Five key steps to take before signing a contract

The success of your business often depends on the strength of your relationship with your suppliers and distributors, so it makes sense to protect both your business and these relationships by entering into robust, fair commercial contracts with them.

However, as soon as you have signed an agreement, you are legally obligated to honour the terms, even if you are not across the detail. As a result, you could find yourself stuck with obligations that could negatively affect the usual operations of your business and its growth plans. This article outlines five key steps business owners should take before committing to a contract.

1. Confirm who is signing the business contract

Signing business contracts can be complicated, particularly where the other party has a sophisticated corporate structure, or associated entities. For this reason, it is essential to check that the party signing the contract is the party you intend to be in a contractual relationship with.

It is also worth noting that when it comes to signatories, typically a company’s director is authorised to sign a contract alone. However, if the company has more than one director, depending on the type of contract you are signing, two directors might be required to sign to ensure it is legally binding. 

From a practical perspective, you should also double-check that your details and contact information are correct and up to date, as well as those of the other party, to ensure accurate communication during your contractual relationship.

2. Review the details of the contract

Distribution and supply contracts can often contain intricate details that are easy to overlook or dismiss. While it may be tempting to assume that the contract provided to you by the relevant counterparty reflects previous discussions you have had, it is crucial to take the time to carefully review the terms before signing. This is because the agreed commercial terms may not be accurately reflected in the drafting of the contract (which typically goes into significantly more detail than your commercial discussions). 

For example, if your business contract includes an agreed price, that price may increase annually by a pre-agreed formula or by an amount determined by your counterparty at their sole discretion (without consulting you).

When reviewing the contract’s details, you should consider:

• What each party is required to deliver under the contract.
• Your rights and obligations.
• The term and pricing of the contract.

Being across the details will ensure both parties have clear expectations about their obligations, and reduce the risk of future disputes.

3. Understand the term of the contract 

Most business contracts have a start and end date. 

Since your business must fulfil its obligations for the contract’s duration, this timeframe can impact your business’ long-term growth. For example, if you enter a long-term agreement with a manufacturer that is no longer large enough to meet your business’ needs, you might not be able to end the agreement early to switch to a more suitable manufacturer, which could ultimately affect your profitability.

By contrast, a contract with a shorter duration provides flexibility for both parties. However, you may want to consider including rights of renewal that allow you to extend the term for further (short) terms if the relationship continues to suit your current business needs and growth trajectory, therefore benefiting from some certainty of tenure (which is often the most attractive factor of a longer-term contract).

4. Check the dispute-resolution process

When signing the contract, your relationship with the counterparty is likely to be positive, and the expectation is that you will have a long, constructive working relationship. Unfortunately, this is not always the case, and disputes can arise in the ordinary course of business. So, it is essential to ensure both parties are clear on how you will resolve a dispute should one occur.

Contracts often include a clause that outlines the preferred dispute-resolution process between the parties. Dispute-resolution clauses vary (often depending on the context of the relevant contract), but might specify a combination of processes, including:

• Negotiation, where both parties meet to openly raise any concerns and negotiate a solution to the problem.
• Mediation, where a third-party can meet the parties to identify common positions and help them to reach a resolution.
• Arbitration, which is similar to mediation but is subject to formal rules and will result in a binding decision.

Ultimately, it is important to familiarise yourself with the clause and ensure you are comfortable that the outlined process is suitable to your business and the nature of the disputes you are likely to face.

5. Seek legal advice

Regardless of how well you know your business, have an experienced lawyer review the commercial contract before you sign. This becomes especially important for any long-term, high-value or key strategic agreements (regardless of value).

Lawyers can:

• Identify potential issues in the proposed terms of the contract taking into account your business’s risk appetite (a “key risks” or “red flags” review).
• Help you understand your legal obligations (immediate and ongoing) in full.
• Bring attention to important details that can be easily overlooked or dismissed.
• Negotiate on your behalf if any terms need to be changed.

Key takeaways

Before signing a commercial contract, you should:

• Confirm who is signing the business contract.
• Review the terms of the contract.
• Understand the term of the contract.
• Check you are comfortable with the proposed dispute-resolution process.
• Seek legal advice.

By taking these steps, you can ensure that you make an informed decision when entering into contracts, increasing the likelihood of a constructive and dispute-free relationship.