Contracting with Monsters

Geoffrey Sturgess, Consultant Solicitor in our Company Commercial department, offers advice and tips on negotiating contracts with customers that are much larger than you.

The term “contracting with monsters” is not the subject of a procurement manager’s nightmares but in fact a description of the common experience of entering into a commercial agreement with another entity that is much, much, bigger than you.

This can be experienced by £bn turnover companies contracting with government just as much as a £1m company dealing with a large retailer or bank.

Strangely when a large company is supplying a smaller one the contracts tend not to be questioned…do you try to change the bank’s or Microsoft’s standard agreements?  When, however, a small company supplies a much larger concern there is often a contractual negotiation even though the large concern provides the contract. This contradicts the old saying “I will sell in your language but I only buy in mine”.

The reason for this is that a big business will have carefully crafted contracts to cover the goods or services that they supply, but it is less able to do that for the huge variety of goods and services that they buy.

What a big company generally has are standard terms for the purchase of each of goods and services. These tend to be “framework” agreements, in effect terms setting up a framework for not only the current transaction but also future repeat business. Therefore all that is required next time around is an order which, if accepted, will incorporate the terms already set out in the framework agreement.

Of course contracts between differing sized companies may not only be for the supply of goods or services. They could be for an investment or a joint product development, for which a large company is unlikely to have standard forms, and won’t involve procurement, but similar principles will apply.

The larger company is likely to have a procurement department. They have standard form documents produced by their legal department, and they have processes to follow. These processes often include a prohibition on changing the documents without the involvement of the legal department, which they generally do not want to do. The documents are often supplied as un-amendable pdfs rather than Word documents to discourage attempts to amend them. If the deal is complex they may involve their lawyers, but again they will start with standard forms and discourage too much change.

You, as a smaller company, have a particular interest in getting the documents right. If a dispute ever arises you would be greatly disadvantaged by unclear wording. You are less prepared to argue, and less able to afford to argue, over wording that could have several different meanings. Half changing documents that were not designed for the transaction in question is a recipe for no clarity.

Smaller companies often have their own standard document for dealing with their sales. One tactic is to append that document, or at least its key operative provisions, to the larger company’s document with wording that says in effect: “any conflict between our document and yours, ours wins”. This sometimes allows procurement managers to accept the substantial amendments thus made as it does not involve actually changing the “sacred” wording of their standard contract but just their meaning. Schedules are generally within their area of discretion.

If, however, this is not available the contract itself will need to be changed.

Most importantly try to get some plain English “heads of terms” agreed, setting out in some detail what the parties, that is your and their respective commercial people, think that the contract will be covering. Try to get your lawyers involved in this. Theirs probably will not be. The agreed heads can be used as a yardstick against which to test the contract.

When you see the contract, first find some typographical errors in it and suggest corrections. This forestalls any argument that “we never amend our standard contracts”. Second find any areas where use of their wording would be obviously and factually wrong in the circumstances of your particular transaction or doesn’t reflect the heads of terms. Even procurement managers will eventually concede the need for change if, for example, you are supplying a cloud computing solution and their document, which was produced five years ago, assumes you will be attending at their premises and installing software on their servers.

Once you have achieved acceptance that change is necessary, suggest your changes and then be persistent in getting them accepted. This may be a long and tedious process. If possible avoid making actual changes to their wording at this stage, as this can be time consuming and expensive.  Once they have accepted that change is inevitable, you can then consider introducing content changes.

If all else fails fall back on a side letter signed by both parties and stated to clarify or amend the contract. Like your terms appended to their contract, this can be used to explain the parties’ intentions and override unsuitable wording in the contract. It risks creating contradictions and less clarity but is again something that larger organisations will agree to signing as a way of avoiding involving their lawyers. Side letters should be produced by your lawyer even if they look as though you wrote them.

Finally remember that if things go wrong in your dealings with the larger company the consequences can be very expensive, and pay particular attention to the provisions which do, or should, limit your liability to them. Liabilities that go beyond your ability to insure may be limited if you point out that any such claim would wipe you out leaving you unable to put anything right.

If you would like advice on commercial contracts, contact Geoffrey or the Commercial Team on 02380 717717 or email geoffreysturgess@warnergoodman.co.uk.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.