Live in peace with your contract

11 August 2005
Live in peace with your contract

As Tom Page, a senior solicitor at law firm CMS Cameron McKenna, puts it: "It's important to envisage all possible outcomes upfront and to include mechanisms for resolving them." And in the case of business partnerships, clauses should be included that detail who is responsible for what, and whether partners are allowed other business interests.

Particular attention should also be paid to what happens if one partner wants to get out of the business. According to Moira Myers, a partner at law firm Matthew Arnold and Baldwin, in a lot of cases this will entail making arrangements for assets to be sold. "Exit clauses should be determined at the start of a partnership," she says. "People are far more amicable before they've made their millions."

Myers recommends including pre-built mechanisms for determining the price of a business. This can be calculated based on the profits or by taking a multiple of the turnover. Agreement should also be reached on whether the business is to be sold outright or whether one partner has the right to buy the other(s) out over a period of years.

When it comes to supplier contracts, Myers says that terms can often depend on the relative bargaining power of each party.
If, for example, a catering company agrees to run the restaurant for a small hotel, it is in a good position to negotiate terms. But if the same firm wins a contract to provide catering services for a large hospital trust, then it will more than likely be faced with a contract that offers a set of standard terms.

Amend terms But that doesn't mean catering companies should accept such terms in their entirety, says Myers, who finds it surprising how many large organisations will amend terms if a case is presented in a just and fair way.

So be prepared to raise issues. Good clients will be happy to listen to your concerns, and nothing is set in stone until you sign on the dotted line. If you have doubts, raise them. "Otherwise," Myers warns, "the seeds for a breakdown are there from the outset."

All supplier and outsourcing contracts should contain service level agreements (SLAs) which lay out what is deemed an acceptable level of service, adds Page. For some areas, such as accounting or IT, where service levels are easily quantified, this is relatively straightforward, but criteria can get less exact when trying to pin down what is a good standard of food preparation, for example.

In the eventuality a client does not think its supplier is living up to its side of the bargain, a lot of contracts include a remedial clause, which gives suppliers extra time to make good. But even this attempt to offer a bit of leeway in the contract can be riddled with pitfalls, according to Myers, who says it all depends on what you are being asked to do in the time given.

"A standard 45-day remedial clause may be fine for mending a substandard oven," she notes, "but is it enough time to replan and deliver new menus for all patients across a hospital trust?"

If the performance or service does not improve, it may be time to resort to the penalty clauses which often appear in contracts and usually take the form of some kind of financial penalty. Page recommends that the level of penalty be determined at the time of drawing up the contract "to prevent squabbles breaking out over how much was loss through poor service".

It is advisable, however, to set financial penalties at a realistic level. Page says that many deals break down because suppliers can't risk taking on the potential losses high penalty clauses may imply.

Avoid costs If certain eventualities are not covered in a contract and disputes cannot be resolved amicably, all is not necessarily lost. Thankfully, there are several routes arguing parties can go down before they head off to court, and thus avoid the uncertainty of legal judgments and the crippling costs of solicitors and barristers.

In fact, Page explains that many contracts include clauses which state that, in the event of a wrangle, alternative dispute resolution processes must be tried before the lawyers are called in.

Courses of action such as mediation and arbitration can be highly effective.

Howard Day, a chartered surveyor at Howard Day Associates and an accredited mediator, says that 90% of disputes that come to mediation are resolved, with the vast majority settled within a day. "It's all about coming out with a solution that both parties can live with," he says.

The mediation process starts with a joint meeting between the disputing parties and a mediator, where each side gives an opening statement and airs its grievances. Next, individuals have time alone with the mediator when they can talk frankly. Having heard both sides, the mediator then moves between the factions, attempting to find common ground and a satisfactory resolution.

Solutions found through mediation are not legally binding - in some cases, a simple handshake signifies the end to a quarrel - but what is more likely to come out of mediation, says Day, is a signed memorandum setting out four or five keys points that have been agreed.

Day admits that the process isn't rocket science but says it offers an independent, objective referee who may be able to help each party see things from the other's point of view. "Mediation is good for business, as it gives people another option," he says. "I've seen disputes grind people down with the time, stress and cost they take up."

And with Day charging an average of £750 for a day's mediation, even the most quarrelsome factions would agree that it is a cost-effective way of ironing out a sticky issue.

A slightly more costly and formalised dispute resolution process is arbitration. Although disputants follow the same basic steps as in mediation, the evidence is mulled over by an expert in that particular field and resolutions are legally binding.

According to Gregory Hunt, head of business relationships at the Chartered Institute of Arbitrators, alternative dispute resolution processes such as mediation and arbitration are less confrontational than court cases and don't necessarily signal the end of a relationship.

He notes: "By settling a dispute amicably, the door is left open for parties to continue doing business."

Advice for avoiding contract breakdowns Envisage all possible outcomes and include clauses to cover them:

Partnership contracts

  • Who is responsible for what?
  • Are other business interests allowed?
  • What happens when one partner wants out?

Supplier/outsourcing contracts

  • Don't just accept standard terms and conditions.
  • Raise an issue if you have concerns.
  • Set and monitor service level agreements.
  • Include remedial periods.
  • Decide on the level of penalty clauses at the outset - and be realistic.

Also ensure you include clauses that insist on trying alternative dispute resolution procedures before going to court.

The chartered Institute of Arbitrators Firms in the catering and hospitality sector can gain access to arbitration services at a reduced rate through the Chartered Institute of Arbitrators (CIA).

The CIA has developed an innovative commercial dispute resolution scheme in association with the Association of British Travel Agents designed to offer disputing parties from the travel sector the opportunity to have their dispute resolved cost-effectively by capping fees.

According to Gregory Hunt, head of business relationships at the CIA, the scheme is also open to companies working in the UK hospitality and catering sectors. Through the agreement, arbitration fees are capped to a maximum of £2,700.

To find out more about the scheme, contact Gregory Hunt at the Chartered Institute of Arbitrators on 020 7421 7436 or e-mail

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