Part Three: Tips for contract management and exit
Once you’ve secured a contract, the last thing you want to do is lock it away, particularly when its finer details could affect the direction your business takes and the duties it must fulfil right up until the contract ends.
Knowing how IT contractors and small businesses work, we look at contract best practice to help you manage yours correctly and avoid common problems that can crop up along the way.
Store your contracts efficiently
Often businesses are unable to find their contracts or deny they’ve entered into one, only for the other side to produce a contract that was signed some years earlier.
Businesses need to have a system for recording and storing contracts or they won’t know what they’ve agreed to or how to manage the contract effectively.
Make sure your colleagues understand the contract
Frequently, we come across contracts which are operating in a totally different way to the structure set out in the contract. In many businesses this happens because contracts are negotiated through a sales function that does not link up with the operational side of the business.
One way to deal with this is through more involvement across business functions during the contract negotiation stage. At the very least, the team that negotiated the contract should explain how it works to the operational team. If not, it could lead to accidental breaches and expensive legal proceedings.
Document contractual changes
At times, a contract will need to be amended. This can happen if a service is extended or if the scope of work changes, for example.
When this happens, businesses need to properly document the change and make sure that a copy of the change is kept in a secure place. If contractual changes aren’t recorded and stored safely, there’s always the potential for a dispute over what was agreed.
Make sure everyone is following the terms
On many occasions, a business will naturally assume the other party is complying with the contract terms when they aren’t. For example, a business may contract for the supply of an IT system on the basis they’ll make payments in stages: a payment upon signing, a payment for installation and another when the product goes live.
These staggered payments can help guarantee timely completion. However, a supplier may invoice for all stages at once, or for some stages early, and if no-one checks the payment details then that financial incentive to reach the ‘go-live’ state on time could be diminished.
Monitor targets and milestones
Contracts for services frequently contain Key Performance Indicators (KPIs). Many hours negotiating KPIs are wasted if they’re never measured. Make sure you revisit them regularly to drive and measure performance and to avoid a potential breach of contract.
Be careful when dealing with breaches
If the other party breaches your contract, understand your position by taking legal advice at the earliest opportunity. How you react, or more often, don’t react, could affect your ability to make a claim.
After an incident, you need to be careful that nothing you say or do amounts to accepting the breach. This means taking appropriate action as soon as the breach happens. Failing to do so, and acting as if you’re still bound by the contract, could mean you lose the right to get out of it and will be left with a damages claim only.
Comply with notice conditions
If you’re looking to get out of your contract, one of the first things to check is the termination clause.
Many people simply see the words '3 months’ notice' in a termination clause and think that they can get out of a contract at any time if they give 3 months’ notice. But this is not necessarily the case. The conditions of the notice will often determine who you can give notice to, the method you can use, such as first class post, and the point at which you can provide the notice.
Check that you have grounds to end the contract
People often want to end a contract if they feel they’re not receiving what has been promised. But understanding whether you have the right to do so can lie in the small print.
For example, many service contracts contain a statement which says “time is not of the essence in respect of the delivery of the services”. So, in circumstances where you would naturally assume the right to end the contract, such as a service provider failing to deliver by a contracted date, you might not actually be able to.
Tie up loose ends before the contract finishes
Before serving your termination notice check if there are any last responsibilities you need the other party to commit to before the contract comes to an end. If you’re receiving data management services, for example, you may need the service provider to transfer data to you and send it in a particular format.
Making sure the course of your contract runs smooth
Where you have ongoing contractual duties, rarely is the sensible approach to put your contract in the bottom drawer and forget about it.
If you’re dealing with other businesses, and their progress depends on meeting certain milestones then tracking they’re hitting the milestones appropriately and to the timescale set out in your contract is crucial. Not only will it reinforce quality, efficiency and consistency of service, it will also help you spot a potential breach of contract.
Following the rules laid out in your contract could also help you identify possible exit points from your contract and conclude your business relationships in a fair and appropriate way.
If you’re about to enter a contract and are interested in hearing more on how to manage that part of the process, you can read the previous instalment from the solicitors at Jordans Corporate Law, Tips when entering into contracts. For further useful information for business owners, check out our business blog.
If you’re vigilant about the smooth running of your contract you’ll want to make sure your business is also protected. Whether you’re a contractor or small business, professional indemnity insurance could help prevent your business from becoming vulnerable when faced
At Hiscox, we want to help your small business thrive. Our blog has many articles you may find relevant and useful as your business grows. But these articles aren’t professional advice. So, to find out more on a subject we cover here, please seek professional assistance.