By Tilly Clarke, Associate at law firm Cripps
In the enthusiasm of entering a new business deal, it is easy to concentrate on the big issues: price, product, service. Certainly these issues need to be properly set out in your contract, but other contract terms and considerations are equally important, but often overlooked.
Signed, Sealed, Delivered….forming a binding contract
Make sure you are committed to the contracts you want to be committed to, and only those contracts. This means firstly taking care not to inadvertently enter into a binding contract, and secondly making sure a contract is properly binding when you want it to be.
Most contracts can be made without the need for a written agreement. A legally binding commitment to buy or sell goods or provide services for example in most cases can be formed by a conversation, email exchange, or simply by getting your relationship underway. Using words like “subject to contract” may help you avoid contractual commitment before you are ready.
However, some types of contracts – the most notable being for the sale of your house or lease of your business premises – need to be in writing and some – deeds for example – require a specific form of words. If rules aren’t followed, the contract won’t be binding.
Say what you mean…the terms of the contract
The only way you can be sure of the terms of your contract is to put it all down in writing and make sure you sign it. All the terms written in your contract matter which means that you need to make sure that what you put in properly reflects your deal.
Don’t leave things out. There is a common misapprehension that the courts will imply things, including “reasonableness”, into contracts, with the result that people don’t get down to specifics. However, there is no general duty of good faith and the courts are reluctant to imply anything except where it is absolutely necessary.
Make sure what is written down is what you want for your deal. Terms which often get overlooked include termination rights, dealing with disputes, and ‘boiler-plate clauses’ (the “legal bits at the end”) however all of these are important and some can end up being critical to your relationship. For example, if you agree to a five year deal with no right to terminate, then you won’t be able to get out of the contract without putting yourself in breach even if it becomes commercially unworkable (for example because of a major increase in the cost of raw materials) and if you don’t have a clause preventing sub-contracting, you might find your carefully chosen supplier has got someone else in to do all the work on your project. A key customer contract which includes a “change of control” clause, so that if you sell your business the contract automatically terminates, could materially impact the price you could get for your business if you want to sell.
It is also tempting to skim over the definitions in a contract. While these should appear self-evident, the definition of the price or the services to be provided, for example, are key to the contract and need to be checked thoroughly. Even simple mistakes can have serious consequences.
Liability also needs careful consideration. Take some time to think about what might happen if one of you can’t do what you’ve agreed, or does something wrong – who should take responsibility for what? Are there any limits to that? Who has insurance? A good contract should fairly allocate risk and provide reasonable protection to you if things go wrong.
Don’t let your contract gather dust…
Once signed, the contract should not be destined for the filing cabinet never to be looked at again. Businesses often spend much time negotiating contracts but then forget to renew or update them when there are changes to the commercial and practical arrangements. For example, if you agree to change the product specifications, add more services or increase prices, you will need check and amend your contract to reflect these changes if necessary. If you move premises or have a change in personnel, check to see if the notices clause needs updating.
Your contract should be a living document, as individual as your business relationship. Don’t overlook the basics.