Send in the contract Stormtroopers to secure deals

While for many businesses such issues may seem far, far away from their daily negotiations, contractual disputes have steadily increased over the past few years in the fallout from the recession.

When the credit crunch hit, market competition intensified as companies fought to secure new business and establish relationships with potential clients to help ride out the storm. Honour-based work increased with organisations reluctant to frighten off potential buyers with complex legal documentation. In a buoyant market, an honour-based system doesn’t tend to present any problems – as long as everyone is making money, no-one has any complaints. However, if the economy contracts, failing to have the appropriate documentation in place can prove extremely costly.

During a recession more than any other time, businesses set out to look after number one. This means if there’s ambiguity in a contract – or worse, no contract whatsoever – businesses are more inclined to renege on implied agreements or seek to squeeze more out of the proposed fee than was originally intended.

Suppliers who fail to draft secure contracts prior to beginning work expose themselves to greater risk of buyers backing out of deals if they encounter cash flow difficulties or seek to reduce outgoings.

As businesses rein in spending, risk appetite wanes and changing market conditions, such as decline in the value of commodities, could make prior agreements less economically viable. If there’s no paper trail to underpin the initial commitment, a business can face real difficulty in establishing at a later date what had been agreed.

When the market shrinks and new customers are thin on the ground, comprehensive contract negotiations take a back seat to establishing sound business relationships. Yet over- emphasis on pleasing clients can spell disaster for a business and seriously threaten financial security as customers take advantage of the absence of a detailed framework and exploit the opportunity to get more for their money – which, if repeated with several customers, creates a vacuum in the supplier’s accounts.

It’s not just suppliers that take the hit when a suitable contract is not in place. Buyers also fall victim to businesses defaulting on prior commitments. If details of an agreed project are not explicitly outlined in a legally-binding contract, suppliers can take more time to deliver work, or dilute the level of service initially agreed.

In an effort to save on costs, some businesses undertake contractual duties in-house but it’s imperative that contract managers are not distracted by sales targets and spend adequate time preparing contracts to avoid sacrificing business security.

Even when adequate time is taken to create a detailed and lengthy contract, key issues can still be overlooked – as in a recent case where a dispute emerged over payment terms despite the business in question drafting a 309-page legal document prior to agreeing the deal.

Lawyers can help to take the pressure off by ensuring legal documents are iron-clad before work commences, freeing up management time and safeguarding businesses from potential financial losses further down the line.

A galaxy of things can go wrong when you fail to put comprehensive legal documentation in place before embarking on a new business deal. Don’t rely on honour-based agreements; the Force has a Dark Side and not even George Lucas is exempt.

l Simon Catto is a partner at law firm HBJ Gateley.