5 Best Practices for Commercial Contracts
These days, a good contract is one that is adaptable. Companies often spend an inordinate amount of time and money negotiating and drafting legally binding contracts in order to have reliable, fixed agreements with their business partners. But, this does not mean that contracts should not be flexible, as agile contracts allow for better relationships and results. Here are five best practices for handling commercial contracts given the need for adaptability:
Designate Types of Changes
Change is inevitable, and rather than try to avoid it at all costs, companies should plan for it so that they are properly prepared. To be ready for potential changes, the parties to a contract should designate the types of changes that may occur and how they will be treated. For example, many industries are subject to a number of rules and regulations, sometimes at the local, state, and/or federal level, and usually at all three. In the event that there is a significant change in the law that will substantially affect the contractual relationship, the parties must know beforehand how they intend to handle that. It would be unrealistic for one side to absorb the full impact of any such change, so it may be necessary to revisit certain contract terms. Ultimately, acknowledging that change is possible and being willing to work around it instead of against it will be key.
Specify Imposition of Costs Related to Changes
Any time there is a change to a contract it is highly likely that there is going to be some costs associated with making those changes. For example, a new compliance law may affect the procurement process or a company policy change may affect hiring practices. Whenever there is a change such as this, which will inevitably affect business operations for one or both sides to the contract, it is going to require some amount of money to address it. Given the potential for such an unexpected financial impact, it is important for the parties to a contract to know who will bear what costs, if any, so that it does not become a source of tension.
Clarify Implementation of Changes
To effectuate a change to a contract, it is generally wise to negotiate and draft an amendment. This document should be appended to the original agreement and should clearly delineate what portion of the contract is being changed and provide the precise language that is creating that change. However, there may be instances in which the parties do not have the time or desire to go through this process and simply want to make a quick, simple change to a minor aspect of the agreement. This may be achieved via an email exchange or other informal method. If the parties are comfortable with this option, they should clarify early on if, when, and how they will make certain types of changes.
A change to a contract is essentially meaningless if the contract management teams are unaware of the purpose and scope of that change. Any time a contract is modified, no matter how trivial the modification may seem, all involved parties must receive notice of the change. Communication lapses continue to be the number one reason that contracting disputes arise, and unexpected or undisclosed changes often lead to such issues.
Just as a contract itself must be adaptable, the contract management process that the companies employ to manage their agreements subsequent to their execution has to be amenable to adjustments. The easiest way to accomplish this is by utilizing practical, purpose-built contract management software. Contract matters such as project deadlines and delivery and payment schedules should be automated as much as possible, so that the team can focus on the high level business matters that contracts, and any changes thereto, will influence.