Good lawyers talk to you about your business
Luisa D’Alessandro, Commercial Partner at Schofield Sweeney works in contract law, covering all types of commercial agreements. Her practice includes the digital sector including IT contracting, e-commerce and data protection.
Data protection has become a hot topic over the last year, with the introduction of the General Data Protection Regulation (GDPR). What impact has this had on the businesses you deal with?
I think there has been a lot of hype and scaremongering, focusing on the potentially large fines for breaching GDPR, and we have worked with our clients to allay concerns.
The issues behind GDPR, personal data and privacy are not all new, and there has been legislation around this for many years. We have run training seminars for clients to bring them up to date with the new legislation, to become aware of the changes, their responsibilities and the risks to their businesses.
Although the ICO, the governing body for data protection, is responsible for enforcement, it also helps with compliance and good practice in a positive way by offering advice and guidance.
As for contractual arrangements, while GDPR is important, the media focus has perhaps sometimes led clients to focus disproportionate attention on GDPR and potential fines, whereas clients need to manage risk on a range of other issues too.
Clients might ask questions about GDPR in contracts and what we often find is that the impact of that issue is low compared to others and by looking at contracts more closely, other risks are uncovered.
Business people are looking to do deals, make sales and engage with people. When should a contract be considered?
Signing on the dotted line may be the end of the sales process, but it also seals a working relationship, and the contract defines what each party needs to deliver.
When is the best time to think about the nitty gritty of a contract?
Being aware of what a commercial agreement would typically cover can be really helpful as it enables to you to factor things in to your discussions and negotiations with your counterpart, whether that’s a buyer or seller.
The sooner you think about the contract, the better. For example, what is the deliverable scope, what are the risks, what are the obligations? There are some common issues which are covered in the guide below.
Early engagement can be commercially beneficial, aside from helping to protect your legal position.
There is a push for investment and promotion of the digital economy in Leeds specifically, and Yorkshire generally. This must be an exciting and challenging time to be working in the technology sector. Are there any specific things to consider for IT contracts?
A key thing is being clear on what is being purchased or supplied for the price.
IT projects often have several stakeholders, each with differing requirements and a varying understanding of what is achievable. That makes it all the more important to ensure the contract is clear about what will be delivered and when without the need for additional explanation.
A typical issue with large scale IT projects is that when parties enter into a contract, they may not necessarily know the full scope of the deliverables, so you would build mechanisms into the contract to account for that. For example, a change control mechanism is helpful to facilitate and control how changes under the contract are managed and dealt with so that there is a process and procedure for the parties to consider changes, discuss what the ramifications are and agree a way forward.
It’s about building flexibility into the contract, not just leaving it to chance. Many IT projects can snowball out of control quickly, with different stakeholders, requests and requirements changing the course of a project.
A good contract will make it fair for both parties to handle additional work and manage costs.
Generally, contracts are entered into in a positive way, with everyone wanting to get off on the right foot, but you do have to acknowledge that things can go wrong and do go wrong.
Termination rights have their place in a contract, but quite often, terminating a contract isn’t necessarily the best commercial outcome.
A lot of management time and additional resources will have been invested in the relationship, and further costs, risks and gaps in supply are likely if a contract ends unexpectedly.
Thinking about mechanisms and remedies that are put in place for when projects go through their natural cycle and maybe don’t pan out as anticipated, can help both parties resolve issues together, in a positive way, therefore avoiding business disruption.
As IT projects can impact a business long term, it is worth thinking about what will happen when a contract comes to an end.
Consider for example, what obligations should perhaps continue after the end of the relationship and what assistance the two parties might give each other in order to effect a proper and orderly exit.
Talking of an ‘orderly exit’, how does Brexit impact contracts?
Brexit is a difficult topic, because everyone knows it’s an unknown quantum, and therefore difficult to foresee. We are talking to our clients about this, but the commercial and long-term legal ramifications are largely unknown. It is likely that many things will continue as they are for a while after Brexit, for example, GDPR legislation will still be effective in the UK.
Because of my role, I talk to different people in many sectors, and I do hear different viewpoints and approaches to Brexit, from those who haven’t planned to those who have bought extra stock and have contingency plans.
Contracts may not necessarily have provisions in them specifically to mitigate the effects of Brexit but maintaining a dialogue and good working relationship with customers and suppliers is good business practice and could help overcome some of the contractual challenges Brexit may give rise to.
Contracts are commonplace in business, and it is not always commercially viable for a lawyer to scrutinise every single one.
It may be more prudent to think about what is high value or business critical, and consider the risk if something was to go wrong. In those cases, you would be well advised to seek legal advice.
For those who want to handle contracts themselves, whether this is to save costs or for non-critical projects, I would say the best advice I can give is be as clear as you possibly can. Even if it’s obvious to you, get it down on paper.
It can be tempting for people who have been involved and talking about a deal for a while to assume that the other party completely understands and is in sync with what they are thinking.
Putting things on paper can often flush out any gaps and misunderstandings.
Your lawyer should be able to identify the legal ramifications of a contract, but just as importantly, talk to you about your business.
Common contracting pitfalls
This guide to common contracting pitfalls will help you think about what needs to be considered for a contract.
Typical issues with commercial agreements
Commercial agreements come in many forms and can cover a whole variety of sales and purchasing arrangements. While each will be specific to a particular set of circumstances, there are a number of common themes which come up time and time again when entering into commercial contracts.
This guide addresses some of the topics which a commercial agreement will typically cover and provides some hints and tips on how to avoid some of the problems that can typically arise.
Identifying the parties
One of the most important points in any commercial agreement is to properly identify the contracting parties. If this isn’t done correctly, there is a real risk of confusion around who is obliged to do what. Worse still, the agreement may even seek to bind an entity which doesn’t actually exist which can lead to all manner of problems when it comes to enforcement. Common pitfalls include referring to a trading name as opposed to a corporate entity or including incorrect registration details such as an incorrect company number.
Being clear about what the agreement covers
One of the most frequent failings in commercial agreements, is a failure to clearly and fully set out the scope of the deliverables, whether they be services, products, a combination of those or indeed some other deliverable or scope of appointment. Whether supplying or purchasing, it should be a fundamental element of any agreement that it is clear on the face of the document, what is being supplied or purchased. This will have an effect on other key provisions throughout the agreement including remedies for a failure to perform, termination rights and additional sums payable beyond the agreed scope of work.
Sometimes, depending on the type of agreement in question, the parties may not always know what the deliverables will be when they enter into the agreement. In that case, the contract should allow for possible changes. In simple terms, this can be done by a contract variation but it is worth including a mechanism to specify how the parties will actually manage the change process, for example, through a change control mechanism (not be confused with a change of control provision).
How long the agreement lasts
There are many options for dealing with the term of an agreement. For instance, contracts can be for a fixed duration, a minimum term with renewal terms or can be ongoing without a specified duration. They might require some action in order to renew or continue or might be worded such that they end if the parties fail to take some action. Some common problems in this area, include a failure to clearly define an agreement’s duration or use of wording which is potentially conflicting. Similarly, a failure to understand how renewals and terminations operate, often leads to parties becoming locked in unwittingly, so incurring fees for longer than intended.
Notice periods need to be carefully worded, bearing in mind for example that there is a difference between when notice can be served and when it becomes effective.
Price and payment
Although not always, in most cases, there will be some kind of fees payable. How a payment is to be calculated, when it is to be invoiced, when it falls due, what currency it is to be paid in and the ramifications of a failure to pay on time are just some of the issues which should be typically taken into account in price and payment clauses. Where complex payment calculations are involved, including a worked example can be very useful. Another helpful tip is to always ensure that the provisions are clear on the face of the document. For example, if the payment is to be calculated using a percentage calculation, state exactly what the percentage is to be applied to.
Remedies if things go wrong
When entering into an agreement, parties do of course, hope that things will work out. However, the time to think about what might happen if they don’t is before the agreement is signed. Therefore, it is important to set out what remedies the parties will have if matters don’t go as well as expected. For example, in an agreement for services, if a service provider fails, consider things such as whether the services could be re-performed (which is not always possible if they are time critical for instance), whether those services should be re-performed by the provider or whether the purchaser might source an alternative supply and recharge the costs, whether some kind of credit may be appropriate or even a loss of priority of supply or perhaps, exclusivity.
The main aim should be to include remedies which are appropriate to the nature of the agreement, without necessarily going straight to a termination of the agreement for a breach and the associated costs of finding an alternative provider or replacement customer.
Terminating the agreement
While termination should in many cases be a last resort, it may sometimes be the only realistic option. This might be because other remedies may have failed, because the nature of the breach is such that termination is the only suitable result or simply because the parties (or one of them) wants to walk away.
Termination provisions are important and the circumstances in which those rights may be exercised should be as clear as possible. For instance, contracts often allow termination for “material breach” but it can be helpful to specify clauses which if breached, should lead to a termination right. It can also be useful to have a right to terminate for repeated breach if for example, a party is frequently in breach of particular obligations, albeit that each breach alone, may not be viewed as material.
What isn’t in the agreement
It is of course, easier to focus on what is included in a draft agreement as opposed to what is missing. However, when reviewing a commercial agreement, it is important to consider whether any issues are not dealt with which ought to be and to include sufficient provisions to make sure that at least all the core issues are dealt with. Moreover, the parties should bear in mind that where certain matters are not addressed in an agreement, the law may, depending on the circumstances, imply certain terms. A good example of this relates to the ability to claim interest for late payments. If a contract does not include an interest on late payment clause then there will be a right to claim interest at the statutory rate (which is often higher than a rate which parties would normally select).