A contract is a legally binding agreement between two or more persons or entities. Business contracts can be complex, so it's important you fully understand the terms of a contract before you sign anything and seek legal and professional advice first.
The following information provides advice and tips to help
you manage a key aspect of being in business.
Dealing with contracts is part of running a small business. You will have a number of business relationships involving some type of contractual commitment or obligation, so managing your contracts and business relationships is very important.
The majority of contracts entered
into will have VAT implications for supply and purchase of good and services.
Contracts can be verbal (spoken), written or a combination of both. Some types of contract such as those for buying or selling real estate or finance agreements must be in writing.
It is advisable (where possible) to make sure your business
arrangements are in writing, to avoid problems when trying to prove a contract
Regardless of whether the contract is verbal or written, it must contain four essential elements to be legally binding. These are:
But, it may still be considered invalid if it:
There is no specific format that a contract must follow. Generally, it will include some terms, either expressed or implied, that will form the basis of the agreement. These terms may outline contract conditions or contract warranties.
Contract conditions are fundamental to the agreement. If the contract conditions are not met it may be possible to terminate the contract and seek compensation or damages.
When negotiating the contract terms make sure the conditions of the contract are clearly defined and agreed to by all parties.
Contracts may follow a structure that can include, but are not limited to, the following items:
In almost all cases of creative
work (such as a logo you pay to have designed) copyright will remain with the
creator, regardless of whether they created it on your behalf. If you engage a
contractor to produce material that attracts copyright protection make sure the
contract includes detail of the licence that you have to use the material, so
that both parties are very clear about what the material can be used for.
A ‘standard form’ contract is a pre-prepared contract where most of the terms are set in advance with little or no negotiation between the parties. These contracts are usually printed with only a few blank spaces for adding names, signatures, dates, etc. Examples can include:
Standard form contracts are generally written to benefit the interests of the person offering the contract. It is possible to negotiate the terms of a standard form contract however, in some cases your only option may be to ‘take it or leave it’.
TIP: Make sure you read the entire contract, including the fine print, before signing. It's easy to miss something important that can catch you out later on. Take your time and read.
If you intend to offer standard form contracts you must not include terms that are considered unfair. This could include terms that:
Before you sign a contract:
Once you’ve signed a contract you may not be able to get out of it without compensating the other party for their genuine loss and expenses. Compensation to the other party could include additional court costs if the other party takes their claim against you to court.
Some contracts may allow you to terminate early, with or without having to pay compensation to the other party. You should seek legal advice if you want to include an opting-out clause.
If it’s not possible to have a
written contract make sure you have other documentation such as emails, quotes,
or notes about your discussions, by way of evidence to help you identify what
Most contracts end once the work is complete and payment has been made.
Contracts can also end:
If a contract warranty or minor term has been breached it is unlikely that it can be terminated, though the other party may seek compensation or damages.
Some contracts may specify what will be payable if there is a breach. This is often called liquidated damages.
If there is a dispute regarding the contract it is important both parties communicate clearly to attempt to resolve the matter. You may consider using a mediation or arbitration service:
12th January 2021
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