4 Key Reasons Why You Should Review Your Commercial Contracts Regularly: Part 2
This second part of the article follows on from the previous one which touched on how to start the review and identify key commercial contracts and key considerations for both customers and suppliers.
In this 2-part article (4 Key Reasons Why You Should Review Your Commercial Contracts Regularly: Part 1) Dr Maria Anassutzi, Intellectual Property Expert, will be examining some key clauses and provisions that businesses should be considering before reviewing their contractual relationships and commercial contracts and how to go about doing so. This second part of the article follows on from the previous one which touched on how to start the review and identify key commercial contracts and key considerations for both customers and suppliers.
When considering whether to renegotiate a contract price, then the following considerations should be taken:
- Whether particular volume of purchases have been achieved and whether they allow for any rebates or discounts and if not why not? What would be the benefit to the supplier can this be used for renegotiating the contract price?
- If payment is in another currency have the exchange rates been considered when deciding/agreeing on the price?
- Does the contract control future price increases and are these implemented in the agreement? Failing to comply with such a provision may constitute a waiver if, for example, you allow the supplier to increase the price by a greater amount than the contract allows. It may constitute a waiver of your rights to rely on such a clause.
- Is the customer entitled to bulk or group discounts and have these been accounted for?
- Is the price linked to an external factor, for example, Retail Prices Index? Industry indicates can also go down as well up. Can the clause be applied, so that the price can decrease?
- Does the customer have the ability to require access to financial records to check figures, particularly in relation to the calculation of royalties, pass-through of costs or attributing overheads? How often and how quickly? Who bears the costs?
Other helpful clauses
Other clauses which may be of assistance when renegotiating the contract include:
Best value clauses: as favoured by public sector organisations, so that they meet best value criteria. Consider if this can be used to your advantage.
Benchmarking: look who bears the costs and how the clause deals in practice with the outcome of benchmarking. Must the supplier match the price and/or the quality? Does it deal with quality or price or both? It may allow you to look for additional suppliers.
Most favourable nations clauses: these are contractual provisions that enable one party to receive the most favourable price or terms and conditions offered by the other party. However, the clause must be appropriately drafted to meet competition law requirements. It is also useful to ensure that the practical control mechanisms are in place to ensure these are being complied with?
Continuous improvement provisions: these provisions act as a guarantee to the recipient that the supplier will try to improve the services and its terms and that any savings made by the supplier are passed down to and shared with the customer. It may allow for the customer to request that improved services are provided without extra charge.
Can termination be used as a means of renegotiation?
It may be helpful to consider whether your right to terminate could be used as a means of contractual negotiation. In anyway, attention needs to be given to ensure that any action does not give the other party grounds to claim damages for wrongful contract termination. Termination clauses should be reviewed carefully with the help of your legal advisor:
- Is partial termination an option?
- Check for a minimum notice periods.
- Adhere to the notice provisions when exercising any rights to terminate, especially where the form and date of such notice is prescribed by the agreement.
- If terminating for material breach, you must be able to prove that there has been such a breach and that it has not been waived.
- Be aware that certain contracts come with enhanced rights, which may not be reflected in the documentation; for example, commercial agents have rights to minimum notice and potentially, to exit payments as a result of the Commercial Agents (Council Directive) Regulations 1993.
- In unwritten arrangements, consider whether reasonable notice is required.
- Consider rights to terminate, if the supplier or purchaser is at risk of becoming insolvent. Be aware that the clause may be drafted to be available early in the insolvency process.
- Change of control: this may be a useful trigger for termination; in an economic downturn changes of control may not be more likely to happen, for example in refinancing scenarios.
If the renegotiation strategy involves terminating an agreement, then consider the impact on the business and the relationship:
- Is an exit plan required? If so, does this need to be negotiated?
- How quickly a new supplier can be found?
- Who bears the costs of the exit? Scrutinise indemnities and cost-underwriting clauses to analyse the impact on termination.
- Consider the impact of employment issues.
- Consider if any intellectual property rights need to be asserted.
- Check any hand-over clauses, for example, for documents or for business processes.
- Consider which clauses survive termination and the impact of these.
Employment issues on termination
One of the main issues arising from termination can be the impact of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). The effect of TUPE may be to transfer dedicated employees back in-house or to the new supplier being appointed. Consider whether this has an impact on the cost of appointing a new supplier or bringing the arrangements back in-house. In particular:
- The consultation obligations mean that the risk of TUPE is likely to rest with the incumbent and the new supplier, but check an indemnity given.
- Does the contract contain specific provisions dealing with employees and protection under TUPE?
- Check non-solicitation clauses regarding employees.
- What is the impact on the new supplier and can they benefit, under the Contracts (Rights of Third Parties) Act 1999, from any indemnities?
This article is for general purposes and guidance only and does not constitute legal or professional advice.