Whether you are launching a new business, supplying services, working with contractors or entering into a commercial partnership, clear contracts are essential.
A contract records what each party has agreed to do and provides a framework for dealing with problems if the relationship does not proceed as expected. Although some contracts may be legally enforceable without being written down, relying on conversations, informal messages or assumptions can expose a business to unnecessary risk.
A professionally drafted written contract provides clarity, protects commercial relationships and can save considerable time and expense if a dispute arises.
What makes a contract legally binding?
Under the law of England and Wales, a contract will generally require an agreement between the parties, an intention to create legal relations, consideration and sufficiently certain terms. The precise legal analysis will depend on the circumstances.
Contracts do not always need to be signed or even written to be enforceable. An agreement may arise through emails, conversations or the parties’ conduct. However, proving the terms of an informal agreement can be difficult.
A written contract helps establish:
- what goods or services will be provided;
- how much will be paid;
- when payment is due;
- the parties’ respective responsibilities;
- how long the arrangement will last;
- how it can be brought to an end; and
- what happens if something goes wrong.
Official guidance for small businesses recommends agreeing payment and other key terms before beginning work and recording them in writing.
Avoiding misunderstandings
Many commercial disputes begin because the parties had different expectations.
A customer may believe that additional work was included in the original price, while the supplier considers it a separate service. A contractor may expect a project to last six months, while the business believes it can terminate the arrangement at any time.
A detailed contract allows the parties to identify and resolve these issues before work begins.
It may address:
- the scope and standard of the work;
- deadlines and delivery arrangements;
- approval procedures;
- responsibility for delays;
- changes to the agreed services;
- intellectual property ownership;
- confidentiality;
- data protection;
- warranties and indemnities; and
- limitations of liability.
The right provisions will depend on the type of transaction and the parties involved. A generic template may not reflect the risks facing your particular business.
Protecting cash flow
Late or disputed payments can place significant pressure on a business.
Your terms should clearly state:
- the price or method of calculation;
- whether VAT is payable;
- when invoices will be issued;
- the payment deadline;
- whether deposits or staged payments are required;
- the consequences of late payment; and
- whether interest and recovery costs may be claimed.
Clear payment terms reduce the scope for a customer to argue that they did not know when payment was due.
Businesses should also understand that statutory rights may apply to late commercial payments, but it is generally better to prevent uncertainty through careful drafting than to rely on recovery action afterwards.
Managing changes and additional work
Commercial projects frequently evolve after the original agreement is made.
Without a change-control procedure, it may become unclear whether extra work has been authorised, how much it will cost or whether the completion date should be extended.
A well-drafted contract can require variations to be approved in writing. It can also specify how additional fees and revised deadlines will be agreed.
This protects both parties. The customer knows it will not be charged unexpectedly, while the supplier is less likely to perform additional work without payment.
Ending the commercial relationship
Not every business relationship lasts as long as originally expected.
A contract should explain when either party may terminate and what happens afterwards. Relevant provisions may include:
- termination on written notice;
- immediate termination for a serious breach;
- termination following insolvency;
- an opportunity to remedy certain breaches;
- payment for work completed before termination;
- return of property and confidential information; and
- obligations that continue after the agreement ends.
Without clear termination clauses, a business may struggle to exit an unproductive arrangement or may inadvertently breach the contract by ending it improperly.
Allocating commercial risk
Contracts allow businesses to decide which party will bear particular risks.
For example, the parties may agree who is responsible if:
- goods are damaged in transit;
- information supplied by a customer is inaccurate;
- a deadline is missed;
- third-party intellectual property is used;
- confidential data is disclosed; or
- a product or service causes loss.
Exclusion and limitation clauses must be drafted carefully. Depending on the circumstances, legislation may prevent certain liabilities from being excluded or require a contractual term to be reasonable.
Where a business contracts with consumers, additional protections apply. Consumer terms must be transparent and fair, and unfair terms may not be enforceable. The Competition and Markets Authority advises businesses to use clear language and avoid terms that create a significant imbalance against consumers.
Contracts with employees and contractors
It is important to distinguish employees from self-employed contractors.
Employees have statutory rights and an employment contract setting out their conditions, rights, responsibilities and duties.
A consultancy or contractor agreement should accurately reflect the relationship in practice. Merely describing someone as self-employed will not necessarily determine their legal or tax status.
Appropriate contracts can also address:
- confidentiality;
- ownership of work produced;
- restrictions after termination;
- substitution;
- equipment and expenses; and
- responsibility for tax.
Reviewing contracts regularly
A contract should not simply be drafted once and forgotten.
Your business may expand, introduce new services, begin trading online or work with different types of customers. Changes in law or commercial practice may also make existing terms unsuitable.
Contracts should be reviewed when:
- the business model changes;
- new products or services are introduced;
- repeated disputes arise;
- key suppliers or customers change;
- the business enters a new market; or
- existing terms no longer reflect day-to-day practice.
How Penerley Solicitors can help
At Penerley Solicitors, we help businesses prepare, review and negotiate clear commercial agreements tailored to their needs.
We can assist with customer and supplier terms, consultancy agreements, service contracts, confidentiality agreements, shareholder arrangements and other commercial documents.
Taking advice at the beginning of a relationship is often significantly more cost-effective than resolving a dispute later.
Contact Penerley Solicitors to discuss how properly drafted contracts can protect your business.
