Contract Essentials for SMEs - B2B
Posted on 19th March 2021 at 18:11
Contracts lie at the heart of our everyday transactions and we do not always realise that. Every time we make a sale in our business we have entered in to a contract, every time we purchase something we have entered in to a contract, even if there are no written terms.
So what is a contract? Effectively, a contract is a promise or to use another word, agreement, which is recognised by the law. Your contract may be framed as an agreement, SLA or an engagement letter, but however you frame it, it should clearly set out the terms upon which you are transacting.
When we set up our businesses, we are all, understandably, focused on sales and growth, we need to generate revenue to survive. We don’t feel that we have the time or money to look after the legal and regulatory aspects of our business and that is very understandable. We need to first work out if our businesses are viable.
However, as we grow our business we need to ensure that we are clear on the terms upon which we are transacting with both our customers and our suppliers. Firstly, having well drafted terms and conditions, will create a transparent relationship with your customers. Secondly, it will set out what rights and obligations you have and how to deal with issues when things go wrong because sometimes, they will go wrong. We cannot over emphasise the importance of avoiding costly legal disputes, they are financially draining and stressful and can be detrimental for SMEs.
To put it in to context, a 2020 UK survey showed that a quarter of SMEs admit to having spent between £5-15,000 on dealing with legal matters within the past 12 months . Nearly one in 20 has spent over an eye-watering £30,000 in the same timeframe. Despite 4 out of 10 of them holding less than £10k in cash reserves. Prevention is better than cure!
Who are your customers?
Firstly, you need to identify who your clients are, are you operating in the B2C or B2B world or both? If your business operates in the B2C world, you probably already know that you are operating in a consumer protection environment which is heavily regulated. The legislation in this area will influence what you can and cannot include in your terms and conditions. There are several pieces of legislation you need to be familiar with and adhere to, the key ones being:
Sale of Goods and Supply of Services 1980
Sale of Goods and Associated Guarantees Directive Regs 1999/44/EC. S.I. No. 11/2003
Unfair Terms in Consumer Contracts Regulations (93/13/EEC)
Consumer Protection Act 2007
Distance contracts EU Consumer Rights Directive (CRD) S.I. No. 484/2013
Industry specific laws
Conversely, there are very few protections in the B2B world, which means businesses operating in that space need to be very clear as to the terms and conditions upon which they are transacting to avoid disputes.
Well drafted template terms and conditions can really help to avoid costly disputes but you must know them or at least read them before you take action. If a dispute arises, the first port of call is always to the written terms.
So how do you minimise your legal risks?
The first action is to have your own template T&Cs, written in plain understandable English and which comply with all legislation relevant to your business.
Typical key terms (will vary depending on market and industry)
► Term – if it is an ongoing contract, set out the term of the contract and whether renewal is an option or even automatic. Though be careful with automatic renewals in the B2C world as it may be deemed an unfair term depending on how you manage the renewal.
►Termination, We advise clients in the B2B world to include a termination for convenience provision which means you can terminate the contract at any time without having to give a reason but you should include a notice period e.g. supplier can terminate for convenience upon providing 30 days notice. If you exercise this clause, don’t cite a reason when terminating!
► Payment terms, one of the most important terms. You need to set out clearly how and when you are going to invoice and how long the customer has to pay you and specify that if payments are not paid in accordance with the terms then that will constitute a material breach of the agreement.
► Renegotiation of the financial terms In the B2B world, if circumstances change, for example, if you have based your financial terms on certain facts like labour costs and increases to the minimum wage would have a big impact on your bottom line then you want to able to reopen the discussions on the financials.
► Liability – You need to try and limit your liability as much as possible therefore while you would agree to being liable for direct losses i.e. losses which arise directly as a result from your business actions. Make sure you do not agree to being liable for “indirect” or “consequential losses” as this could open you up for liability for all sorts of loss that you cannot even quantify for example loss of business profits. You should always try and cap your liability. There is no right answer as to the amount for the cap but you should consider the value of the contract relative to what you are providing and taking in to account the costs you might incur if something goes wrong or seriously wrong. You should try and limit these risks and take out appropriate insurance.
► Indemnity – An indemnity is a promise to pay on the happening of an event. You should consider whether you need to include an indemnity at all. If it is common in your industry or your clients expect one, then make sure it is only a fault-based indemnity rather than agreeing to a general indemnity. What do I mean by that? I mean that you should only agree to provide an indemnity to cover when your business has been at fault or negligent. Also make sure that your liability cap covers any indemnity you give and include that the party benefiting from the indemnity must mitigate its losses
► Retention of Title – If you supply goods in the B2B world consider including a retention of title clause. In theory, such a clause entitles the supplier to retake possession of any unpaid goods. However, beware, to be enforceable your retention of title clause must be properly drafted and incorporated into the contract with your customer. Without one, it is likely that you will not recoup any monies or the goods if your customer goes in to liquidation.
► KPIs – Ensure any KPIs are clear and achievable. If there are any penalties related to failure to meet KPIs, you need to be particularly conscious of this.
You also need to be aware that where you sub-contract any part of what you do and pass personal data to the sub-contractor, then you need to have written agreement with the sub-contractor setting out how the data is processed by the sub-contractor. The Data Protection Commissioner’s website is a good starting point for learning more about GDPR obligations.
► Covid In a Covid world where going in and out of lockdown is a real possibility, your contract is the place to try and deal with any Covid related impacts on the contractual relationship. You should try and contemplate what happens if and when lockdowns occur and agree a reasonable position with your trading partners – transparency is key to a good working relationship.
For example, if your business goes in to lockdown what does that mean for any volume commitments you have with customer or suppliers?
►Industry specific provisions, for example if you are selling software, intellectual property rights and licensing will be key terms for you.
Businesses also need to be alive to the supplier terms and conditions that they are signing up to. Always make sure you read them and understand them. Look out for the key terms and ask questions if in doubt. If possible, try and negotiate them e.g. to include a termination for convenience provision so that you can terminate the contract without having to give a reason if you are not happy with the supplier.
Beware of IT companies! They are very clever at building in hefty automatic price increases and automatic renewals unless you give several months’ notice of termination in advance of the renewal date. Most people do not read the terms and think that they can cancel at the renewal date, not realising that the date for cancelling may have passed 3 or 6 months earlier and that they are now locked in to a renewal with a hefty annual price increase to boot. Its very important to know what your notice period is and diary it so that you can decide whether you want to renew or not well in advance of the expiry of the notice period. You should also discuss the price of the renewal with your supplier before the notice period expires as again IT companies are very clever at building in automatic price increases which can be as much as 50%.
Practical tips for contract management
Have your own templates and know them.
Keep copies of all executed contracts in the one place.
Read and understand supplier contracts, negotiate them where you can. We have all clicked the button to say that we have read the T&Cs but how many of us actually have? It is only when things go wrong that you look at the terms and realise what you have signed up to and how little rights you have.
Contract database, it doesn’t have to be fancy, an excel spreadsheet recording a list of each contract and its key terms. This will also highlight your key contracts, when they are up for renewal and also help you understand where your legal risks are.
Most people consider contracts and terms and conditions boring but they are key to transparency and avoiding costly disputes. Revenue and growth are so important to ensuring a successful business but if you do not minimise your legal risks and have appropriate contracts and proper contract management in place then you might find that their revenue starts to be impacted as a result of entering in to bad contracts. Also, when disputes arise, try and resolve them early on and in as fair and as practical manner as possible.
This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
¹Survey of 502 senior decision makers in small businesses by Direct Line Group https://www.directlinegroup.co.uk/en/news/brand-news/2020/prepare-to-prevent--uk-smes-risk-inciting-insolvency-through-rel.html
Tagged as: Contract Key Terms, Contract Law, Contract Management, Irish SMEs, Legal Risk, SME contracts
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