Why All Businesses Should Conduct An Annual Review Of Their Contract Templates
A Discussion of Key Terms to Consider in Conducting This Review
During these unprecedented times, all businesses are taking stock of their operations and financial viability. As part of the assessment of their operations, businesses should conduct a review of their contract templates and any other documents used in day-to-day operations. Businesses often are either too busy to review their contracts or are too attached to their templates to make changes. Yet, the contract that establishes a business’s relationship with its clients is arguably a business’s most important document. A well-written contract should clearly delineate the responsibilities of the business (usually delivery of goods or provision of services) and of the client (usually payment), as well as ensure that the business is adequately protected. In addition to safeguarding its commercial interests, businesses should conduct annual reviews to make sure that the business complies with all legal and regulatory requirements. Below is a non-exclusive list of issues businesses of all types should consider when reviewing their templates:
- Business review. As you look back on the past year think about whether any issues could have been avoided if your terms of service contract had been written more clearly or contained different provisions. Some examples are set out below:
- Payment. Is it clear how and when you get paid? If you charge a flat fee, are the terms and timing of payment clear? Could you have avoided a painful conversation with a client if the language surrounding payment terms had been drafted differently? If you are providing specific services, think about whether you require a deposit or whether you should be paid in stages. If you are managing assets, is your Investment Management Agreement clear on timing and of payment of fees and on how such fees are calculated (e.g., do you get paid in advance or in arrears, is there a performance fee, etc..)?
- Delivery of Goods and/or Provision of Services. Whether you are selling goods or providing services, is it clear what your obligations are, how and when must they be performed and how are these obligations fully satisfied?
- Breach. This is especially important for ongoing relationships. If you buy something in a store, you receive a product for payment. Your relationship with respect to that transaction effectively ends when you leave the store, physical or virtual (unless you need to do a return). How do you handle a breach if you have an ongoing relationship with a client such as renovating their house, managing their assets or supplying them with products essential to their business? Not every breach needs to result in termination. Make sure there is opportunity for both you and your client to remedy a breach.
- Change in Business Structure or Personnel. Does your contract need to be amended because your business structure has changed, or a key person of your business has left? If your agreement specifies who will perform certain services and that person no longer provides those services, your clients, at a minimum, may need to be notified.
- Force Majeure Clauses. These clauses are often referred to as Act of God clauses and address each party’s contractual responsibilities or forgiveness of such responsibilities in the event of full-scale business interruption events such as acts of terrorism, natural disasters and pandemics. Many businesses typically do not include them; however, now, more than ever, these clauses should be incorporated into business templates.
- Legal/Regulatory Review. It is a good idea to do a periodic legal/regulatory review of you contract. If you are in a regulated business, review your contract annually to make sure that any new regulations have been reflected. If you are in an unregulated business, still conduct a periodic legal review. There may have been general regulations that apply to all businesses enacted in your state or new regulations may have been enacted that impact your industry. Don’t assume that just because you have had your template for 20 years, that it is correct. Things to think about are:
- Disclosures. Are there any required disclosures that you must give your clients? Are your disclosures up to date (e.g., changes in privacy laws)?
- Consents. Are there consents that you are required to obtain from your clients to conduct your business activities (e.g., trading with affiliates)?
- Accreditation/certification. Does your document definitively state any requirements around who can be a client of your product or service (e.g., investor requirements)? Have these criteria changed either by the needs of your business or by newly-imposed regulations?
The above is intended to be a summary of high-level considerations and can be used as a starting point by most businesses, whether asset managers or website designers. As you conduct your review, remember, each provision in a contract should serve a purpose and any extraneous provisions should be deleted.