Employment eBulletin April 2011 - Tips for Contracting in a Downturn

There are legal and commercial risks facing many businesses in the current economic climate, but there are certain steps that can be taken to control, and hopefully minimise, these risks.

When contracting with suppliers:

• Understand the business of the supplier and be alert to early signs of difficulty.
• If the supplier is understood to be in actual or suspected financial difficulty, consider taking action to terminate any pending contracts or defer any future payments.
• Review terms or contracts with suppliers to ascertain procedures around delivery and when title in goods will pass to you. Consider if there is an opportunity to acquire title to assets (physical or intangible) before they are delivered. Remember, if you hold title to assets held by your supplier you may have a right to seize the assets.
• When negotiating new contracts, explore additional protection that may be available to your business, such as:
  • letters of credit;
  • escrow arrangements, where a third party holds money on behalf of both parties, subject to obligations to release the funds to one of the parties in specified circumstances.
• If the supplier contracts with a third party for goods/materials, consider contracting directly with the third party, i.e. cut out the supplier as the middle man.
• Consider renegotiating unfavourable terms to ensure flexibility in the contracts, i.e. ensuring that prices are not fixed and any downward pricing trends can be addressed.

When contracting with Customers:

• Review your existing payment terms; can you get payment up front?
• Review contractual provisions relating to your ability to retain security over assets. Is title to any goods and/or materials retained by your business pending payment by the customer? Retention of title provisions are never so important as in an economic downturn.
• Consider what customer due diligence is carried out by your business to assess the customer’s ability to pay, i.e. are credit checks carried out as part of the procedure?
• Ensure your standard terms contain appropriate provisions allowing you to review prices.
• Consider whether third party guarantees should be sought for new customers. 
• Remember, cash should be king and you should ensure you have procedures in place to monitor and collect cash payments efficiently.

General Points to Note:

• Be alert to any warning signs, such as late payment by your customers.
• Carry out proper evaluation and/or risk assessments before entering into any new contracts.
• Review existing contractual arrangements to understand what terms have been agreed and what risks your business is exposed to.
• Consider the need to review and update any insurance policies in view of increased risks in the current market.
• Be aware of the link between legal exposure and reputational risk and align your strategy accordingly.

The Commercial, Outsourcing and Technology Team at Wright Hassall is experienced in drafting, reviewing and negotiating commercial contracts and terms and conditions of business. If you require assistance in reviewing any existing or new contractual arrangements, please contact Christine Jackson on 01926 880774.

For employment advice, please contact Sarah Stratton on 01926 884684.