!: Why You Should Review Your Commercial Arrangements Now: Part 1

Why review existing commercial contracts?

There is a great variety of reasons why a business would seek to renegotiate or terminate some of its existing commercial arrangements. This may include: (1) the need for a business to improve its financial situation or to avoid falling victim to the financial difficulties of its business partners; (2) a business strategy to renegotiate the price or to exit from an unprofitable agreement, without incurring the cost of litigation or, as in the recent case of the UK government; (3) the wish to centralize its spending, benchmark its suppliers and achieve costs savings and of course; (4) the need to align contracts with legal requirements and business direction. However, this exercise should be carried out bearing in mind that the reason is to make savings and achieve efficiencies and not to jeopardize or damage a good commercial relationship. Whatever the reasons, the assessment should consider all the business arrangements including the supply and purchase contracts with key customers and suppliers and back-office contracts, such as purchasing and outsourcing arrangements, facilities management, logistics, IT support and maintenance contracts.

Where to start

Firstly, you should start by:

1) Reviewing the entire agreement pool, 2) Identifying the agreements that need to be reviewed and 3) Highlighting existing clauses in such agreements, for example, benchmarking, continuous improvement, exclusivity and minimum purchase obligations that you may be able to use to start the renegotiation.

Then you would move to renegotiate the individual terms, such as the price or the scope of the goods or services with the help of you adviser in order to avoid any claim by the other party for breach of contract.

Depending on how strong (or not) your renegotiation base is, you could of course just rely on commercial considerations and either:

1) Renegotiate; 2) Terminate the relationship as a whole; or 3) Negotiate a staged exit, lesser commitment.

It is good to remember that when you look for an "agreement" with a customer/supplier, that not all contracts may be documented in one document. The terms of the relationship may arise from various arrangements, so gather the facts and understand how they interact among themselves before progressing with the review. At this point, it is essential that any review and update is taken having first taken advice from your legal advisor in order to avoid any claims for breach of contract.

In particular, consider:

-Signed or draft agreements (which have been used between the parties for some time); -Any course of dealing between businesses over a period of time; -Exchanges of correspondence, including e-mails; -Implied terms; for example, even if there are no service level agreements or key performance indicators, the Supply of Goods and Services Act 1982 requires the service provider to use reasonable care and skill; -The parties' conduct, which may constitute the contract or vary its terms; for example, always accepting payment after 60 days instead of the 30 days set out in the contract. -The other side's terms and conditions; -Schedules, side letters and letters of comfort; -Invitations to tender (ITTs), responses to tender and unfinished agreements.

Considerations for customers

Always, consider using the contract terms to commercial advantage. If, for example, the contract does not specify purchasing exclusivity and there is no requirement to buy a minimum amount from that particular supplier, consider dual sourcing from a cheaper supplier instead of terminating.

Considerations for suppliers

A supplier may wish to consider the following:

- Review credit limits with existing customers as well as under taking credit searches against new customers to ensure that the level of credit is appropriate to the financial standing of the customer. In these tougher times, such credit limits need constant review. Bear in mind that the information received may be out of date. - Where appropriate, include retention of title clause or ensure that your current clause works effectively. If your customer becomes insolvent, an effective retention of title clause may be the only way that you will realistically recover or part-recover the debt or your goods. - Insist on a guarantee from the directors or the parent company, if there is concern over any new customer's credit rating. If the customer becomes insolvent, you can seek recovery from the guarantor. However, ensure that all available checks are carried out against such would-be guarantors; otherwise the guarantees may not be worth the paper they are written on. - Consider entering into a factoring agreement or taking out credit insurance to improve your client's cash flow, especially as many customers are paying their suppliers late to improve their own cash flow positions. - Check invoicing and payment terms and put in place a strategy to enforce them. Seek to negotiate more favourable terms and then enforce them. - Check your contractual right to terminate or suspend the arrangement, if, for example, the customer becomes insolvent or fails to pay on time or at all.

This articles is for general purposes and guidance only and do not constitute legal or professional advice.

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