Good corporate governance can be achieved by continual review and close monitoring of key service contracts in any business. It not only helps in saving time and money, but also keeps one focused on building profits, points out John Merrigan.
Akey task of management is to ensure that the terms and conditions of the contracts and agreements in any business are up-to-date, reflecting the reality of operations, legal requirements, and thus protecting the organisation’s interests as far as possible.
The distractions associated with contractual and legal disputes are draining not only from the time wasted, but also in terms of unplanned costs, damage to company’s reputation and key stakeholder relationships. Hence, good governance based on continual review and close monitoring of the key contracts in the business will ultimately save you time and money, keeping you focused on building profits.
Against the backdrop of the anticipated growth in the UAE economy this year, the purpose of this article is to prompt you to review this important aspect of risk-management this month.
Client / Customer Contracts
It is often the case that customer contracts have not been updated to reflect changes in the business. Basic contract elements such as payment terms, bank details, company address / contact information, delivery terms / conditions, dispute resolution clauses, are not correct or updated on invoices, delivery notes and contracts. The gaps in this critical information can give rise to delays in payments, disputes and loss of business. A specific area to consider is whether the contracts with customers have arbitration clauses and where legal disputes may be settled. It is vital to take good independent legal advice before changing contract terms.
Often, contractual terms with key suppliers have not been proactively managed, where the terms of business with key suppliers are not even formalised. It is a vital task to ensure that discounts, payment terms, service levels and other long-term arrangements can be assessed, formalised, and critical gaps addressed. The resulting proactive discussions to negotiate the best possible terms will ensure continuity of business and help to keep your input costs
The employment laws of the UAE are constantly evolving to promote best international practice and protecting the rights of both employer and employees. However, it is often the case that the terms of employment contracts, especially pertaining to long-standing key staff, do not reflect changes that have occurred in their terms and conditions. It only becomes an issue when a dispute arises or new labour laws are enacted and require compliance. Critical terms such as job titles, salary and benefit conditions, annual leave, sickness policy, termination and probation among others should be actively updated to reflect the current realities.
The task to ensure that insurance cover in the business is up-to-date is often left aside. It includes buildings and contents, third party liability, professional indemnity, vehicle cover, health insurance cover and other specific risks that may apply. The levels of cover you currently have in place may not reflect the actual operations or critical information may not have been advised to your insurance provider which may affect the validity of cover. Typically, these issues are not addressed until it is too late and a claim arises. It is vital to ensure that insurance contracts provide adequate and updated cover to protect key risks in your business.
Trade Licenses & Other Approvals
A regular review of key documents relating to regulatory approvals, including trade licenses is essential. Typical risks include changes in key designated personal mentioned on the license documents, changes in operations or the nature of business, or new provisions from the licensing authorities such as free zones. If these documents are not updated or compliant, there is a risk of non-renewal, penalties or delays which can impact on your ability to continue trading.
Office & Factory Contracts
The terms and conditions associated with office and factory rentals / leases are critical for the continuation of all business. In the context of the significant changes in the market rates and regulations, long-standing lease contracts should be proactively reviewed to ensure that the contract provisions are as favourable as possible and protect you over the term duration.
Safe Keeping & Storage
It is imperative to ensure that all the above documents are kept safely in secure storage so they can be easily accessed and produced when required. Start compiling a register of key business documents and ensure regularly review.
In order to implement the above, a systematic and thorough approach is required. Start by compiling the documents into one central location. The documents should then be closely reviewed with the following in mind:
Validity: Check the documents are still in force and make a note of the renewal / expiry dates. Use this to plan the necessary actions in the business cycle.
Accuracy: Check the key information and conditions are correct.
Relevance: Check the contract terms are relevant and reflect the business needs.
Risk: assess and detail the risks / critical gaps.
Prioritise: List the key actions / requirements in order of priority as they impact on the business operations.
Accountability: Clearly define and brief the relevant person in the business who will be tasked to take the action and set milestones.
Professional Legal Advice: Seek advice on the major contracts to ensure your agreements are properly drafted and comply with local laws.
Good risk-management of key contracts and agreements that support safe and cost effective business operations is a critical part of good governance. However, these basic concerns are forgotten in the heat of daily challenges and distractions. It is only when a dispute or incident occurs that the real cost is counted. Accordingly, a proactive approach to regularly review and update the terms and conditions of your contracts will save you time, and avoid costly distractions from your core operations. Make it a priority to address this task in the coming month and good luck!