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As a business supplying products or services, you will likely work with several different types of customers during your business journey. When entering into new commercial relationships, you will face risks during the contract lifecycle. Therefore, it is vital to take steps to manage and mitigate against such contract risks. This article will explore key steps you can take to manage contract risks when dealing with customers.
Use this checklist to ensure your supplier contracts contain all necessary terms.
Why is it Necessary to Manage Contract Risks?
When you enter into customer contracts, you expose your business to risk. If things go wrong during your commercial contracts, there could be several negative consequences. This includes:
- customer complaints if they are unhappy with the quality of your products;
- legal disputes if customers bring a claim against your business for breaching their contract; and
- reputational damage to your business as a result of negative reviews.
To avoid the above consequences, you must take active steps to set yourself up for successful commercial relationships with your customers.
How Can a Business Manage Contract Risks?
There are various steps you can take to mitigate against potential contract risks. Here are some of the critical steps you can take at different stages of your contractual journey:
1. Conduct Due Diligence
Before working with new customers, you should conduct due diligence on them. For example, you could research them to see how long they have been established and whether they are a long-standing business. This may help you understand if the customer will be a good fit for your business. There may be certain customers you cannot deliver an excellent service to, for example, if they operate in a niche industry you are unfamiliar with.
You can also carry out credit checks on potential new customers to check their creditworthiness. This could help you identify potential contract risks from the outset, such as determining whether the customer can pay your invoices.
2. Ensure Your Contract is Robust
When working with customers, you will need a robust written commercial contract to manage any potential legal risks you may face during the contract lifecycle. A written contract will give you significant legal protection and assist with risk management.
Your customer contract should include a clear ‘Scope of Work’ with precise details of the products or services you will deliver. By including details of the deliverables, there will be less risk of mismatched expectations and a customer complaining that you have failed to meet your contractual obligations.
Your commercial contract should set out the following:
- when the contract starts and the way to end it;
- specific payment terms, including payment intervals;
- the timeframes for delivery of the products or services;
- provisions to protect your intellectual property rights;
- any obligations of the customer;
- how you will process your customers’ personal data if applicable; and
- a clause limiting your liability if you breach the agreement.
In addition, you can include a thorough dispute resolution procedure clause in your contract to minimise risk further. Including this provision can be advantageous, as it will set out a procedure for the parties to follow when a problem arises. A dispute resolution clause can also steer disputes away from formal legal action and encourage the informal resolution of the dispute via negotiations.
3. Fulfill Your Contractual Obligations
Once you have signed your contract, you must understand it and comply with it. Failing to do so could result in you breaching your contract obligations and potentially facing a breach of contract claim from the customer.
There are various steps you can take to help manage contract risks after signing a contract. For example, you should:
- document and log key dates in your contract, such as dates for the delivery of the products or services;
- explain the key contract terms to your team (such as contract managers) so relevant individuals are aware of what their obligations are; and
- communicate clearly with your customers and keep them updated on your progress under the contracts.
By making sure you understand your contractual obligations, you are more likely to avoid problems and foster good working relationships.
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Key Takeaways
There are various contract risk management strategies you can adopt to reduce your risk exposure. You should carry out due diligence on new customers, enter into a robust contract to protect your business from risk and comply with your contractual obligations. By taking these steps, you can manage contracts successfully and help prevent disputes.
If you need advice on managing contract risks, our experienced commercial contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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