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LEGAL UPDATE: The risk management of contracts

Facilities managers must ensure that contract terms and clauses are clear from the beginning to reduce and prevent problems from arising during the agreement.


22 March 2012


The Facilities managers must ensure that contract terms and clauses are clear from the beginning to reduce and prevent problems from arising during the agreement.

“We don’t need to agree the specifics of the contract right now... we can sort that out later.” More often than not when “later” happens the relationship has gone sour and the parties cannot agree upon anything.

Not having a signed contract in place is a common mistake. Often parties enter into a commercial arrangement without having agreed definitive and binding terms. It’s crucial that you protect yourself by putting the terms of your agreement in writing, clearly stating exactly what you intend to do and how.

While the word ‘contract’ incites apprehension, in lieu of anticipated incomprehensible (legal) terms and expensive (legal) fees, not having a signed written contract in place can leave you open to disaster.

Here’s an overview of what you should look for in a legal contract:

  • Names of parties: the contract will commence by naming the parties and, where the parties are limited companies, it is important to use correct legal names and company numbers;
  • Date: make sure the actual start date (or “effective date”) and termination dates are clear;
  • Recitals: these can sometimes be useful to set out the circumstances in which a contract is entered into because in case of dispute about the correct interpretation of the contract, the stated commercial context can prevent ambiguity;
  • Definitions: sets out definitions of key terms. For example, ‘services’ might be defined as being any services carried out by the contractor including its subcontractors – make sure the specific meaning is clear;
  • Key commercial obligations: in the interests of clarity, it is usual to set out the main commercial obligations, namely, what one party will do and what the other will pay before stating the detailed clauses dealing with the ‘nitty gritty’;
  • Fees/payment: ensure the payment provision clauses are 
clear and that any rights to ‘set off’ are excluded;
  • Services/KPIs: Make sure you can provide what you’ve agreed, on time in scope and in budget; the KPIs should be measured fairly; ensure if any ‘service credits’ are applied for failure to meet KPIs that these are reasonable and opportunities are afforded to rectify ‘reasonable’ service failure;
  • Inability to meet key obligations: ensure that the inability to provide services because of circumstances 
beyond the control of either party 
(‘force majeure’) is not a breach 
of contract;
  • Limiting liability: look to limit or exclude liability to each other (except in respect of personal injury or death) – this can be a powerful shield to a claim, particularly if the cap is an 
all-embracing “aggregate” cap 
on liability;
  • Insurances: the key point to note is that an obligation to maintain insurance is not the same as a clause limiting a party’s liability under, or in connection, with a contract. Make sure your insurances are reflective of the type of service provided/risk and fees.
  • TUPE: is the position clear as to what happens at the outset, during and at termination of the contract, with regards to the specific group of people performing/providing the services? Check whether you’ve agreed upon suitable indemnities;
  •  Termination: in practice, when such clauses are invoked, the parties’ relationship is seldom 
at its best. It’s therefore essential that such clauses are clear and 
that the grounds for termination are unambiguous;
  • Change control: ensure that any amendments to the services and/or the contract are agreed in a form of document that is approved and signed by the parties;
  • Dispute resolution: these clauses can have profound implications for how any dispute is resolved and the contractual rights and obligations enforced, make sure the procedure is clear and that each party pays for its own costs;
  • Law and jurisdiction: if the contracting parties are both English companies, the work is to be carried out in England and there is no connection with anywhere other than England, the contract will undoubtedly be interpreted in accordance with English law and any dispute subject to the jurisdiction of the courts of England and Wales. However, for the avoidance of any possible doubt, it is usual to have a clause expressly saying this;
  • IP/DATA and confidentiality: know what IP and data is confidential, relevant, or could be at risk and protect these via indemnities.
The ‘end game’
Following on from the above, the case of AstraZeneca UK Limited v International Business Machines Corporation [2011] EWHC 306 (TCC), highlights the importance of ensuring that exit management provisions are clear. This case demonstrates that the courts will look at the purpose of the deal 
and consider the documents in 
the round when construing 
clauses or terms that are the 
subject of argument.

Key point: Failing to plan for termination can lead to considerable uncertainty and increased costs. Focus on how you want your contractual relationship to end. Agree the termination clauses together with an exit management plan, build in any demobilisation costs; do this at the outset and update the exit management plan via annual reviews. Such reviews should also be used as an opportunity to review your existing agreement and address any unforeseen issues. Never attempt to negotiate exit processes at point of termination; they are unlikely to result in a favourable outcome for either party.  

Conclusions
1. Signing a contract between 
the parties is an important means 
of securing the legal position of 
the agreement
2. It is essential to carefully examine the terms of agreement in any new contract drawn up between parties.
3. Take legal advice to ensure that you have a full understanding of your responsibilities in the contract
4. Discuss the manner of exit from the agreement as far as possible in advance of the point of termination.

Tony Thiaray is a commercial lawyer at Cushman 
& Wakefield facilities management