Do not let your commercial agreements go stale

When was the last time you thoroughly reviewed your company’s commercial agreements? If it’s been a while, then those agreements almost certainly may be overdue for a refresh. Too often we see businesses let important commercial contracts auto-renew year after year without scrutiny.

In the dynamic landscape of business, commercial agreements such as terms and conditions, supply agreements, and other contractual documents underpin every aspect of your business’ operations and play a crucial role in shaping the relationships between companies. While these agreements often bring stability and structure to business dealings, they can become outdated, leading to potential risks and missed opportunities. Therefore, it is essential for companies to review and regularly refresh their commercial agreements to ensure they reflect their ongoing legal obligations whilst at the same time staying competitive and guaranteeing their legal protection.

There are several important reasons to get into the habit of periodically reviewing and potentially renegotiating your key commercial agreements:

1. Legal compliance

Laws and regulations are subject to continual change and evolution. It is crucial for businesses to recognise that outdated agreements may no longer be compliant with current legal requirements. By routinely reviewing commercial agreements, businesses can proactively ensure compliance and reduce the risk of non-compliance and potential legal disputes. This proactive approach not only demonstrates a commitment to legal compliance but also safeguards the interests of all parties involved.

As an example, the implementation of the General Data Protection Regulation (GDPR) which came into effect in 2018, introduced extensive requirements for companies handling personal data, impacting various aspects of commercial agreements. In response to the GDPR, many companies had to revise their data processing agreements, privacy policies, and vendor contracts to ensure compliance with the new standards. The GDPR also necessitated the inclusion of specific data protection clauses and obligations in commercial agreements, reflecting the evolving legal requirements related to data privacy and security.

This example showcases how changes in laws and regulations, such as the implementation of the GDPR, can directly influence the content and obligations within commercial agreements, emphasizing the necessity for businesses to review and update their contractual arrangements to align with the evolving legal landscape.

2. Risk mitigation

As industries progress and adapt to changing circumstances, it is essential for companies to keep pace with these transformations. Market conditions fluctuate, new technologies emerge, supply costs may increase, regulatory frameworks evolve and consumer expectations shift. Consequently, the terms and provisions in existing commercial agreements may become outdated or insufficient in addressing emerging risks and challenges. By conducting routine reviews, businesses can identify potential gaps or weaknesses in their agreements and proactively address them.

One example of how industry standards have changed in commercial agreements pertains to software licensing and intellectual property rights. In the software industry, there has been a notable shift towards open-source software and the use of cloud-based services. Historically, software licensing agreements were primarily focused on traditional proprietary software, with restrictive licensing terms and conditions. However, with the rise of open-source software and cloud computing, industry standards have evolved to accommodate more flexible and collaborative licensing models.

Commercial agreements in the software industry have, therefore, adapted to include clauses related to the use of open-source components, the licensing of cloud-based services, and the management of intellectual property rights in distributed and collaborative development environments. These changes reflect the evolving industry practices and the need for commercial agreements to address new technologies and modes of software distribution and consumption.

3. Evolving business needs

As companies experience growth, diversification or the introduction of new products and services, their contractual requirements become more complex and multifaceted. In addition to this, customer expectations also grow. Outdated agreements, which were once suitable for the company’s previous scope of operations, may no longer accurately reflect the current state of affairs. This mismatch can result in ambiguity or conflicts that hinder the company’s ability to effectively conduct business. By refreshing these agreements, companies can ensure that they accurately reflect their current business needs, promoting clarity and alignment with their strategic objectives.

4. Competitive edge

In a highly competitive market, the ability to be agile and responsive is crucial for companies to stay ahead of competitors. By regularly reviewing and updating their commercial agreements, businesses can enhance their capacity to adapt to changing market conditions more effectively. This agility not only enables them to seize opportunities swiftly but also empowers them to respond promptly to shifts in the market landscape. As a result, companies that prioritise the regular review and update of their commercial agreements gain a competitive edge by staying nimble and capitalising on emerging trends and opportunities.

5. Relationship management

Effective commercial agreements are essential for maintaining positive and productive relationships with suppliers, partners, and clients. By reviewing and refreshing these agreements, companies can demonstrate their commitment to fairness, transparency, and professionalism, thus fostering stronger and more enduring business relationships.

An example illustrating the importance of relationship management in effective commercial agreement maintenance involves long-term supply contracts in the manufacturing industry. In situations where a company relies on a consistent and dependable supply of raw materials or components from a supplier, establishing and maintaining a strong relationship is paramount. Effective commercial agreement maintenance in this context involves not only ensuring that the terms and conditions of the supply contract remain relevant and enforceable but also nurturing a positive and collaborative relationship with the supplier.

Should unforeseen circumstances arise such as changes in market conditions, adjustments to production schedules, or modifications in product specifications a well-maintained commercial agreement, coupled with a strong relationship, allows the parties to engage in constructive discussions, negotiate amendments if necessary, and ultimately preserve the continuity of the supply chain. This exemplifies the significance of relationship management within the context of commercial agreement maintenance, where harmonious and communicative partnerships can often help to address challenges and adapt agreements to the evolving needs of the parties involved.

6. Cost and efficiency

Outdated agreements may contain inefficient or obsolete clauses, leading to unnecessary costs or operational inefficiencies. By streamlining and updating commercial agreements, businesses can enhance operational efficiency and cost-effectiveness, contributing to overall financial health.

The proactive reviewing and refreshing of commercial agreements are essential for businesses to adapt to changing circumstances, mitigate risks, and support sustainable growth. By embracing this practice, companies can position themselves for long-term success while safeguarding their legal and financial interests.

At Thomson Snell & Passmore, we would strongly advise you to take the time to carefully examine your suite of commercial agreements. That way, with the right rhythm of contract reviews and negotiations, you can ensure your commercial agreements stay finely tuned as your business grows and evolves over time. If your company requires any guidance on contract management best practices or assistance with a particular negotiation, please do not hesitate to reach out to us.