Business Contracts: The Devil is in the Details

Written on the 31st of May 2012 by Chris Todd

Overlooking important "fine print" in business contracts can get you badly burnt by that "Devil in the detail"

We’re all guilty of overlooking the fine print of legal documents, agreements and contracts on occasions, particularly when it comes to dealing with telecommunications, utilities and credit providers.  Our thinking is usually...I’ll just sign this because there’s nothing I can do about it.  That might be true, but at least as individuals acting in a domestic capacity there is consumer legislation protecting us from unfair and onerous contracts imposed by the mega companies.

However, in business you adopt that complacent approach at your peril.  Business contracts that we enter into with suppliers, customers and service providers are not entered into in a domestic capacity and so we don’t have the same protections.  In the commercial world, we are largely left to our own devices when it comes to commercial contracts.

For those businesses that are heavily reliant on material contracts, it’s not just the existence of a written contract that’s important, it’s the terms and conditions – i.e. the “fine print”.  The devil can be (and almost always is) in the detail.

Based on situations we've seen recently…how would your business cope in these situations?

1. Supply of a key input into your business will cease in 14 days because you didn’t realise that the supply contract (which the supplier told you was their standard contract) had a clause permitting the supplier to terminate the contract for any reason on 14 days notice......And unfortunately alternative supply in your industry has a 3 month lead time.  Do you have sufficient stock on hand? Probably not; OR

2. Your cost of goods is about to increase significantly because you didn’t realise that that ‘great’ long term 5 year supply contract had a price reset clause buried in it enabling the supplier to unilaterally increase prices at the start of year 3....So your ‘tidy margin’ has become an ‘untidy loss’ for the next 3 years.  It’s pretty likely that the bank and other creditors will be getting restless; OR

3. You have just employed 3 new staff and a week later your main customer who had been buying 10,000 units a month for years cuts their purchases from you to 1,000 units a month and shifts the other 9,000 units of business to your main competitor who is now cheaper than you.....And this could have been prevented if you insisted on a minimum quota provision in the contract.  How will you meet the revenue shortfall, not to mention the extra $200,000 wages?

We’ve come across many other horror stories where businesses have been complacent and decided not to insist on a written business contract, or have settled for a ‘standard contract’ put to them by the other party without reviewing it to see if it adequately protects them or requesting changes.  Just remember, all it takes is a change in management or financial circumstances of one of your suppliers or customers and the relationship as you knew it can be gone (or substantially changed) in an instant, to your detriment.  Problems can spiral out of control very quickly.

Basic risk management for all businesses dictates that you should regularly review all of your key business relationships to confirm the adequacy or otherwise of your contractual arrangements.

When advising clients in relation to commercial contracts (including leases, supply and distribution agreements, licences, management and service contracts and the like) we always advise them to pay particular attention to the following (among other things):

1.    Initial term and renewal
2.    Price reviews
3.    The default and remedy regime
4.    Termination rights
5.    Exclusivity and non-compete restrictions
6.    Quotas
7.    Warranties and indemnities and
8.    Security for performance (such as guarantees and charges).

The negotiating power may not always be in your favour, but at least having regard to the above will stand you in good stead.

Contract law is very important, so if you need advice in relation to contract negotiation, preparation, renewal or review ... please don’t hesitate to give Chris Todd a call on (02) 4904 8000 or just email us. A contract law attorney will endeavour to respond to your enquiry within 24 hours.