Managing contract risks in your business

8th November 2021

Managing your contracts is an important way of mitigating risk in your business. Here are some tips for navigating this area:

Understand what contracts you are bound by

It may sound obvious, but the first step to understanding your rights, obligations and liabilities is to understand what contracts your business is a party to. Think about all aspects of your business, including suppliers, customers, distributors, consultants etc. Bear in mind that contracts can be formed in a number of ways, including orally or by exchange of emails.

Contracts should be made in writing wherever possible. This helps to provide certainty on the terms of the contract and therefore reduce the risk of disputes as to the content or existence of a contract. Keep a copy of the contract for future reference.

For businesses which enter into a large number of contracts, it’s advisable to keep a contracts register, setting out key information about each, such as whether exclusivity is granted, and renewal dates, to help ensure key dates are not missed.

Understand the terms of your contracts

Understanding your rights and obligations is critical to managing contract risks. These may be set out expressly within the contract. Terms may also be automatically implied into your contract by law.

Key terms to be aware of include:

  • the term or length of the contract
  • what happens when the contract comes to an end
  • how and in what circumstances each of the parties may terminate the contract, and any costs that may be associated with this
  • payment terms
  • delivery obligations, and whether there are any timescales within which deliverables must be rejected
  • warranties and indemnities.

Check your insurance is suitable

Maintaining suitable insurance cover provides a means of meeting a claim if the worst were to happen. Consider what insurance your business has in place, and whether any of your contracts impose any requirements on you, for example to maintain specified levels of cover. However, it is important to remember that your potential liability under a contract is not automatically limited to the level of the insurance cover, and you may still be liable for any claim to the extent that it exceeds your level of cover, or is excluded from your policy.

Protect your intellectual property

It is important to ensure that your business either owns or has an appropriate licence to use all intellectual property (i.e. copyright, trade marks etc) that it needs. Similarly, check that you are not unwittingly giving away ownership of any intellectual property, and that any licences you grant go no further than intended. Considerations for licences will include the geographical scope, whether the licensee will have exclusivity and the term of the licence being granted.

If you need any advice on the contracts you are considering entering into, or your rights and obligations under a particular contract, we’re here to help – get in touch.

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