18 Aug 2019

Creating a Fruitful Contractual Relationship

Authored by: Hadef & Partners, Sector Groups

In brief:

  • Pre-contract discussions are a natural and crucial stage of any business relationship helping parties to understand and define what they each expect from the venture.
  • Getting to know your  business partner and understanding its business culture can be invaluable in ensuring alignment and future mutual success.
  • The written agreement can be a useful tool in safeguarding the relationship as it progresses. Using key performance indicators and other monitoring measures under the contract can help to ensure that the relationship stays on track, and can bring any issues to the fore to allow for quick resolution and the potential for damage limitation.

By putting a relevant, tailored and comprehensive contract in place, parties can set parameters and goals for their venture and understand the expectations of each other for the project up front.

Contrary perhaps to some beliefs, a good commercial contract is not intended to create traps with legal ‘fine print’.  A contract should be used as an opportunity to ensure that parties are on the same page when it comes to the really important details of their relationship, like deliverables, payment, timelines and contingency planning.

  1. Strategies for business success - before contracting and while exploring possible new business relationships, it is worth considering whether:
    • the parties are complimentary: This might include assessing the business culture of your prospective partner, how that connects with yours, and whether it has a good track record in similar projects;
    • the parties have a shared vision for the future.  It’s important that both parties commit to pre-contract discussions to ensure that they are both able and willing to bring what the other needs to the table; and
    • the relationship is scalable. Consider the relationship beyond the contract, and whether there is the potential to grow.  Might you want to do this together?
  1. To help to ensure that your new business venture is a success, consider using your contract as a guide to the operation of that relationship:
    • who specifically will manage the relationship on each side?
    • how will you seek to get ahead of any issues and how you would know if they were arising?
    • how will you foster trust and transparency, but also accountability between the business operation teams?
    • are you prepared to adjust your business, or require that your partner does, to ensure business continuity, e.g. through the introduction of requirements for minimum tenures for assignments in mission critical roles? and
    • how will you monitor and manage performance?
  1. KPIs (key performance indicators) can be a useful tool included in a contract to measure the performance of a relationship. KPIs will, by their nature, be unique to each partnership and the objectives of the deal, but can be invaluable in ensuring continued achievement for the project, as well as risk mitigating where linked to payment obligations.

There are many types of KPIs, so consider which model best suits you, for example:

  • Quantitative “X number of products to be sold by X date
  • Qualitative “the products should comply with the Specification
  • Leading indicators “the services should produce X number of products/Y result
  • Lagging indicators “if the services do not produce X, then the repercussions are Y
  • Input indicators “the outcome will be achieved in X number of hours/days/weeks
  • Process indicators “if the outcome takes longer than X, the fees will be reduced by Y%”.

Finally, in some cases, your prospective business partner might present their own contract for you to use, or require that pre-prepared clauses dealing with, say, liability or force majeure be included in the contract with you. You can certainly use these contracts or adopt these provisions, but that doesn’t mean you should instinctively accept them. If the impact of a certain clause is unclear in the context of your particular deal, raise the question and explore the issue with your partner. Just because it’s ‘standard’, doesn’t mean its right for either of you.

For more information, please contact us on sectors@hadefpartners.com.