When you’re busy liaising with contractors and anxious to get down to business, it can be very tempting to simply sign a contract and take care of the details further down the line. Exploring how this ‘sign it and see’ approach could leave your business vulnerable, we let you in on why you should take a special interest in the details of your contract, particularly in the IT industry.
You could enter into a contract without realising it
For someone to accept a contract they don’t need to sign an agreement. It could be that they act in a way that suggests they’ve accepted the terms of an agreement, such as delivering the work set out in the contract before any paperwork is signed.
On the other hand, you might not have the contract you thought you had. If it doesn’t contain sufficient detail and clarity, a court might rule that there is no contract or find that the terms are different to the ones you thought you’d agreed to.
Making sure that any contract reflects your agreement is key. This way, you know what the result of the contract will be if someone fails to:
- perform a service
- provide goods promised
- pay in line with a contract’s terms.
You need to know what you’re promising
Most IT businesses will have standard contractual terms that they’re familiar with, but when these terms are amended it can cause some uncertainty. Amends usually appear in the commercial detail of the contract, where you may find, for example, the specification for a particular software product being developed. This detail needs to be accurately captured in the commercial agreement for each party to understand what they’re officially agreeing to.
As an IT company, alongside your written contract, you may also find you have a series of contracts that arose from agreements made over email or telephone. This can lead to uncertainty around what has been agreed.
If you’ve taken the time to negotiate and agree a written contract, you’ll need to check that it has an ‘entire agreement clause’. This is a short clause, normally found towards the end of a contract that says the contract contains everything that makes up the agreement, and that any other documents, emails or agreements that existed before the contract don’t apply.
What you agreed to might not be in the contract
IT contracts are often written as framework agreements. These set out the terms and conditions for when someone makes a specific purchase. Orders are then placed on the basis of those terms by completing a separate order form. The framework agreement and the order form will together make up the binding contract.
You may find, however, that the commercial detail in the order form doesn’t match the detail in the framework agreement. They could be different, inconsistent, lacking in detail or simply wrong.
If it’s not clear across all parts of the contract what a party needs to deliver, then it’ll be difficult to determine whether they’ve delivered it or whether they should get paid, which could lead to a dispute.
Your standard terms may not apply
When two companies intend to create a contract, they’ll often send each other their standard terms. A company will want to contract under their own terms because they’ve usually spent time and money having them drafted, checked and aligned to their objectives and appetite for risk. If both parties are either unwilling to engage or budge on their standard terms, it’s known as a battle of the forms.
What this means in practice is that the last set of standard terms that is sent before the contract becomes effective is usually the one that applies. This may seem a little unfair and can be a bit of a surprise to the other party. The best thing to do in this situation is to directly address whose terms you will be contracting under and discuss any terms that you’re not happy with.
You could be liable for more than you realise
There are certain clauses you should look out for in every contract that you’re going to sign or you could end up being liable for more than you thought.
Limitation of liability: checking how far a company has limited its liability is crucial, but it’s equally important that you limit your own liability to an amount that’s in proportion with the value of the goods or services that you’re offering. If you don’t, you may end up paying out for numerous things that were affected by, but not directly related to, your error.
Liquidated damages: a liquidated damages clause simply says if you’re in breach, you’re obliged to pay a set amount. These regularly appear in IT contracts because timely delivery is normally crucial. For example, if you fail to test a product and deliver it by a particular date, you could be charged a specified amount for every day that it’s late.
Indemnities: an indemnity entitles the person with this cover to a payment in a particular situation. An indemnity may come into play if a contracting party loses client data or their software infringes a third party’s intellectual property rights. A party may seek an indemnity in order to make sure that it recovers any losses as a result of these situations on a pound for pound basis. If you see any word like indemnity or indemnify, that should raise a red flag because you’re agreeing to a higher level of recovery than would otherwise apply.
You may be tied in to a contract for longer than you think
Occasionally, one party to a contract may want to end their relationship with the other party. However, businesses can then find out that they’re either tied in for the full length of the contract or have to serve a long notice period. This can be a major commercial problem. IT businesses in particular really want to be able to get out of a contract at any time because the quality of services like software and maintenance are critical.
To do this you’ll need to make sure you have written into the contract the ability to ‘terminate on breach and at will’, by providing a reasonable period of notice.
When you enter into a contract, the safety and future of your business can ride on the terms of the agreement, so it’s essential you know what they cover. Businesses that neglect the details of their contracts can leave themselves vulnerable to a variety of risks. Not only could this have a severe short-term financial impact, but also could affect their commercial success in the long term.
Whether you’re about to sign or you’re currently negotiating a contract, you can learn more about how to handle the small print in our next instalments, Tips when entering into contracts and Tips for contract management and exit. For further useful information for small business owners, visit our business blog.
If you’re concerned about problems your business may face while contracting, there are insurance policies you can take out. Hiscox provides an IT industry-specific professional indemnity policy containing insurance designed to cover the risks faced by IT Consultants. These include breaches of confidence, intellectual property rights infringements and negligence.