SMEs should be aware of 6 key things before signing a contract for goods or services

Businesses often enter into contracts without giving them much thought or consideration. Sometimes this is because they receive a set of standard terms from a supplier which they think are non-negotiable, but more often than not, it is because they are not aware of what to look out for beyond the commercial deal terms agreed by the parties.

When entering into a contract, it is important that you do not simply sign it without having first read and considered at least the main points.

Here are our top 6 things that you should consider before entering into a contract for goods or services:

Does the contract say everything you have agreed?

You need to ensure that what you are signing up to includes everything that you have agreed. It is therefore important that the description of the goods/services being provided is detailed enough in the contract so that if anything did go wrong (for example, the goods/services provided are not to the quality or level you were expecting), you can rely on the contract to enforce your rights. Where details of the services have been provided in a separate document, for example, a sale pitch or response to tender, it would be important to reference these documents in your contract so that you can rely on what has been said in them.

Are you in control of the costs?

The annual inflation rate in the UK has been steadily increasing. In October 2022 it reached a high of 11.1%, the highest it has been since October 1981. The increasing rate of inflation will not only impact on the cost of living, but will also have a significant impact on some commercial contracts. You should therefore identify whether the supplier can increase its prices to reflect inflation by checking whether there is an express indexation clause (or other right to vary the price) included in the contract. If this is the case, it might be necessary to restrict the supplier’s right to increase its costs no more than the rate of inflation (usually measured in line with the Consumer Prices Index or Retail Prices Index), and no more than once per year, in order to retain some control over the likely costs you will incur over the term of the contract. This is particularly important for longer term contracts where there is no express right to terminate the contract early. If your bargaining power is strong, you may be able to resist this clause altogether or request that the supplier provide fixed estimates or a cap on the fees.

Who owns the Intellectual Property?

If intellectual property rights are being created, for example in content or software being developed for you, you should check who will own these rights. If the contract is silent on who owns the intellectual property rights, then they will usually be owned by the party creating them and not you. Therefore, in order to be able to rely on and use these intellectual property rights in your business, you should ensure that the rights are either assigned to you (so that you own them), or you have a licence to be able to use them. If you are being granted a licence, you should check that the licence terms are broad enough to cover all the ways in which you intend to use and exploit the intellectual property in your business both now and in the future.

Is personal data being processed?

Will the supplier be “processing” personal data in the course of providing the services? Under the GDPR, “processing” is defined widely, it includes anyone who receives personal data, whether or not actually do anything with that data. If personal data is being processed, data processing clauses would need to be incorporated into the contract in order to comply with data protection legislation. What set of data processing clauses you need will depend on whether UK or EU personal data is being processed. It is also very important to check where the supplier will be processing the personal data in order to ensure that no personal data leaves the UK or EU without the relevant safeguards in place.

How is liability limited?

There are many different ways a supplier can seek to exclude or limit its liability in a contract. The most common way is for the supplier to include a cap on its potential liability. Often this is linked to the fee or a multiple of the fee. You should ensure that the cap of liability for the supplier is not too low bearing in mind the likely consequences and impact on your business if anything goes wrong. Other clauses to watch out for include those which limit the time in which you can bring a claim against the supplier, limit the type of loss which is recoverable, and those which limit the remedies available to you, for example, in respect of defective goods, you might find that your right to recover your loss is limited to the repair or replacement of the goods. The type of limitation clauses you will encounter will very likely differ across contracts and businesses to reflect the value, risk and bargaining strength of the parties.

How easily can the contract be terminated?

There may be a number of reasons why you might need the right to get out of a contract, for example, if your business needs change, if the supplier has increased its costs to a point the contract is no longer commercially viable, or if the supplier’s cap of liability has been used up, which subsequently exposes your business to greater risk. It is just as important to consider what rights the supplier has to terminate and the impact of early termination on your business, for example, the level of disruption and costs you might incur when looking for a suitable replacement supplier. You should therefore consider how easily both you and the supplier can terminate the contract and what impact this might have on your business.

It is very important that all contracts are carefully considered before entering into them as it is very unlikely you will be able to negotiate the contract once it is signed. In some scenarios it is unlikely that you will be able to negotiate some or all of the terms. In other cases it may be appropriate to have a full negotiation. However, in both scenarios the same principles apply and it is important that you know what you are signing up to.

At Edwin Coe, we have a great deal of experience in reviewing, advising and negotiating contracts for clients who operate in a broad range of industries and sectors, including those in Media, IT and Technology, Manufacturing and Retail. Drawing on our in-depth industry knowledge, the experience that we bring ensures that our clients have advice that is appropriate and proportionate to the contract that they are entering into.

If you need advice in respect of reviewing or negotiating a supplier contract, or would like to discuss this topic further, please get in touch with Selina Clifford, or any member of the Intellectual Property team.

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