EOW Reflections: Contract for the marriage not the divorce

What a beautiful city Edinburgh is. The highlight of the week was Monday in an Edinburgh bathed in sunshine. I was there for the World Commerce and Contracting (WCC) Summit talking about the importance of putting fair payment terms into contracts (and sticking to them) so that small and micro businesses get paid quickly. The insights I came away with into the power of the contract were illuminating. We’re working on a guide for small and micro businesses on contracts and this event was very timely.

Why do I need a contract I hear you ask. In theory, you have a contract if you’ve had a conversation with the customer you’re intending to supply with your goods or service. However, if it isn’t written down there’s no proof as to what was agreed and that can lead to disputes later. People remember conversations differently. A simple written contract, one with the main points in a couple of paragraphs, goes a long way to making sure your business relationships flourish.

We ask firms applying for an award from the Fair Payment Code to provide us with a copy of the contracts they use so we have proof that they are contracting to pay their suppliers in 30 days for a Gold Award or in at least 60 for a Silver or Bronze Award. We’re asking Awardees under the Code to treat their suppliers, particularly the small business ones, fairly, and the contract helps to prove that. It also makes customers think about how fair the payment terms they put in their contracts are. We do spot checks to see what the contract says and ask suppliers if the contract is being adhered to.

A written contract can prevent problems and disputes, help you make sure everyone is complying with their obligations (such as delivering goods at the right time in the agreed quantity and of the specified quality), and protect your business from risk as long as it’s clear who does what when, allowing you to enforce your rights should the contract be breached.

Given the power of contracts why do we hear from so many small and micro businesses that they either don’t have a written contract with their customers, that they have simply accepted the one presented to them by their customer, that they haven’t read the contracts they’ve signed or that they don’t understand the payment terms in their contracts?

A contract is an agreement between two or more businesses which is intended to be legally enforceable. It’s often the case though that the bigger customer in the business relationship presents the small supplier with a contract and expects the supplier to roll over and accept all the terms in it, including sometimes payment terms longer than 60 days.  There’s an imbalance of power here. The supplier doesn’t have to supply any particular customer with their goods and services unless the contractual terms suit them too. They can ask for changes to the clauses, explain why they need those changes (e.g. to be paid quicker), negotiate a better deal, or decide the whole business venture is too risky and walk away.

A good contract should take into consideration the needs of both the supplier and the customer. Both sides may have to give up something, will have to be flexible and compromise. If that’s not the case, then the working relationship is likely to be beset with problems all through. Who wants to work with someone who won’t listen to and consider your requirements too. A brilliant phrase I’ve taken away is ‘contract for the marriage, not the divorce’. Get a mutually beneficial contract that will help the business relationship work rather than break down and end up in dispute. If you get the agreement in writing, you’re much more likely to be successful including more likely to get paid by the agreed date in the contract, rather than having to ask for our help to get paid money that’s overdue.