27 August 2019

Utilising contracts to manage commercial relationships

Whilst many joke about a good contract being shoved in a drawer and forgotten about, a really great contract can be an important performance or relationship management tool.

Productive and powerful commercial contracts can provide a valuable roadmap for difficult relationships and help parties find a way through fraught times to ensure they stay together, whilst working collaboratively.

Generally speaking, we know as commercial lawyers that our work on drafting the perfect turn of phrase or the most accurate reflection of an anticipated scenario, will be forgotten about in due course when everyone is back to the day job of business as usual. Conversely we are also aware that contracts are under the greatest scrutiny when the underlying relationships start to fall apart or disagreements come to light. However, in between these extremes, the commercial contracts we’ve put in place can do so much more to enhance the parties’ business relationships and strategic planning.

Although it might take longer to negotiate, getting into the contractual detail of setting out clear mechanisms for addressing changes to the goods or services being supplied, determining price increases or managing changes in legislation or commercial impacts can enable parties to work more closely together through events that would otherwise have the potential to tear the relationship apart.

When negotiating a commercial contract there is real benefit in thinking ahead to the operational ‘what ifs’. This process not only helps to identify potential issues to be addressed ahead of time and ensure the commercial contract accurately reflects specific circumstances, but also flushes out the areas of potential conflict before they can escalate to that level. Anticipating those issues ahead of time can allow the parties to have a frank conversation in a less pressurised atmosphere around how they might handle such situations together, rather than it becoming a more contentious topic that catches people unawares at a later stage of the relationship.

In this way, using the drafting and negotiating stages of a commercial contract as a key part of cementing your commercial relationships can be a really positive experience with long-term benefits.

Managing Underperformance

When commercial relationships aren’t going quite as they should, they can often slide towards an irrecoverable position, but if an early understanding of what is going wrong can be established then there are ways of turning things around by means of the commercial contract.

If the original contract isn’t reflecting the reality of the situation quite as well as it might, maybe there is a way of agreeing a variation to the contract in an effort to get it back on track.

If performance issues are proving a concern, it is worth taking a look back at how any service levels or key performance indicators were included in the contract to consider if they need re-visiting and revising. Often issues can arise simply because the wrong measures are being taken to drive behaviour in the desired direction. By reconsidering such aspects, the parties might be able to reflect on how their relationship has developed over the duration of the contract and how new impacts on each party’s business have shifted the emphasis.

Another means of salvaging a relationship before reaching a stage where you find yourself considering early termination, can be checking whether there is a dispute resolution procedure included in the original contract. Whilst these type of clauses can often be overlooked as a bit of a boilerplate item during negotiations, they can come to the fore during the operation of the contract and aid efforts to keep dispute discussions on an amicable basis and the parties working to resolution, rather than greater disruption or escalation of issues.

Early Termination

Unfortunately if the commercial situation is considered irretrievable then terminating the contract may be an option, but that is still a step that needs careful consideration.

Whether a right to terminate the contract has arisen is a key question which will need precise attention alongside the more practical issues, such as whether a replacement supplier can be found at potentially short notice, or how to minimise the disruption to your business upon ending the contract in question.

The starting point should always be checking that any required mechanism and notice requirements set out in the contract are correctly followed to successfully bring about termination. It is important to address the question of when the right to terminate arises and take the requisite steps to ensure it is done effectively.

How to correctly terminate the contract is also a fundamental concern. Getting it wrong can at best mean you haven’t actually brought the contract to an end, but can at worst, expose your business to claims of repudiatory breach and therefore a possible claim for damages.

If you would like more information on the topic covered above, or would like to discuss how this might affect your business in more detail, please contact any member of our Commercial team whose contact details can be found here.

This article is the first in our 'Commercial Talking Points from 2019' series, which offers insights and guidance on the key topics from this year. To view all of the articles, click here.