracts in place with your manufacturers or suppliers?

Some businesses rely on their manufacturers and suppliers more than others.  For example, a winery relies significantly on the quality of grapes supplied by growers and therefore its contracts with its growers often contain stringent quality provisions.

Likewise, a manufacturer with a “just in time” inventory policy will require extremely detailed and strong contractual obligations with its suppliers relating to quality, delivery and design as any failings in these areas could have devastating effects on the manufacturer’s manufacturing capacity.

These contracts cement the vertical integration of businesses, that is the connection between businesses from manufacturer to retailer.

Do you have contracts in place with your wholesalers, distributors or retail outlets?

Depending where you sit on the vertical supply chain, these entities may be suppliers to you or you may supply to them.  Regardless, the cementing of the vertical integration of your business may be vital to the capacity of your business to obtain supplies and dispose of finished products or services in a manner which gives you the confidence to produce those products and services.

Do you have contracts in place with your customers and clients?

Your customers could be manufacturers, suppliers, wholesalers, distributors, retail outlets or end-users.  Presumably, your customers/clients will be attempting to obtain the best commercial arrangement from you that they possibly can.  Having strong, well thought out contractual relationships with your end-users can create the degree of certainty that is the difference between business success and failure.  You are not subject to the vagaries of your customers.  It may reduce your exposure to the vagaries of the economic conditions.

Do you have contracts in place with your joint venture partners?

A joint venture is a commercial relationship between separate business entities for a common purpose.  The scale of joint ventures can be huge (such as mining ventures).  Conversely, joint ventures can be smaller arrangements, such as a relationship between two parties who come together for the purposes of satisfying the requirements of a tender.

No matter what scale the relationship, it is crucial that these relationships be carefully recorded in writing.  If they are not, there may be confusion, not only within the relationship, but also from outside. 

For example, a partnership is a form of joint venture but, from a legal point of view, a joint venture usually refers to a relationship that falls short of a partnership.  If the terms of a joint venture do not specifically negate a partnership relationship, it may be that outside parties are entitled to regard the joint venture as a partnership and therefore recover from one ‘partner’ the debts of the other ‘partner’.

It is difficult to imagine a joint venture proceeding without a written contract, as the likelihood of a misunderstanding arising at a future time is significant.

Do you have contracts in place with your investors?

In the early stages of a business, investors are often related to the principals of the business operation.  Indeed, often mum and dad will put their house on the line to secure finance for a son’s or daughter’s new business venture. The terms of these loans are very often not reduced to writing either at all or adequately.  As a result, this can leave mum and dad extremely vulnerable.  It is also a recipe for disaster when it comes to administering the estates of mum and dad after they have died, particularly in so far as other siblings are concerned.

As a business grows, the owners of the business often look outside their family group for the next line of funding for the growth of their business.  This is most frequently either a bank or an equity investor.  If your existing investor arrangements are not properly recorded, this can cause a difficulty for the bank or equity investor.  They will want to know the exact terms upon which any capital of the business operation may become repayable. 

Of course, it is possible that secondary financiers will be paying out the primary financiers as part of the re-financing deal.  The secondary financiers will, in these circumstances, want to be assured that the money being used to pay out primary investors is bona fide and not a means of depleting the resources of the company or business operation unreasonably.

The bottom line is that all arrangements with financiers must be accurately and appropriately recorded.  If the money has been advanced by way of loan, a loan agreement should be put in place and any security provided in support of the loan must be properly created.  If this security includes a  charge over company assets, it may require registration on the Personal Property Securities (PPS) Register.

If finance is advanced as shareholders’ funds, that is in return for equity in the business, this must be recorded in the appropriate places, such as in the minutes of a directors’ meeting and on a share certificate.  Consideration should also be given in this case to entering into a shareholders’ agreement.

If the financial arrangements are of a more complicated nature, such as convertible notes, proper regard to the statutory requirements with respect to such financial arrangements is also essential.

Do you have contracts in place with your suppliers of intellectual property?

Intellectual property is a term used to describe a range of rights offering protection for creative and intellectual effort.  Such rights include copyright, designs, patents, circuit layouts, plant varieties, confidential information, trademarks and business reputation.

The benefit of these rights can be assigned to others.  This is extremely common in commerce and business today.  Often, those owning the intellectual property rights are not the ones who exploit those rights.

Without written permission to use the intellectual property rights of others, one runs the risk of being accused of breaching those rights and having to pay substantial damages.

A common way of “passing” the right to exploit intellectual property rights to another is by way of a licence agreement.

Licence agreements can cover a very wide range of issues, such as:

• a definition of the rights being passed
• the remuneration for the use of the rights
• the term over which the rights are being granted
• the areas or circumstances in which the rights can be exploited
• who is responsible for protecting registered rights, such as patents and trademarks
• the agreement reached in relation to the ownership of any improvements to the intellectual property
• the responsibility for the development of prototypes
• who has the manufacturing rights.

The list goes on.

Do you have a written lease?

It is often the case that a business is operating within premises without being secured pursuant to a written and executed (not to mention registered) lease.  This can happen in a number of ways, such as:

• you are trading in premises but the lease has not as yet been finalised
• there was never any intention to draw up a lease
• there used to be a lease, but it expired and was never renewed.

Whatever the reason for it, occupying premises without having certainty with respect to the key terms of that occupation, such as rental payments and tenure, is very dangerous.  If your premises are important to you, either from a goodwill point of view or because of the cost of moving, a properly drafted and maintained lease arrangement is crucial.

Having said this, there is statutory protection for certain leases pursuant to the Retail and Commercial Leases Act which can go some way to avoiding the negative effects of an unwritten lease arrangement.  However, the statutory provisions are in no way an appropriate substitute for a valid written lease agreement.

Do you fully understand your entitlements, obligations and risks with respect to your contracts?

It is one thing to be aware of the existence of a contract to which you are a party. It is quite another thing to understand that contract. Too often we see businesses act contrary to their contractual obligations or fail to enforce their contractual entitlements because they are not aware that they have those obligations or entitlements.  Contracts should be regularly monitored and reviewed to ensure compliance.  Further, as circumstances change, it may be appropriate to change or vary contracts either with the consent of all parties or pursuant to an entitlement to do so within the contract itself.

For example, a contract may specify that, upon certain events occurring, the rights and/or obligations of a party to the contract may vary. Careful monitoring of such contracts is essential to ensure compliance.

Lease and licence agreements are very good examples of contracts that must be monitored. For example, with respect to any renewal period, it is often the case that there is a “window” during which notification of an intention to renew must be provided or the opportunity lost.

The use of Contract Lifecycle Management software which digitally creates, records, manages and analyses your contracts, may help your business if you have more than a handful of contracts.