John says...
(John Davies - Founder and Legal Expert)
“The UK is a Great innovative and entrepreneurial nation. Starting your own business is something I've written about before and we continually see and hear from start-ups bringing their ideas and energy to the UK economy.
I know that in those formative years, entrepreneurs need digitally savvy, speedy and cost effective legal support to help achieve their ambitions. A need we hope Everyday Legal helps fulfill in the UK."
Understanding Your Contracts
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.
Understanding Business Contracts
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.
You may:
-
be a
supplier
of goods and services – retailer, wholesaler, independent
contractor;
-
have
a partnering agreement with other businesses – partnerships, joint
ventures, consortium; or,
-
be a
purchaser of goods and services – as a borrower of money, in rental
agreements and franchise agreements.
TIP:
The majority of contracts entered
into will have VAT implications for supply and purchase of good and services.
Verbal and Written Contracts
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.
-
Written Contracts
may consist of a standard form agreement, or a letter
or document confirming the agreement.
-
Verbal
agreements
rely on the good faith of all parties and can be
difficult to prove.
It is advisable (where possible) to make sure your business
arrangements are in writing, to avoid problems when trying to prove a contract
existed.
Essential Elements of a Contract
Regardless of whether the contract is verbal or written, it
must contain
four
essential elements to be legally binding.
These are:
-
an
offer
-
an
acceptance
-
an
intention to create a legal relationship
-
a
consideration (usually monetary).
But, it may still be considered invalid if it:
-
entices
someone to commit a crime, or is illegal
-
is
entered into by someone that lacks capacity, such as a minor or bankrupt
-
was
agreed through misleading or deceptive conduct, duress, unconscionable
conduct or undue influence.
General Terms and Structure of an Agreement
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:
-
details
of the parties to the contract, including any sub-contracting arrangements
-
duration
or period of the contract
-
definitions
of key terms used within the contract
-
a
description of the goods and/or services that your business will receive
or provide, including key deliverables
-
payment
details and dates, including whether interest will be applied to late
payments
-
key
dates and milestones
-
required
insurance and indemnity provisions
-
guarantee
provisions, including director’s guarantees
-
damages
or penalty provisions
-
renegotiation
or renewal options
-
complaints
and dispute resolution process
-
termination
conditions
-
special
conditions
TIP:
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.
Standard Form Contracts and Unfair Terms
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:
-
employment
contracts
-
lease
agreements
-
insurance
agreements
-
financial
agreements
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:
-
allow
one party (but not another) to avoid or limit their obligations
-
allow
one party (but not the other) to terminate the contract
-
penalise
one party (but not another) for breaching or terminating the contract
-
allow
one party (but not another) to vary the terms of the contract.
Before Signing a Contract
Before you sign a contract:
-
read
every
word,
including the fine print
-
ensure
that it reflects the terms and conditions that were negotiated
-
seek
legal advice
-
allow
plenty of time to consider and understand the contract
-
don’t
be pressured
into signing anything if you are unsure
-
never
leave
blank spaces on a signed contract – cross them out if you have nothing to
add so they cannot be altered later
-
make
sure that you and the other party initial any changes to the contract
-
obtain
a copy of the signed contract for your records.
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.
TIP:
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
was agreed.
Perhaps we can help?
We have reviewed 1000's of contracts for businesses and individuals across many areas. If you are concerned about a contract and want an expert review, check out our contract review service or contact us here!
Ending a Contract
Most contracts end once the work is complete and payment has
been made.
Contracts can also end:
-
by
agreement – both parties agree to end the contract before the work is
completed.
-
by
frustration – where the contract cannot continue due to some unforeseen
circumstances outside the parties’ control.
-
for
convenience – where the contract allows a party to terminate at any time
by providing notice to the other party.
-
due
to a breach – where one party may not have complied with an essential contract
condition, the other party may decide to terminate the contract and seek
compensation or damages. Should this occur, you may wish to seek legal or
professional advice.
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:
John Davies
12th January 2021
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