Contracts and Common Sense

Contracts are the very building blocks of business.

No matter what size a company is or what service it provides, they all rely on contracts to regulate their relationships with staff, customers and contractors.

Once those contracts are in place, how many firms actually review them to ensure that they remain relevant to what they do, what they buy, who they employ and how?

Companies might think that this isn't necessary, given that there is a document in place after all.

However, circumstances may change over time - sometimes, dramatically so - and it is essential that contracts accurately reflect those new arrangements.

If not, there is always the risk of lengthy, complex and costly disputes of the sort which can prevent businesspeople doing what they do best.

For evidence of this problem, we need only turn to information published by the Ministry of Justice about the workings of the Commercial Court, which deals with claims worth more than £5 million.

Its last annual report showed that of the 802 matters which came before it during the previous year, the most single most common area of dispute - accounting for just over one-quarter (214) cases - was in relation to commercial contracts https://www.judiciary.uk/guidance-and-resources/commercial-court-annual-report-2020-21-published-2/.

In fact, it was also the principal area of argument the year before too.

Now, many companies across the UK will not be fortunate to generate sales in excess of £5 million, let alone become embroiled in legal matters involving sums greater than that value.

Even so, they are still subject to the same common, contractual pressures.

Last December, the House of Commons' Library provided the latest snapshot of the corporate landscape in England and Wales https://commonslibrary.parliament.uk/research-briefings/sn06152/..

By the time that research was compiled, of course, the UK economy was doing its best to adjust to life after the Covid pandemic.

Arguably the most notable legacy was the shift to hybrid working.

One study noted that, by September 2022, 22 per cent of the British workforce was spending at least one day a week working from home https://post.parliament.uk/research-briefings/post-pb-0049/..

As companies pivot to allow or even require staff to work on a hybrid basis, employment terms need to reflect that.

The same not only goes for any external consultants who might be engaged to provide specialist support.

A review may also be needed to determine the usage and treatment of any company devices or confidential information.

Due to the sheer number of British businesses, I reckon that it would be almost impossible to ascertain how many have undertaken a thorough review of such arrangements since the remaining lockdown restrictions were lifted in January last year.

The task might seem easier for a smaller company but it might not either retain or employ legal counsel of its own and, as such, may lack the resources or know-how to ensure that contracts are up-to-date.

The pandemic has also prompted a number of firms to seek to change the location or size of business premises only to discover that their lease or licenses don't allow them to do so easily.

Even if we set aside the commercial impacts of Covid-19 for a moment, there are still very important considerations in the fine print of contracts governing what you sell and what you buy.

If you're not careful and haven't perhaps been made aware of roll-over clauses, you might find yourself bound into the long-term purchase of services which are no longer relevant to your business.

Additionally, you might be paying for services such as marketing or Human Resources without having agreed performance levels in advance which maximise their value and keep your company moving forward.

If you're partnering with another organisation to develop a new product or service, bespoke rather than generic contract wording can not only avoid possible disagreement but help you secure in full whatever returns you are due if and when those items start to pay off.

As a lawyer who has worked both in-house and as an external resource, I completely understand that the world of contracts can seem bewildering.

Not confronting the issue, though, and simply keeping your fingers crossed in the hope of avoiding difficulties usually doesn't work.

It is true that the deficiencies of contracts are only really highlighted when there is a dispute and, by that stage, it may be too late to do anything about it other than settle to keep the costs of a claim from escalating.

Being on the front foot and aware of what your various contracts say, can literally pay. It adds clarity to cashflow and relations with staff, contractors and customers.

In the choppy waters of the current economy, that can be the difference between sinking or staying afloat.