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Home | News & events | Press releases | Protect against credit crunch with tight new contracts

Protect against credit crunch with tight new contracts

21 January 2009

Businesses are being urged to draft tight new contracts to help protect themselves against the effects of the credit crunch.

Shoosmiths commercial specialists said firms entering into new contracts should include anti-crunch clauses.

Partner David Jackson said: “It’s tough for businesses right now, but they can help themselves, because whatever the nature of a proposed new contract there are ways in which they can gain protection, including:

• guarantees of the other party’s obligations from its parent company – if the other party becomes insolvent its parent company must step in and deliver on contract obligations
• personal financial guarantees from the other party’s directors or shareholders
• ensuring contracts covering goods have appropriate retention of title provisions to protect goods if invoices go unpaid
• termination provisions allowing for a swift exit if the other party becomes insolvent, or if the contract ceases to become profitable
• when paying for goods or services, consider making the price subject to indexation, so that prices are cut accordingly should the economy decline

“Equally, many contracts will have been signed when times were more bouyant, and whatever the nature of the agreement – IT, outsourcing, supply – there might now be a feeling that it no longer provides the value it once did.”

Jackson said: “Even in contracts where you fear there’s little room for manoeuvre, taking a close look at the terms to evaluate where your business stands is always worthwhile.”

This will mean: 

• understanding the contract – what obligations does it really place on you?
• understanding the implications of walking away from the contract – what ongoing liabilities there might be?  How should you position yourself best so as to minimise risks?  How do you avoid wrongful termination claims? Is your IPR appropriately protected?  How do you ensure a smooth transition to a new supplier?
• policing performance properly – ensure your team understands the value of paying  attention to performance 
• watching out for ‘black holes’ – it is sometimes possible to find a platform on which to negotiate if the provisions of a contract have been drafted in a way that might make it unenforceable
• making contingency plans – if you are reliant on certain customers or suppliers, try having alternatives in mind should the worse happen
• review key dates – some contracts are renewed on a rolling basis, where either party has an opportunity to withdraw before the annual renewal; make sure such dates are recorded so that opportunities to exit contracts you no longer want or need are not missed 
• looking out for signs of financial stress on the other party – if a customer is struggling to pay your invoices review the credit terms afforded to them.

For further information please contact:
Name: Alastair Gray
Phone: 08700 864096
Email: Alastair.Gray@shoosmiths.co.uk

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