Beginner's guide to business agreements (without becoming a lawyer)
As an employee, you probably did your own thing while building your expertise. I am guessing you would have had any legal documents taken care of by other people in your employer’s team.
One day, you change gear to set up your own business, or you get promoted to a senior position with management responsibilities.
You go from being a subject matter expert to also having broader responsibilities. These include looking after the legals, or appointing someone who will. Your previous training and experience may not have included “legals” and yet, suddenly, you have to negotiate not only the business deals but the written agreements that record them and make decisions around all of that.
I was recently talking to a client who was setting up their first business with a former colleague. They asked me to look at some agreements for them because they used to work in a big corporation where the legals were seemingly done by fairies.
They’d prepared a simple draft customer agreement using an online template. But it didn’t include a clearly stated price! The clause essentially cross-referred to a schedule, which was not there. So, it was not obvious to them that they had to prepare a schedule that included the price. Without a clearly stated price in the contract, they could end up working for the wrong price, and/or in a dispute about the right price. Typically, the courts will decide a “reasonable” price where the contract is missing that bit. However, no one wants to have to go to court to set the price of their work/goods.
Also, they told me that they were unsure what to look for in the supplier agreement they’d been presented. Was the agreement reasonable? Or was it lopsided against them? Why were certain clauses there? What were the implications?
This set me to thinking that it would be useful for owners and managers who are making that transition to taking responsibility for the “legals” in their business to see how the agreements are really only a reflection of the commercial trade-off between the party on each of the issues covered by the agreement.
This article gives you the understanding you’ll need, without becoming a lawyer yourself. It doesn’t tell you what individual clauses should say, nor replace the need for legal advice. It is focused on helping you move into and confidently own your responsibility for the “legals” by understanding the underlying “why” for the clauses you find, or (also importantly) the clauses you should find in your agreements, and some of the different perspectives on what is fair in each case. It will give you great commercial benefits, allow you to work with your lawyer with more efficiently, and help you negotiate with your suppliers, commercial partners and clients with more confidence.
The background
Maybe you have just moved into a management role and/or started up a business of your own. You’ve been promoted due to your proven skills in your field, or you’ve embraced the startup life based on those skills or your passion for some new venture.
Now, you find yourself having to make a whole range of decisions that are not really in your comfort zone, field of expertise or the focus of your passion project. You are expected to answer and decide ‘like a boss’ on all sorts of things, including some pretty dull-looking legal agreements with suppliers and/or clients.
Your first response may be that this is beyond dull and a distraction from your core skills and the places where you shine. You may instead (or also) find it somewhere on the scale between a bit daunting and full-on scary.
I would encourage you not to look at it as an irritating distraction from your mission, but as an important way to protect that mission. I would also encourage you not to find it scary. Most importantly I would encourage you to engage with the process and to get advice as you do.
Professional legal help is, of course, a good idea, but it is worth the effort to develop an understanding of the agreements and the commercial issues which underpin them. Don’t forget these (sometimes dull or even very dull) things are critical to the way your business is operating.
Supplier agreements
In my experience, people come to business management and/or ownership from a really wide range of backgrounds and have often developed very different skills and experience along the way.
Some will have had careers in larger corporate organisations before starting their own business based on their skills and/or passions. In this case, unless their role was specifically focussed on legal or procurement, it is likely that other people/departments mostly dealt with the written part of negotiating with suppliers, and/or the company’s terms of business for customers were longstanding standardised documents for which often only the Purchase Order part would be changed.
After years of negligible inflation, the Consumer Prices Index to April 2022 puts inflation at 9%, and given the war in Ukraine and other supply issues it seems likely to rise above 10%. Imagine being a supplier in a contract with a three-year fixed price contract without a mechanism to increase your prices whilst inflation on your costs keeps eating at your margins. That way lies financial problems!
Amongst the feedback I have heard from business managers and owners faced with an agreement offered to them by a supplier or client are: “These agreements are all pretty standard right?” “You have to agree to what the supplier offers/client wants, yes?” “It’s a PDF so they won’t change it” “I would not know what changes to ask for”, “I don’t know what to look for in these agreements”.
Let’s unpack some of these sentiments.
“These agreements are all pretty standard right?”
Well, not so much. Very often in any given sector, there will be a fairly standard list of topics that a supplier agreement with the reputable suppliers in that sector (who have thought about and invested in their agreements) will cover.
So, if we take as an example the accountancy sector, pretty much every accounting firm’s letter of engagement or terms of business will include sections or headings dealing with at least the following issues: Scope of work; Fees; Data Protection; Limitation of Liability.
Some of the wording may even look alike from one accounting firm to another. But before you fully relax and think, it is all much the same: there is no guarantee that each firm will cover all the issues in the same way; some agreements may be poorly drafted, others very clearly written. Some accounting firms will deal with each issue in a way which is fair to you, others will have drafted their agreement with a huge bias in their favour either on every single point, or on some very key points.
I am not just picking on accountants here, just using them as an example, but similar differences show up in every sector. For instance, if your supplier is delivering machinery to you, some supplier agreements will include a clear set of warranty clauses that allow you to get any faults repaired or the machine replaced if the repair is not possible. Others will have confusing clauses leaving you unsure where your business would stand if the machinery fails. Worst of all, some suppliers will try to write into their agreements that they are not responsible for any faults or failings of the machines they have delivered to you at such expense.
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I have also seen supplier agreements worth hundreds of thousands of pounds where the supplier made no promises as to when the work would be done or the standard to which it would be done, but the whole payment was required up front!
Even where the contract is reasonably fair to you, you will also need to check that it works for you and that you understand the obligations and risks it brings to your business. Otherwise, unexpected consequences can follow.
An example might be where the supplier would have equipment at your site and requires you to include it in your insurances (since it will be protected only by your site security and not theirs). If you haven’t understood that this means you need to make sure the insurances are arranged properly. Then, if that machinery is stolen from your site, you could find that your business has to pay the supplier the value of the equipment, but your insurers may not be willing to pay out (if their policy did not include cover for the supplier equipment left on site).
Given the potential variations, my thinking is that it is worth a read before signing a supplier agreement. It is also worth raising any concerns or changes and finding out how the supplier responds before proceeding.
“You have to agree to what the supplier offers/client wants, yes?”
Very often, no, that is not true.
There are times where it may be relevant:
Otherwise, most B2B suppliers are keen to do business with you as a customer. So if you have queries or concerns over any part of their agreement (and this may be over the “missing bits”), it can be worth discussing the agreement to see how the supplier deals with that, and, ideally, to agree suitable changes. After all, if they are ‘shirty’ with your concerns before you have even signed on the dotted line, you can’t expect their attitude to improve after they have your signature and contractually binding promise of payment.
And clients? The client is always right, yes?
If you’re one of my clients, please look away for a moment… I will tell you the unvarnished truth as I see it... No, not always.
Whilst, as a business, you will need to be accommodating and responsive to the wants and needs of your clients, you always need to check in on the needs and risks of your business, and only if it still works for your business after that check should you agree to the client’s requirements.
Being able to say you have a client or another client will not help your business to survive and thrive if you misjudge the risks for your business of the promises you make to clients. Of course, you want to sell your goods/ services and have happy clients, but please remember, not at just any cost.
If the client says they have an agreement for engaging a supplier, it may be perfectly fine and reasonable, but do please check it through and make sure that it is before you sign it or start working for that client. After all, my guess is that the purpose of your business is to survive and thrive and be profitable… and that might not be the outcome if you automatically agree to just any terms put forward by a client.
Here is the UNLESS Scenario…
If the client is a public authority (such as a local council/NHS), they may well be required to contract only on particular terms. And,?EVEN THEN, you need to be aware that the bulk of the agreement offered to you may well be negotiable and only limited aspects of the agreement are likely to be ‘sacred’. It can be very instructive to ask which parts of the agreement as ‘fixed’ and why.
“It’s a PDF so they won’t change it”.
My view is that this is what the supplier (this is usually a supplier rather than a client) is hoping most of their potential clients will think.
I have even had lawyers send me a PDF to sign, knowing (surely) that if my client has instructed me to check the agreement that is exactly what will happen, and either I will ask for an amendable version or simply add comments to the PDF or send my comments in a separate email, which is of course more work for them.
So, I would start by asking for an amendable version before you even review the agreement, as it can simply save time. You’ll very quickly get to find out if the supplier really meant, this is the PDF ‘set in concrete’ version and there is and never will be another or even a variation on this version OR whether they are willing to discuss reasonably any reasonable concerns.
“I would not know what changes to ask for”
“I don’t know what to look for in these agreements”
As you can imagine, an article like this is not the place to provide a full analysis of what you would want to look for or the changes you would need for a particular agreement, especially as I have not seen your agreement.
In my future articles I am going to be looking at some of the headline issues and why they are important. I will not aim to tell you what precise wording you should be looking for, but rather to explain why some of the topics, such as insurance, are important. Hopefully, that should allow you to start reading agreements with a more enquiring and confident approach. You will also realise that for all the references to “legal”, the underpinnings of these agreements are absolutely commercial and about your business.
Meanwhile, if you have any questions, please give me a call on 020 3609 8764.