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Top 3 B2B contract traps to watch out for

Posted by Andrew Dickinson on 26-Apr-2016 21:37:31

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I am not a lawyer and anything I write on business contracts cannot be relied upon legally, however I have been reading, drafting and negotiating telecommunications agreements since 1986. Of course every agreement is different but over the years I have noticed three contractual areas that come up regularly.

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Initial period extensions

This is a very common trick and one you and your customers definitely need to look out for as often it is buried in the small print. Customer A signs a 36 month contract and a day after the 36 month period expires tries to cancel the service. Supplier B points out a clause in the contract that says the agreement will continue for another initial term (36 months) if the customer does not issue notice in writing at least 3 months before the initial term expires. Ideally don’t agree to this in the first place but if the supplier refuses to take the clause out and you simply have to buy from them then put a reminder in your calendar to review the contract after 30 months. This will give you time to renegotiate and switch to a new supplier if you have to.

Step-in clauses

These apply mainly to resellers and are commonplace in any sector with recurring revenues. It is where, under certain circumstances, your supplier has the right to contract directly with your customers, cutting you out of the supply-chain. Just the heading often gets a reseller’s hackles up but step-in is actually a good thing for all parties when used in the right context. For example; if a reseller goes into liquidation without their suppliers having step-in, the end customers are likely to be immediately disconnected. This is because suppliers will have no guarantee of future payment. Whilst they will have to stand in line for the debt the reseller owes them for past invoices, they are unlikely to risk keeping the end users switched on in the hope that someone buys the business as a going concern. Step-in is a slightly grey legal area because the end customers might be viewed as an asset of the business in administration. However there is nothing to stop an end customer contracting directly with the ultimate supplier in order to maintain vital services. They will probably still be obliged to pay their past debts to the reseller in administration but most contracts cease immediately in the event either party goes bust. Even without such a clause they will argue they were forced to breach their contract in order to maintain the supply of a vital service. However, suppliers should expect resellers to push back where they try and extend step-in to cover breach of any contract term by the reseller. It has been known for unscrupulous suppliers to try and takeover a reseller’s customer base for a relatively minor breach of contract e.g. Late payment. At best they may threaten use of this clause in order to gain leverage with the reseller. End users should ask resellers if they have step-in with their suppliers as this protects them. From the resellers perspective, having step-in makes their customers feel more secure and many will make this clear to prospects if they question the reseller's financial stability.

Invoice disputes

Most contracts stipulate a period in which an end user or reseller has to query an invoice, usually 14-30 days from receipt of invoice. This is important to ensure a billing validation process is put in place however the supplier’s legal right to absolutely enforce this cut-off time is questionable. The overriding principle is if the end user or reseller has been over-charged for a service then they should be refunded, however long after the invoice date the error is discovered. Of course reasonableness will come into this argument and there are often extenuating circumstances but don’t assume that just because it has taken you three months to find an error, you are not due a refund. On the other side of the argument resellers will sometimes claim that they are not required to pay previous-period billings because they cannot or will not re-invoice their end users. There is little legal support for this position. Previous period billing is unfortunately common in the communications industry and where possible resellers should not be issuing bills to their customers based solely on the bills they receive from their suppliers.

Small businesses will not usually have in-house council and cannot necessary afford to pass every contract by an external lawyer. Suppliers know this and you should expect all contracts to be written in their favour. Take time to read through the terms and conditions and don’t be afraid to question clauses that don’t feel right. If the prospective supplier has offered a reference site ask for a large customer that is likely to have been over their contract with a fine tooth comb. When you are asking them about service and product performance slip in a question about what changes they made to the contract. 

Jola sells only through channel and our core competence is helping resellers and dealers with great customers sell them business communications services. Our support extends to every aspect of adopting a new product from qualifying prospects through marketing, sales collateral, contract templates and technical training.

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