Practical protection before you enter a contract

When entering into a contract parties often get so involved in negotiating terms that they fail to consider who the other party is and what they are worth.  Let’s say you are offered a £1 million contract on which you believe you can make a large profit.  That promised profit could blind you to the necessary and practical steps you should take to protect yourself.

The first point is to make sure you know who you are contracting with.  Is it an individual, a partnership, an LLP or a limited liability company?  If it is a limited liability company, is it one in a group and is it the one you want to be contracting with?  If the other party is overseas, that could cause you difficulties: if something goes wrong how do you sue them, where do you sue them and how can you enforce any judgment?

You also need to know whether the company is worth anything.  For companies in England and Wales this can be done quite simply.  There are a number of credit reference agencies who will provide a report or you can simply carry out a search yourself at Companies House free of charge.  You can see the latest filings by a company, including their last accounts, which will give an indication of the company’s value and liquidity.

Of course, if the company is not worth anything you can take steps to protect yourself.  You might choose not to proceed with the contract.  Or you might ask for a parent company guarantee, personal guarantees, an advance payment or a payment bond.

You have to be wary of people who split their businesses between the trading entity and the holding company.  The holding company holds the assets whilst the trading company incurs the liability.  If the trading company cannot pay, you will be unable to take action against assets held within the holding company.  

For some people, the evidence of insurance feels like sufficient protection.  But is it?  You need to consider what the terms of the insurance may be.  Does it cover all possible risks?  Is the level of insurance at an appropriate limit?  What is the insurance excess?  All these factors should be considered as cover that is disproportionate to the contract being entered into will mean your potential losses are not covered.  You can, of course, request a copy of the insurance policy before you sign on the dotted line.

A view of the policy has the added advantage of allowing you to inform insurers of any possible claims.  Doing this will prevent an insurer refusing to indemnify the insured because of late notification of potential claims - the most common reason for insurers failing to pay.

Another reason for viewing the policy is to ensure that terms of the insurance are complied with.  These may relate to the way in which works are to be undertaken or the safety steps that are required.  If you know of these conditions then you can insist they are complied with at the time the works are carried out.

These are very simple, effective and free steps that you can take to protect yourself.  Knowing who you are contracting with and understanding their worth will give you reassurance when you enter into a contract.

For more advice, please contact Peter Allen at our Chelmsford office on 01245 453813 or email [email protected] .