Signing on the dotted line: the importance of commercial contracts

Having robust written contracts in place, however, will put your business on a firm footing, and help to head off future disputes at the pass.

Why are written contracts important?

Well drafted commercial contracts give both parties certainty from day one as to what rights and obligations they expect to have, how their relationship will be governed, and the extent of their respective risk and liability.

An ad-hoc arrangement with a third party may appear convenient, flexible and cost-effective – particularly at the outset, when everything is going well. If the relationship hits a bump in the road, or if there’s a mismatch of expectations, or if your partner starts to misbehave, it will be far more difficult to bring your partner into line and to obtain remedies for any loss or damage you have suffered if you cannot point to a legally binding contract.

This is particularly important when your partner is going to be using your intellectual property (e.g. if they will be manufacturing products using your product formulations and specifications, or promoting and selling products using your trade marks). In these instances it is vital to have sufficient contractual safeguards in place to police their use of your most valuable assets.

Robust contracts will also be of importance when you come to take on investment, and when you look to exit your business. One of the first items on a potential investor or purchaser’s due diligence checklist will be to ensure that your business has binding arrangements in place with your key suppliers and customers, and that those contracts do not contain any deal-breaking “red flag” risks. To seek to document or re-negotiate your key relationships at that point will put you firmly on the back foot.

What are some key points to look out for?

Scope and Exclusivity – your contracts should define very carefully what rights you are granting to your partner, particularly if you are seeking to grant exclusive rights.

In the days of bricks-and-mortar, exclusivity was often defined on a territorial basis. In an interconnected and multi-channel era, exclusivity can be carved up in a number of ways – such as by product, by channel, or by customer group.

Whatever rights you grant, you should ensure that all rights not expressly granted to your partner are expressly reserved to you.

Treatment of intellectual property – this will be a vital concern, since your intellectual property is your most vital asset.

If you are contracting with a product developer you will need to ensure your contract assigns to you the ownership of the intellectual property in anything they create for you – as a matter of law they will often be the first owners of such intellectual property.

If you are contracting with a distributor or retailer, who will be marketing and selling your products under your brand, you will want contractual protections over the way they use your brand, and to ensure that they notify you of, and allow you to control, any infringement claims that may arise.

Terms of supply – your contracts should set out clear processes for ordering, delivery and payment.

English law permits parties to limit their liability for certain breaches. If you are contracting with a manufacturer or a logistics partner, you will want your contract to contain broad remedies for defective products, non-delivery of products, late delivery of products and incorrect delivery of products. If you are contracting with a distributor or retailer, you will want to limit your liability for any failure by you to fulfil orders to them correctly.

Termination – if your relationship breaks down, you need to be able to up stumps and walk away. Your contracts should contain express rights for you to terminate, and you should think carefully about the types of breaches that will have the biggest impact on your business, and ensure they are captured within the clauses dealing with termination of the contract.

How can lawyers help?

Lawyers can help in a number of ways with your commercial contracts.

Parties with huge commercial bargaining power (such as major retailers) are likely to have their own standard contracts that they use with brands. It is also likely that there will be very limited scope to negotiate these contracts. However, lawyers can review these contracts and report to you on their key terms, so you can be sure of exactly what is expected of you, and what you can expect of your partner. They can also identify key risks arising from these contracts, and seek to negotiate them on your behalf.

Conversely, other commercial partners may not have their own standard contracts, and this presents an opportunity to get on the front foot. Here, lawyers can draft a template contract for you, tailored to your needs and putting you in the most favourable position. In situations where the same contract can be used with multiple partners (for example in international distribution) the initial outlay can prove very cost-effective, and contract management will be made easier by dealing on similar terms with a network of partners.

This article was originally published on theredtree.co.uk.