Contract Terms really drive Payment Performance
This article appears in our Q1 2023 issue of Finance Transformation Magazine. To download the issue, click here
Chris McAvoy-Newns, Employment Law Solicitor at People Legal, has shared with us his thoughts on how small businesses can protect themselves when contracting with corporate clients to ensure payment and limit liability.
The vast majority of UK private businesses are small 'one person' enterprises. According to the 'Business population estimates for the UK and regions 2022: statistical release', published by BEIS in 2022, SMEs account for 99.9% of the approximately 5.5m business population.
A key challenge facing the typical small business is how to ensure payment when faced with the larger more bureaucratic faceless processes of a corporate client. The small business owner will naturally want the business but must take adequate care at the contracting stage to adequately protect against non or late payment and to limit their liability.
1. Engage a professional: You are not a legal expert therefore invest in a solicitor or other appropriate adviser and engage them to draw up the contract(s), review them as appropriate and, where necessary, negotiate them on your behalf prior to any signature;
2. Standard Terms: You are in business to do business so have the solicitor/adviser create your standard terms for you and persuade the client to either accept them or use them as the starting point for negotiations;
3. Communication: The very act of involving your solicitor/adviser in contract discussions via email will establish immediately, to your potential corporate client, your level of professionalism. If your potential client knows that your standard terms were professionally drafted by your legal team there is a greater prospect of them respecting this and agreeing to them;
4. Review: Any potential large corporate client will have their own Standard Terms, drafted to fully protect themselves, whilst potentially leaving the small business exposed to onerous terms with unlimited damages beyond the cover of their insurance indemnities. It is therefore critical that all contracts are reviewed by an appropriately qualified solicitor or adviser;
5. Risk Assessment: If the client insists upon their Standard Terms, you need to understand your potential liabilities and decide whether, bearing in mind those liabilities together with the work involved, and the fee payable, it is worthwhile undertaking the work. It is not just payment terms but potential damages for incomplete or substandard work that must form part of your risk assessment.
6. Limit your Liability: A key liability under these standard terms arises through the use of indemnities. An indemnity is a protection against, or compensation for, a loss or liability. The small business will effectively promise to pay out if a particular trigger event happens and this liability can be unlimited.
Often the small business will be required to give many indemnities, yet the client will give few in return. Common indemnities include indemnifying the client in respect to errors in relation to the performance of the services or breaches of data protection legislation.
Sometimes these clauses state that the client can make deductions from payments to satisfy such indemnities. Imagine working hard for a month and then discovering you're not going to be paid for such work!
Rather than just sign their standard terms, consideration ought to be given to the losses that the client may suffer if you e.g., inadvertently, and accidentally breach the data protection legislation and the client receives a substantial fine. If you cannot limit your liability in some way then you need to ask the question: is the work really worth it?
Additionally, sometimes these contracts effectively give the client the right to terminate at their discretion with no notice and no payment in lieu. You may think you have negotiated an e.g. 3 month notice period but, in reality, there may be a vast list of examples of gross/serious misconduct contractually entitling the client to terminate without notice.
If you find yourself lumbered with the client's standard terms, containing a raft of onerous indemnities, the very least you should do is ensure that you have insurance in place and the liability under the indemnities is capped in line with your insurance.
Be certain to include a clause in the contract making it clear that you'll have no personal liability. Also, contract as a separate legal entity (e.g. a limited company) rather than individually.
The UK Small Business Commissioner, Liz Barclay , states elsewhere in this edition that the small business sector is the engine for UK economic growth. As you succeed in signing new clients you will potentially need to expand your business and create employment. This is where Chris' expertise can help you further.
Although such growth can be positive, bringing on board individuals to work with you can create challenges and issues to consider. For example: should I engage them as a contractor, or employ them as an employee, or something in the middle?
What protections do I need in my contract in respect to, in particular, confidentiality, intellectual property and post termination competition? What steps do I need to take to ensure there is no discrimination or detrimental treatment in the workplace and what should I do if a candidate or staff members alleges that they have been discriminated against? What liabilities can arise if I let a member of staff go because it isn't working out?
Chris specialises in end-to-end Employment Law processes and can assist with all of these questions.
About the author: Chris McAvoy-Newns
Chris qualified as an Employment Solicitor in 2008 and has practised in large law firms as well as in-house for FTSE 100 companies. He has been recommended on numerous occasions by Legal 500, is an accredited mediator and a trainer.