Contract reviews: why they’re vital to managing your business’s risks
We’re always told to ‘read the contract’ before signing, but how many businesses conduct a thorough assessment of the terms? If a company is small, in its infancy, or if an order is crucial to its survival, then a contract review could be overlooked in the haste to secure a deal. But does it really matter?
Throughout this article, we’ll be using one of Client Director Phil Thorpe’s clients to explore why contract reviews are vital. As a market leader in the mobile telecoms sector, the client received various contracts from parties in the US and Asia, which required those parties to be released from any liability – and his client to accept total responsibility. We’ll take a look at how the contract reviews helped to ensure the company had sufficient insurance.
It’s all in the small print
Business contracts are usually comprehensive documents, which typically attempt to pass all responsibility to the other side. As a result, they will limit the liability of the party that has issued the contract, as in the example above. This might, at first, seem like a sensible route to take, but in fact, it doesn’t necessarily benefit either side.
“One likely consequence is that the contracted party can’t get insurance for certain aspects of the terms. As such, they may need to pull out of the deal,” explains Phil.
“Alternatively, it might only be able to get partial cover, perhaps at a higher premium, but decides to proceed anyway. If something goes wrong down the line and the contracted party doesn’t have sufficient insurance to cover its liability, then both parties could suffer serious financial and reputational damage.”
By carrying out a review of the contract terms as early as possible in the process, these risks can usually be significantly reduced or avoided altogether, and a mutually beneficial business relationship can be forged between the two parties.
The power of contract reviews
The purpose of a contract review is to highlight unfair or unreasonable liability terms and to address the specific insurance requirements that are involved. It gives the receiving party a chance to find out which parts of the contract can be insured and which cannot, and to then negotiate with the insurer and/or request amendments to the terms.
Generally, large companies have an in-house legal team and established terms and conditions so they can respond quickly and appropriately to incoming contracts. However, start-ups, SMEs and many UK divisions of international organisations may not have these luxuries. For them, an expert insurance broker becomes an invaluable intermediary.
“By engaging with their insurance broker, these companies can adopt a stronger negotiating position,” says Phil. “Firstly, brokers can help their clients to choose the right insurer in anticipation of contract referrals. Some insurers are more willing or able than others to extend their policies to cover wider contract terms. As such, there is an art in the broker recognising clients that are likely to need cover extensions and placing the risk with a more accommodating provider.”
Brokers can also ensure their clients’ insurance programmes are appropriately structured, building a solid foundation on which to base future contract negotiations – and speeding up the review process. This means implementing adequate intellectual property, public liability, professional indemnity, cyber liability and directors and officers insurance from the outset.
Read more: 7 things you need to know about public liability insurance
But Phil is keen to stress that time is of the essence. “Leaving things too late can be a real problem,” he cautions. “If a broker isn’t made aware in advance that contractual issues are likely to arise, then he or she won’t have the opportunity to recommend a more receptive insurance provider, or to push for the best possible deal.”
Leaving things too late can be a real problem
If appropriate insurance can’t be arranged in time, the company may have to turn down the work and lose out on valuable revenue; or, in desperation, it may even decide to take the work on regardless of being uninsured, which could have big repercussions later on. Once signed, contract terms are virtually impossible to change.
“There will always be toing and froing with these sorts of things. That’s why receiving contracts at least a month before a signature is ideal,” says Phil. “Early intervention is key.”
Putting everything into practice
With the example outlined, Phil’s client was required to accept total liability. As such, it was important to review the contracts and identify potential issues.
“Obviously, my client’s insurers wouldn’t accept full liability,” says Phil, “Consequently, a two-week period of negotiation began. Eventually, a compromise was reached where liability was mutually shared – each party would support the other and not impose terms that were unreasonable.
Eventually, a compromise was reached where liability was mutually shared
“An insurance programme was put in place, which included public and products liability, professional indemnity, and also cyber insurance. The cyber policy, in particular, would cover responsibility for breach of confidential information. All policies were extended to include activity and claims brought in courts anywhere in the world.”
Read more: A-Z of cyber security
Having gone through this rather lengthy process – which was only just resolved in time to meet the contract deadlines – the client learned which areas to push back on before referring future contracts to its broker and insurer. Thereafter, it was able to present the broker with contracts that fit with insurer requirements and insurance cover. The experience was also a stark reminder of the importance of starting the procedure as early as possible to ensure sufficient time to review before signing.
“This dedicated management process also gave the client the confidence to sign contracts, while being as fully insured as possible, with the right insurance partner,” Phil adds. “The client could, therefore, avoid exposing itself or its venture capitalists to unnecessary uninsured risks. Importantly, it could also get on with generating revenue!”
Stay calm and negotiate
Ultimately, then, it’s all about taking a proactive, realistic and timely approach to each and every new business contract – to the benefit of all parties involved.
“Even if the contracted party is in the less-strong negotiating position, against a large corporation that has standard terms and conditions signed-off by its lawyers, it doesn’t mean there’s no scope for negotiation,” says Phil.
“If we get in early enough, and provide a reasoned and rational argument surrounding proposed changes, these large companies will invariably try to comply. That’s because they want what the contracted company is offering! Terms can usually be changed to suit both parties, as it’s in everyone’s interest to be happy and appropriately insured.”
