Why ‘Contracts’ and ‘Formal Agreements’ are so important in business today
We all like to think that the industry we’re in, whether that be security, defence, development, insurance or technology (all focused on high-risk jurisdictions or high-end skills), is well swept-up and organised and it is…to a degree.
A key-way to protect your business and ensure it’s professionalism, is by embracing contracts and all the other names given to those pieces of paper that make sure both sides of a business agreement know what their obligations and responsibilities are.
The purpose of this blog is just a little refresher on why contracts are so important, even if you ‘just don’t like them.’ You could be a start-up business or have been going for some time now, contracts are relevant to business of ALL sizes.
Unsurprisingly, there are many ex military working in the defence and security industries; both founders of Proelium Law are ex-military so we recognise and like working with ‘our own’ when we see them. We’re generally a trusting bunch but there can be a tendency for a little too much trust, the assumption that because they’re ex military like us, they’ll ‘do right by us’. Generally this does still happen, the problem comes when ‘external influences’ get involved, something you simply can’t factor into the equation and that’s where, in our experience, things generally start to go wrong.
For the sake of clarity, ‘A Contract’ is a formal process and can be either written or verbal. ‘Agreements’ are often less formal but can become formal if the elements of a contract are in place. So, you could ‘agree’ to help a mate take down a tree, but it’s not a ‘contract’ unless there are many more elements to that agreement, that both sides agree to. When I was taught this subject it was called ‘Contract Law’, not ‘Agreement Law’, so let’s continue by giving the subject it’s proper name.
It is our honest opinion that smaller companies are simply not making the best use of contracts (or for that matter the best use of law firms) and trust us when we say.. time spent now, is a problem avoided in the future. No doubt you will know, if you have ever tried to do business with a large multi-national company, that it is impossible to do anything without a contract in place; this is entirely the correct procedure and one small businesses would be well advised to duplicate.
There’s a lot of confusing language surrounding contracts and the different types you can have for different reasons. For example:
- Non-Disclosure Agreements (NDA’s) are still a contract, they are just a contract not to reveal information but the word agreement has become the norm
- Joint Venture Agreements (JV’s) are increasing, still they are contracts and often in this industry given the transcending of borders, incredibly important
It would be impossible to list the elements of a contract here but ultimately, a written contract is a formal, legally-binding agreement between two (or more) entities, (they could be company to consultant, company to company or many other variations), that lays-out what each side will do often in return for some form of compensation. Within the contract are terms. These terms set out the structure of the contract.
For now, here are some real basics to consider what you (and we) would be thinking about before drafting a contract:
- Who the parties to the contract are? An increasingly important issue when it comes to knowing your client for the purposes of money laundering regulations
- How long the contract will last for and when will it end? Important if you are distinguishing from an employee or a consultant or contractor
- Who will perform what task and for how long, where and to what standard? Extremely important because if you can’t establish these parameters, how does anyone know what they are doing for certain and how do you fix it if it goes wrong? This is the part where you both agree to do something, even if its just one party agreeing to do something for the other party
- Confidentiality You may think this is obvious, that you would expect someone to keep quiet about the work they do for you, unless of course it was something you wanted to publicise; either way, ensure you control the information
- Dealing with problems Somewhere in the contract you want to work out how you’ll deal with any problems that arise. Try to talk first, don’t run to a law firm to start litigation straight away; putting something in the contract that says the first port of call is talking, will always help. The legal option is for much later on when everything has failed
Please don’t think this list is exhaustive, far from it, this is just a taster of some of the common considerations in a contract.
Avoiding complexity in contracts
Complexity in contracts is just part of the reality of doing business today. Our advice is don’t be frustrated by it, embrace it! One reason why contracts are sometimes so complex is that there is an awful lot of case law behind the particular term you read. A term is, in basic speak, one of the paragraphs in a contract with a heading above it. It isn’t just lawyers being awkward, someone somewhere may have paid lot of money to test that term in court, so get comfort from that. Just because the last contract you had wasn’t that long and you liked it because it was short, it doesn’t mean it was a good contract.
You’ve heard the term ‘not worth the paper it’s written on’? A badly- drafted contract could be what is called ‘unenforceable’. What this means, in this context is, the terms would be unlikely to stand up to scrutiny, in a court room. So a badly-drafted contract could really offer you no protection or ability to enforce the terms and ultimately, could lose you money.
So, why are contracts so important?
A clear, well-drafted contract (regardless of how long it is), makes it clear what is expected of someone and what their position is. Knowing exactly where you stand is important, it allows better working relationships and if it does go wrong, you have a bit of paper that makes it clear what should have happened from the outset.
That’s all for now. If you enjoyed reading this post and would like to know more about our services, please contact us. We’re always happy to have a no-obligation chat, to see if we are the best law firm to help you.
If you would like to talk to Proelium Law please contact us on: email@example.com +44 (0) 20 3875 7422 Mobile +44 (0) 7725329437
If you’d like further information, or to discuss working with us, you can get in touch via our Contact Us page
Anti Money Laundering and Counter Terrorist Financing are two subjects often linked but misunderstood.
Some quick distinctions to understand - the activity of money laundering is where cash raised from criminal activities is made to look legitimate and re-used in the financial system.
The activity of terrorist financing is less focused on the source of the funds, but interested in what those funds are used for.
The Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) legislation is important to your business, particularly if your business is engaged in legitimate activities in overseas or high risk jurisdictions. In the UK for instance you need to establish if Money Laundering Regulations apply to your business or not. See here for guidance.
Importantly, on 10th January 2020, new legislation was enacted in UK in the form of the 5th EU AML Directive. Amongst other areas, brings cyptocurrency into the purview of legislation and places obligations on business owners to make checks in respect of identifying beneficial owners and when enhanced due diligence is required. For the legislation click here. For a easier to understand guide click here.
What do I need to do ?
Making sure you know the source of any funds and where any funds you are giving out are going, is very important. Ensure you have a due diligence process in place if you are engaging with local suppliers and check the backgrounds of locally employed staff. You can only do so much to ensure you don't fall foul of the legislation but remember - the UK legislation has extra territorial reach, which means as a UK firm operating in a foreign country, you could still be prosecuted for offences under the legislation in UK. See here for guidance
The issues raised here may seem somewhat off putting for you to even engage in business. Ensuring you comply with the requirements (or at least establishing whether you need to) and then implementing systems to do so, will be a huge boost to your company management systems.