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As a supplier of products or services, contracts are the lifeblood of your business. However, each new customer contract will come with its own risks. As such, there are specific key issues that your business should consider before entering new customer contracts. This article will explore what your business should consider to prevent risk before signing a new contract with a business customer.
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Why is it Important to Minimise Contract Risk?
Your business should think carefully before entering new contracts and have a risk mitigation strategy. This is because taking on legally binding obligations under a contract exposes you to potential risks.
For example, as a supplier, you could face various problems, such as:
- disputes with your customers if you breach your contractual obligations; or
- cash-flow problems, for example, if your customer fails to pay you as agreed.
You should carefully consider and understand the risks involved before entering a new contract. This will put you in a better position to mitigate against those risks and help avoid problem issues later down the line.
What Should Your Business Consider Before Signing a New Contract?
There are various issues you should consider and explore before signing a new contract. Here are some of the critical issues:
1. Is the Business Relationship Right for Your Business?
From the outset, you should carefully consider the relevant contract and whether it is suitable for your business.
You should research the new customer and consider:
- if you will be able to develop a good relationship with them;
- whether they seem reputable; and
- their creditworthiness and if they are able to pay your fees.
You should also consider the customer’s requirements and whether you will be able to deliver them successfully. For example, if the customer has niche requests, explore whether you can commit to those requests. Do you have the right team and resources in place to meet any deadlines specified by the customer? This is a vital consideration to avoid future risks and problems.
2. Can You Negotiate Contract Terms to Protect You From Risk?
Before signing a new contract, you must ensure you are comfortable with its terms. Ideally, you should use your own contract or standard terms and conditions as a supplier. Savvy business customers are likely to negotiate terms to protect their own interests. However, there are certain critical terms that you should ensure your contract includes.
You should negotiate key terms before signing a new contract, including the following:
|Ensure that your contractual obligations to the customer are clear and reflect what you have agreed. Make sure you are confident you can commit to them. If you breach your contractual obligations, your customer could have several legal remedies, including the right to claim damages from you. Ambiguous contractual obligations could lead to disputes.
|You should ensure that the payment terms under the contract reflect your business practices and are workable for you. If you have negotiated specific payment terms, make sure they are clearly set out
|If things do not work out with the customer, you will need to ensure you have a way out. For example, you can seek to include a termination clause that gives you the right to terminate the contract by giving the customer notice, or terminate the contract if the customer breaches its contractual obligations.
|Limitation of Liability
|Your contract must include robust limitation of liability clauses. A limitation of liability clause is a contractual term that limits your liability to the customer for breaching the agreement. Without this, you could incur substantial contractual liability, which could be far more than what your customer pays you under your contract.
3. Should Your Business Seek Legal Advice Before Signing?
Every new commercial relationship and project is unique and comes with its own risks. Before proceeding with a new contract, you should consider whether you fully understand all the risks involved.
If you are still determining the implications of the contract and its risks, you should seek legal advice. An experienced commercial lawyer will be able to guide you on:
- legal risks you may have yet to consider;
- questions to ask your customer; and
- any additional legal issues to address.
A solicitor can help you prevent risk in various ways. For example, seeking legal advice could help you identify any onerous red flags and quickly address them at an early stage. It can also help you understand any complicated legal terms the customer requests are included in your contract, so you know the implications of them.
Additionally, disputes can be extremely time-consuming and highly costly for your business. A solicitor can also guide you on risk prevention for the relevant project to help you avoid future disputes, for example, by guiding you on agreeing on a process to resolve any problems under the contract.Continue reading this article below the form
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Giving new contracts careful attention and considering the risks involved before signing them is essential. Contracts with your customers could give rise to various potential liabilities for your business. As such, you should carefully consider whether a new contract and customer relationship is workable for your business. You should seek to negotiate a contract that protects your best interests and protects you from risk. Further, you should also explore whether you need to take legal advice on the risks involved and how to mitigate them. These early considerations can help you understand and manage contractual risks before entering into new contracts.
If you need advice on a contract before signing it, our experienced 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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