Legal Issues and the Small Business Part III
This article concludes the series of Legal Issues and the Small Business and we deal with the especially important issue of making sure that your contracts are in place and that you understand them. We published the blog headed ‘Why use a Contract’ (back in February) this year, but let's remind ourselves why they are so important to a small business.
Check you have written contracts for all your supplier arrangements.
A contract is a legally binding agreement between two or more persons or entities. Business contracts can be simple or complex, and it is absolutely vital for you to fully understand the terms of a contract before you sign anything.
The following information provides guidance to help you along the way.
Understanding business contracts
Dealing with contracts is part and parcel of running any business, regardless of its size. You are bound to have a number of business relationships involving some type of contractual commitment, so managing your contracts and business relationships is crucial.
Verbal and written contracts
Contracts can be verbal, written or a combination of both.
- Written contracts may consist of a purpose written agreement, standard form agreement, or a letter or document confirming the arrangement.
- Verbal agreements have to rely on the good faith of all parties and can be difficult to prove or ascertain every single term or detail.
- It is clearly preferable to have all your business arrangements in writing, to avoid problems when trying to prove either that a contract existed, or a detail of it.
The usual terms and structure of an agreement
Contracts can be standard in structure but there is no specific format that a contract must follow. Generally, it will include some terms that will form and reflect the basis of the agreement. These terms may also describe conditions or obligations.
Contract conditions are the backbone of any agreement. If the contract conditions are broken by a party, it may well be possible to terminate the contract and seek damages.
It is vital to ensure that clarity exists in any trading relationship so, when negotiating the contract terms, make sure the conditions of the contract are clearly defined and agreed to by all parties.
Contracts tend to include the following:
- Full names and other details of the parties to the contract, including any sub-contracting arrangements
- The length of the contract
- A description of the goods and/or services that your business will receive or provide
- Payment details and dates, including any interest to be added to late payments
- Whether insurance is required and/or whether either party seeks indemnity provisions
- Whether any guarantees are required - including director’s guarantees
- What happens if there is a breach
- Complaints and dispute resolution process
- Termination and breach of contract process and conditions
- Other specific conditions relevant to your relationship (e.g. IP and brand protection)
Beware of Standard Form contracts and unfair terms
A ‘standard form’ contract is a pre-prepared contract where the huge majority of the terms are written in advance with little or no room for negotiation between the parties. These contracts are usually printed with only a few blank spaces for adding names, signatures, dates, etc. Examples can include:
- employment contracts
- lease agreements
- insurance agreements
- financial agreements
Standard form contracts are generally written to benefit the interests of the party who wants the other party to sign it! Sometimes this will be offered on a take it or leave it basis. Obviously, such standard contracts must be fully understood, and they may contain onerous conditions.
Rules exist which provide that these terms should not be considered unfair in that rights are only granted to one party which majorly disadvantages the other. Terms to be careful of include those such as allowing one party only to:
- to terminate the contract
- penalise for breaching or terminating the contract
- avoid or limit their obligations
- vary the terms of the contract.
Before signing a contract
- Read and understand each and every word, especially the small print
- Make sure that it really does reflect the terms and conditions that were negotiated
- Give yourself sufficient time to be comfortable with it
- Never sign anything under pressure or threats
- Never leave blank spaces on a signed contract – put a line through them so no one can write in words afterwards
- Check for alterations made by hand and initial those if agreed
- Obtain a copy of the signed contract for your records.
- Ensure that only authorised staff sign the contract.
Following signature, you are legally committed and bound by it. If a party breaches it, the other party may be able to claim damages for loss caused by the breach.
Ending a contract
Most contracts end once the work is complete and payment has been made.
Some contracts may allow early termination but there is no guarantee of this.
Contracts can also end:
- by agreement – both parties agree to end the contract before the work is completed.
- for convenience – where the contract allows a party to terminate at any time by providing agreed notice to the other party.
- due to a breach – where one party has not complied with an essential obligation under the contract, the other party may decide to terminate the contract and seek damages. Should this occur, you may wish to seek legal or professional advice.
If a minor term has been breached it is unlikely that it can be terminated, though the other party may seek damages.
Some contracts may specify what will be payable if there is a breach. This is often called liquidated damages, where damages can be easily pre-assessed.
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:
If you do not have a written contract please make sure that you have other documentation such as emails, quotes, or notes about your discussions, by way of evidence to help you identify what was agreed.
3rd August 2020
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