Spring is in full bloom. The change of season provides an opportunity to delve into a little spring cleaning. It is a chance to reduce clutter and freshen up your home. However, how often do you think about applying the concept of spring cleaning to your business contracts? Just like a home, a business can truly benefit from a cleanup to revitalize and reinvigorate a company. Priorities in business vary according to industry, but closing deals is a common factor across the board. When was the last time you evaluated your contract life cycle? What deals worked for you and which deals did not? Do you have a plan for contracts coming to an end? Do you know which contracts auto-renew or which contracts are tied to a specific action or conditional circumstance? Do your employees have a solid grasp of their duties and responsibilities tied to a contract? Taking the time to review your business contracts will allow you to assess what’s working and what you need to change. Contracts housekeeping may be tedious, but it is necessary. Here are some tips to help you with your contracts housekeeping:
This one sounds simple, right? Interestingly enough, it is not unusual for a company to continue to carry out their terms of the agreement without realizing that their contract expired. This can quickly result in a sticky situation especially if your industry is heavily regulated. There may be additional reporting requirements, regulatory changes, or price fluctuations that are material to the contract’s terms. When your contract is up to date, it ensures that parties involved in the contract continue to execute their end of the bargain. If anything goes wrong, the parties can rely on the contract’s terms to reach a resolution. This will prevent a lot of last-minute scrambling that could quickly sour a business relationship. Since business relationships are important to preserve and grow, an up-to-date contract ensures that things continue to run smoothly and profitably.
Companies can go through a lot of change in a short amount of time. Common occurrences such as bankruptcy, hiring employees at a rapid pace, new workflow systems, mergers and acquisitions, and re-structuring can throw off the ability for a business to manage certain aspects of the company effectively. This in turn, affects the company’s ability to handle their contracts and comply with those contract’s requirements. During these times of pressure, it is easier for things to slip through the cracks. That’s why implementing best practices for contract review is critical to ensure that the business always has a safety net.
Contract review: Whether you have in-house counsel, outside counsel, or a contracts manager, someone needs to be reading and reviewing the contract. Contract review can be arduous and the reader must be meticulous when approaching language that presents a significant risk to the company. Many times, boilerplate language gets skipped over which increases the chances of the reviewer missing additional language that affects the company’s position in the deal. There is also a difference between reading the fine print and understanding it. If there is something in a liability clause that you are unsure about, who do you ask? A contracts attorney will be able to answer your questions and give you the pros and cons so that you can make an informed business decision. Contracts review is time-consuming, but it sets the company up for success and manages risk effectively. Even though it is impossible to avoid all risk, diligent contract review gives you the chance to weigh your options thoroughly.
Playbook:
Not all contracts are the same. The lens used during contract review matters. Businesses must determine what interests are necessary to protect. For example, a SaaS agreement will likely focus more on protecting intellectual property whereas a supplier contract that sells produce to a grocery store chain may focus more on logistics like timing, transportation, and delivery. Depending on the bargaining power between the parties, some parties may benefit from redlining (editing) the contract to make the terms mutual rather than one-sided. That’s where a playbook comes in.
A playbook lists the businesses’ negotiables and non-negotiables based on risk management and economic factors unique to that business. A playbook explains how to play the contract game with instructions depending on various likely scenarios. It tells the reviewer what the business is open to negotiating like price, and what the business is not open to negotiating, like choice of law. Moreover, a good playbook will break down the applicable product/service and provide an explanation as to why the business’s position is “x, y or z.” That way, if someone like an account manager encounters pushback on a certain clause, they can provide a vetted, well thought-out response to the customer/client. Should that issue arise again with the same client/customer, the response will be the same - creating uniformity and consistency. One great example of why a playbook is important is if a company requires a non-disclosure agreement before negotiating a potential deal. Many times a non-disclosure agreement can be one-sided depending on the company’s interests. The playbook will provide guidelines on how to approach the non-disclosure agreement. Whether the playbook instructs for liability language to be mutual (therefore indicating that the liability section must be redlined to reflect that position) or it instructs that the business purpose description must be as specific as possible (with guiding examples), the playbook provides stability and continuity so that everyone is on the same page.
Management system:
Next, contract management is crucial to contracts housekeeping. From start to finish, your management system should be able to provide you easy access to certain information: the date of the new contract submitted for review, how long the contract has been under review and by whom, the deadlines associated with the contract review, type of termination, remaining to-dos (especially if the to-dos require various people within different departments to answer specific questions before the contract is signed), and contract filing (where and how contracts are filed and saved). Currently, there is a plethora of fancy contracts management systems, but keep in mind that simple systems work too. Some smaller businesses may be able to properly manage their contract lifecycle via Sharepoint or an excel spreadsheet. Other larger companies may need a more complex system. There is no right answer to what your contracts management system should be, but you need to make sure to have a system in place. The system should make sense and be conducive to the needs of your business. By relying on your system, you should be able to modify and include important aspects of a contract like: auto-renewal options, termination deadline reminders, regulatory requirements, point of contact for the contract, history of communication/negotiations, whether the contract is connected to another contract in your workflow, whether there should be an insurance check based on the good/service, name of employee who will be overseeing the contract execution from start to finish, and whether the contract has been fully or partially executed. These are just the basics, but the basics are everything when it comes to contracts housekeeping.
Past: Have you kept track of what contracts in the past failed to work? Do you remember what happened and why? Is there something you can change in your current contracts to prevent history from repeating itself? Have you kept track of what contracts in the past worked? What was something that you thought yielded a successful result? Maybe it was an indemnity clause or adding liquidated damages – note the good things that come out of a contract that helped reduce risk.
Current: What contracts are on your plate today? Have there been any recent disputes or issues? Is this contract just starting or is it about to end? If the language states a thirty-day written termination notice, you must make sure you are terminating the contract properly.
Future: What deals are you excited about and why? What negotiation power will you have? Is there a potential conflict of interest? Are there restrictions based on your signed contracts that would prevent this future contract from happening? Do you have a contract template ready for when this future deal occurs?
Conclusion
Contracts housekeeping takes patience and determination. Best practices help keep the process as accurate and stress free as possible. Businesses should prioritize contract management because it is the foundation to a responsible and compliant business. When a business is intentional and methodical, the sky is the limit. While contracts housekeeping is not a walk in the park, it is part of risk management to ensure long-term success.
If you have questions specific to this article, or about contracts in general, contact Nicole Corbett (ncorbett@setlifflaw.com) at (804) 377-1268 or Steve Setliff (ssetliff@setlifflaw.com) at (804) 377-1261.
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