David v Goliath – 5 top tips for scale-ups and SMEs contracting with enterprise customers

Negotiating supply contracts with large enterprise customers can be a challenge for any supplier, and it can be especially challenging for scale-up and SME businesses. Enterprise customers typically present their standard procurement terms as ‘non-negotiable’ along with a wide range of mandatory supplier policies, insurance requirements and so on. Given the volume of suppliers they deal with and the risks these present, it is understandable that customers need to streamline their procurement processes. However, these terms are, invariably, favourable to the customer and may contain legal ‘traps’ for unwary suppliers.

In the desire to conclude a deal it can be tempting to think that the customer’s standard terms must be accepted and there is little point actually reviewing them and many suppliers focus instead on delivery. In our experience, however, it pays to spend some time upfront reviewing and understanding the contractual terms. It may also be possible, through focussed negotiation, to achieve a more balanced contract, or at the very least, have a clear understanding as to the obligations you are taking on. Once the contract is signed there will be little chance of re-negotiating the terms.

In this article we give some practical recommendations to help approach a contract negotiation with an enterprise customer. These are not intended to be exhaustive and specific contract terms and circumstances will vary but these points are common to most situations.

1. Consider your bargaining power.

• Consider at the outset of the deal how important it is to you that you secure this customer’s business and consider also how important it is for the customer to deal with you. This will determine how much you are willing to accept or push back on during the negotiation.
• For example, consider the following:

1. 1. Are there competitors that the customer can easily engage as an alternative or do you offer a unique service which the customer is reliant on and will struggle to find elsewhere?
   2. Do you already have business from the customer and how likely are they to withdraw this business? What are the practical consequences for the customer of removing their business and would they prefer to avoid this? What proportion of your revenue does this customer account for, and can you afford to do without this if they go elsewhere for the services?
   3. If the customer has launched a tender process for the services that you provide, what information do you have regarding this process (such as what stage of the tender are they at and how many other suppliers are they considering)? If you are submitting a bid, there may well be certain key terms and conditions presented to you which you should review before you submit your bid in order to ensure that you are able to comply with them and that they do not affect the price you are offering.

2. Check that your customer has presented a suitable form contract.

• Most enterprise customers will have a ‘suite’ of standard procurement contracts depending on the nature or value of the goods or services they are purchasing but don’t automatically assume that they will have provided you with the most appropriate contract, mistakes do happen.
• Do check that the terms and conditions are appropriate for the services you are supplying, if anything seems unusual or if you are unsure that the terms are suitable do check with the customer.

3. Consider your non-negotiables and what you are willing to fall back on.

• Consider your non-negotiable points before you start reviewing or negotiating the contract. For example, you may not be willing to agree to a liability cap that exceeds the limit of your business insurance cover, your cash flow may depend on being paid by the customer within 30 days of invoices being issued or you may be willing to agree to certain pricing only on the basis of a non-negotiable minimum contract term. Consider also limits on your ability to increase your charges and ‘most favoured customer’ commitments.
• Think about the intellectual property you already own, about any which will be developed over the course of the contract and whether you or the customer should own those deliverables.
• Think also about your future business plans, if you may be likely to sell your business or seek some investment or funding you will need to ensure that the customer does not have the right to terminate the contract if there is a change of control of your business. Consider also whether you require the right to transfer the contract to a purchaser of the assets of your business without the customer blocking this.
• Aside from your non-negotiable points, it is important to show an understanding of the customer’s position. It is useful to determine which points you are willing to fall back on which can then be used as leverage to secure your non-negotiable terms.

4. How to manage negotiations when customers insist on their own non-negotiable standard terms and conditions (T&Cs).

• In the first instance, you can ask to negotiate the T&Cs. Even if the customer will not make changes to the actual set of T&Cs they may be willing to agree to enter into a side letter or order form containing amendments to some of the T&Cs which will take precedence over the non-negotiable document and can address the issues that you have identified.
• If you are unable to negotiate the T&Cs, you can work with your legal adviser to identify the key risks and determine how your business can implement mitigations or manage those risks in practice. For example, if a customer insists on a response time within the service levels that is shorter than you are usually willing to commit to, implement controls and training with the team responsible for dealing with customer requests, so that they know to respond within expedited timeframes for this customer.
• Beware of terms incorporated by reference. The T&Cs may include hyperlinks to secondary documents which can be updated after signing the main contract. This enables the customer to incorporate new terms in the secondary documents which you are automatically obliged to comply with. You should explain to the customer that you cannot expect to agree to terms which you have not been able to review and understand.

5. Take legal advice.

• Last but not least (and whilst we clearly have some interest in this!) it is worth engaging a trusted lawyer to help you review the contract. As well as guiding you on the legal issues they should also be able to advise you on what is ‘market standard’, how far you are likely to be able to negotiate with the customer and discuss alternatives or compromise options with you. They can also advise you about terms which may restrict your ability to raise further investment or exit the business, if this is something you are considering.
• Avoid agreeing to terms with the customer before consulting your lawyer as you could inadvertently find yourself bound to terms which have an unexpected legal effect. This includes signing any heads of terms, as even where they are expressed to be ‘subject to contract’ or not legally binding in practice they can be used by the customer as leverage throughout the negotiation.
• Your lawyer will also be able to help to create a suite of standard form contracts that you can provide to customers at the outset of a deal and you can explain that your fee proposal is based on your standard contract terms. The customer is seeking services from you, and there is a good argument that as you understand those services best, you are also best placed to provide the most suitable form of contract. For example, if you are a storage or logistics business then there may be specific health and safety requirements that are applicable to the customer when operating on your premises that need to be included in the contract. Another example is if you are offering software licensing services. As you own the intellectual property that is being licensed, you will want to draft the intellectual property provisions to adequately protect your product. You can also ensure that you limit your liability and exposure under the contract to a realistic level. By presenting your contracts first, the onus is then on the customer to explain why your terms are not fair and reasonable. Even if the customer ultimately insists on using their own form of contract, to compare it against your standard form contract will help you with negotiations. Having standardised customer contract terms will also be very beneficial if you are looking to sell the business in future and should help with the due diligence process.

Finally, as the customer is likely to request service levels, having standardised service levels that you can offer to all customers means that you have service levels you know you can commit to and can avoid disputes arising on this topic down the line.

For advice on the particular issues relating to the negotiation of contracts or development of standard terms, please contact Anne Todd, Moya Smith or other members of our Commercial team. Anne and Moya have both worked as in-house lawyers at large enterprise customers as well as on behalf of scale-up and SME suppliers. Michelmores runs MiVentures, an award-winning programme for early stage businesses which is dedicated to giving extra support to innovative and scaleable businesses.

This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.