Contract Management: A Storm IS Coming; Prepare Now

Posted by Lydia M. Hilton on

An “ounce” of contract management can often prevent wasting a “pound” of time and energy when disputes arise.

A company’s relationships are (or should be) memorialized in written contracts. When adjustments, revisions, or enforcement of those contracts become necessary in times of economic stress—as is predicted in 12-18 months—the business has enough on its plate without having to scramble to find and read the documents for the first time in months or years.

One of the best ways to maintain flexibility and be ready to address change is to create or update the company’s system of contract management. An effective system, among other things, streamlines contract creation and execution, lets you look up exactly who you have contracts with, identify the major terms of the contracts, when they expire, and if the contracts have terminated early, formal releases to that effect. It also means having contracts you use every day—like Non-disclosure agreements—at your fingertips. Re-creating the wheel every time or stuffing contracts in a folder in a filing cabinet (physical or electronic) never to be looked at again is not an effective contract management system.

On the most basic level, contract management keeps track of customer name-changes and sales to third parties. It is particularly important to make sure that all invoices and paperwork issued after a sale reflect the correct name of the “new” customer/owner. If there’s a dispute about an invoice that shows the original customer’s name, then the new owner may try to take advantage of that to avoid payment. Even if you win in the end, the time and effort could have been better spent on other things.

Perhaps a third party vendor that failed to perform. The contract was terminated, and the third party told you there was no further obligation. But if that understanding is never put into writing or is in a string of emails, unnecessary trouble may follow. Eight months or two years later, the firm might get sued for non-payment on a matter it believed had been resolved when the people with any knowledge about it have forgotten or moved on.

Suppose a great many of the contracts presented to by others contain provisions you object to, for example, certain over-reaching indemnification clauses, choice of law provisions in far-away places, 15-minute payment terms, etc. A good contract management system can include standard alternative provisions for a counter proposal.

Finally, if you are getting ready to sell your business, a good and useful contract management system can be invaluable in setting expectations of purchase price and preventing any post-closing surprises.

It’s helpful to involve counsel with setting up a good system, identifying what data should be extracted from the documents, and what deadlines or other checklists will be appropriate. The investment on the front end—before a crisis—is well spent. The wise business owner will see the challenges ahead and take action, but the imprudent one will keep going with business as usual and suffer in the long run.