When forming a relationship with a third party, the contract is key to keeping your franchise safe. Which is why it’s worth getting to grips with the ins and outs of these deals
When you’re about to shake hands on a new deal, it can feel like everything has finally fallen into place. However, it can be easy to trip up on unforeseen snags when forming agreements with third parties so it’s always worth approaching new contracts with a degree of circumspection. Here are some of the issues that you should take into account before signing on the dotted line.
Who are you dealing with?
The first and most fundamental point to consider is who are the legal entities that are actually entering into the contract. Often the person you are dealing with on a daily basis won’t be the legal entity that enters into the contract – you may be dealing with an individual but entering into a contract with a limited company or partnership.
If you’re dealing with a group of companies, care needs to be taken to ensure that the correct company is referred to in the contract. Many businesses will review the credit rating and financial standing of their customers and suppliers before committing to a substantial agreement but it is vital to check the legal entity named on the contract against the entity whose credit history has been checked. You may think you are dealing with a company with a strong credit rating and of sound financial standing, only to discover too late that the actual company on the contract is a shell company with few assets, leaving you with no means of recourse if things go wrong. Similarly, some contracts entered into with one company will allow other companies in that group to buy or supply under the contract. This again raises the risk that you may be dealing with a business of lesser financial standing than you were expecting.
It’s also worth checking where the company is based. If you’re dealing with a business registered outside the UK, you may face jurisdictional issues if you ever need to enforce the agreement. Often agreements can only be enforced in the home country of the party in default, even where the agreement states that it is subject to English law. If you’re dealing with an overseas business, it is often helpful to include alternative dispute resolution procedures that can be applied internationally rather than relying on traditional enforcement through the courts.
Regulatory and compliance issues
Depending on the nature of the agreement, the contract may also attract regulatory or compliance issues. For example, competition issues often arise in franchise agreements but other relevant compliance issues may include data protection – particularly if the contract is for any form of services where one party will have access to data generated by the other – bribery and corruption or money laundering. Contracts with consumers are now heavily regulated and need to be carefully drafted to ensure they are enforceable.
Sales promises and guarantees
All manner of promises, assurances and claims may be made about products and services during the sales negotiations. Often sales staff may be tempted to make exaggerated claims about the quality or performance of products and services as a means of securing the sale. Thought needs to be given as to whether any of these pre-contract statements have been made and whether or not they are intended to be relied upon. Depending on when and how the contract is formed, the statements may or may not be included and so the safest approach is to expressly set out in the contract all of the statements, warranties and assurances that the parties are relying on and expressly exclude everything else.
Battle of the forms
No article on supplier issues would be complete without mentioning the battle of the forms. This arises where each party tries to form a contract on the basis of their own standard terms. For example, the supplier sends a quote with a copy of their standard terms of sale attached, the buyer then sends an order with their standard terms of purchase attached, the supplier sends an order acknowledgement with a further copy of his terms of sale and so on.
The old rule was that whichever party “fired the last shot” by being the last to get their terms in prior to formation of the contract would win the battle and it would be their terms that applied to the contract.
However, this has never been entirely satisfactory, not least because it means that one party has entered into a contract on terms that they didn’t agree to. This approach also relies on being able to ascertain precisely the point at which the contract is formed – which is rarely easy.
There is case law to suggest that another approach is possible and that the contract has been formed on terms that are neither the standard terms of sale of the supplier nor the standard terms of the buyer. This approach avoids the inherent unfairness of the old rule but can lead to even greater uncertainty because if neither set of standard terms apply, what are the contract terms?
Ultimately, unless you particularly enjoy spending time with your local litigator, a battle of the forms is best avoided and, where possible, you should seek to expressly agree the terms that will apply before the contract is formed.
Losing sight of the wood for the trees
Computers and word-processing facilities have allowed contracts to become longer and longer. It’s critical to ensure that the really important commercial points don’t get buried or missed while negotiating the legal small print. You will need to ensure that key commercial points, such as minimum purchase obligations and volume discounts or rebates, are clearly set out in the final contract.
One final thought – if the contract is intended to remain in force for any longer than a couple of years, you may want to consider including some Brexit provisions. The legal regime around contracts is unlikely to change significantly in the short term but you may need to consider price review provisions or possibly break clauses just in case there are any post-Brexit scenarios that make the contract undesirable or uneconomic.