Contract terms don’t have to be so restricive

Contracts are a hot topic at the moment, particularly the restrictive kind. Lately, the practice by some clients of contractually preventing consultancies from working for competitors has been causing a lot of work for the Design Business Association. There have been instances of restricting future work in this way for an infinite period. But, not only have some such contracts been deemed excessive in their efforts to protect clients, but there is concern that restrictive contracts are in breach of European Union competition law.

Consequently, the DBA has been working with the Office of Fair Trading to try to resolve the issue. In July 2001, DBA chief executive Ian Rowland-Hill told Design Week that just about every contract examined by the OFT contained a clause that it felt could be anti-competitive (DW 12 July 2001).

On top of this, the situation is exacerbated by the unwillingness of many consultancies to challenge what they consider to be unfair terms. Upsetting the client is not good business after all.

DBA solicitor Humphries Kirk has examined a number of the referrals in question and senior partner James Selby-Bennett explains that the law is pretty clear on the subject. ‘The law says two contracting parties can agree their own contracts. There are very few constraints. The only real constraint is that the law frowns upon contracts that restrict competition,’ he explains. This is contained within the Competition Act, 1998, which is based on EU principles. However, in practice this is very hard to enforce.

‘Although the law says that contracts which impede competition are “wrongful” – and I use the word advisedly – there is no mechanism to enforce the law [between clients and their consultancies],’ adds Selby-Bennett.

Nevertheless, he re-iterates the view that contracts that restrict a consultancy from working with a competitor (particularly after a project has ended) are ‘grossly anti-competitive’. He also says that for many clients ‘a cast-iron confidentiality clause’ will suffice.

In practice, of course, many consultancies will still be keen to work with a lucrative client if the price is right. If the potential value of a client relationship is high enough and the end-game is long enough, turning down the work would be a hard call. The upshot, fears Selby-Bennett, is that many are accepting inappropriate terms.

Of course, some consultancies might wish to agree to unusual terms. As Fitch Worldwide chief executive officer Paul Stead says, agreeing to such terms ‘is purely a commercial decision’.

‘Restrictive contracts are a part of the negotiation. If a client wants to enter into a long-term contract or relationship on certain terms about propriety of information, building a level of trust and respect, then that is something we might clearly want to do,’ says Stead, who adds that each situation should be considered on its own merit.

Stead is a little concerned that enforcing the use of non-restrictive client-consultancy contracts is probably neither workable, nor desirable, if it means losing good business.

Others fear some consultancies, particularly the smallest ones, are being exploited. ‘Clients can make designers do what they wish them to,’ Selby-Bennett continues. ‘If the client wants you to jump through three hoops backwards, you will.’

He advises that if consultancies don’t want to sign the terms they are presented with for good reason, the client is unlikely to dump them. If you read the paperwork and don’t agree with the terms or don’t understand them, simply send them back, he goes on to say.

Homebase head of store design Colum Lowe agrees that it is in every client’s interest to listen to the concerns of the consultancy and if necessary to negotiate acceptable terms.

Selby-Bennett says, ‘The problem is a bunch of lawyers acting for big commercial companies and with little insight into the design process are producing these draconian clauses, which, in fact, don’t do their clients any service.’

But what about the client’s perspective? In the competitive DIY and home furnishings market, Lowe is conscious about the need to protect his company’s strategy.

‘We live or die by how well we compete in the marketplace. Consultancies need access to a lot of sensitive information which could aid our competitors, so if you work for us we think it’s reasonable that you can’t work for our competitors for an agreed period, normally six to 12 months,’ he says. Homebase defines a competitor as a company that overlaps its product lines by 50 per cent or more.

In practice, though, he says this would only apply for big projects that make a ‘strategic difference to the business’. He also points out that he sought the advice of the DBA on this matter some years ago, in order to come up with agreeable terms, then ran it past his own lawyers as well.

A sensitive solution to this predicament needs to be found, which not only protects consultancies from exploitation, but does not deter the clients from outsourcing work altogether.

‘The DBA is trying to strike a fair balance between clients and consultancies. I’ve prepared a code of practice that we think strikes this balance and which is now with the DBA for consultation with its members,’ Selby-Bennett concludes.