Major Contract Review: Yes, You Really Do Need To Read Them Again
Every once in a while it is a good idea to dust off copies of your major contracts and take a look and see what they say. What is considered a major contract varies from business to business, but some of the usual suspects include major suppliers, major customers, key employees, commercial leases and equipment leases. Major contracts are those which present the greatest benefit and pose the greatest risk to your business. It is a good practice to make sure they are in order, unexpired, being complied with, and that you have a contingency plan in place if there is an unexpected breach.
Just a handshake. Some contracts are “just a handshake”. But your major contracts should be in writing. There are a couple of reasons for this: firstly, a written contract is easier to deal with if something goes wrong and you need to be able to enforce your rights under the contract, and secondly, if you decide to sell your business down the road, a buyer will require your major contracts to be in writing and getting them organized now is a best practice to prepare for your future.
Whoops, when did that expire? Most contracts relating to on-going relationships have a “Term and Termination” clause which sets out how long the contract lasts, how it can be ended early and what the rights and responsibilities of the parties are at the end of the Agreement. All contracts with a fixed term should have their expiry date diarized in your calendar, preferably with a warning in advance reminding you to contact the other side to negotiate a replacement contract before the old one expires. You may also find it helpful to track the termination rules, so you know how and when you can terminate the contract if the relationship is not to your satisfaction.
Well, things have changed a bit since then. So you have been doing business with the other party for a while now, and things have changed a bit. New systems have come in, payment procedures have been updated, and generally things are going well but just not the same as when you first entered your agreement. It is time to update your contract too; it is binding on the parties and it needs to reflect what is actually happening. Sometimes this can be as simple as updating payment terms, other times it involves a completely new agreement. Having a contract that is stale and out of date can be like having no contract at all.
I didn’t know I had to do that… Sometimes there is a devil in the details, and reviewing your contracts may bring to your attention an obligation which you didn’t realize you had. For example, one of your major contracts may include an “Insurance Clause” requiring you to have certain coverage and add the other party to your insurance. If you have changed your insurance, you may not be meeting this requirement. Or there may be a requirement that you give notice to the other party of certain events. Reviewing your contracts periodically will give you an opportunity to refresh yourself as to your obligations and will help you remember so you do not inadvertently breach them. Carefully read the fine print, and if you do not understand you should take the time to review with your business lawyer.
So I am thinking about retirement. When you sell your business, you are selling a lot more than assets and inventory. You are selling the business relationships set out in your major contracts. Having those major contracts well documented, up to date and properly complied with will help you when it comes to selling your business. Further, you will want to have an understanding of which contracts impose obligations on you to contact the other side when you sell your business. Some contracts may also impose obligations on you personally as an indemnitor or guarantor, and you will want to make sure that those personal obligations are terminated when you sell your company. You do not want them following you into retirement. This review can be done at the time of the sale, but if you keep retirement in mind at the time you are negotiating the agreements you can negotiate clauses that will help ease the process of transferring your business to new owners.
Andrea East is a business lawyer at Pushor Mitchell LLP. She has extensive experience in reviewing and drafting contracts, and in buying and selling businesses. You can reach Andrea at 250-869-1245 if you would like help conducting a major contract review, review of any particular contracts or preparing for selling your business.