Samantha Sellars, Head of Business Law at Simpson Sissons & Brooke LLP, tells us what you need to consider when entering into a contract with another business.
In business you will enter into agreements with other businesses, although these agreements are not required to be in writing (with the exception of property matters) as a business owner it is prudent to ensure that such agreements are evidenced in writing ‘a Contract’. It is important that the content of the contract is clear where all parties’ rights and responsibilities are clearly defined in this commercial relationship with no ambiguity; ideally in plain English. You are entering in a contract with another party and therefore should understand what is required between you both. Certainty of the terms and conditions within a contract are in order to avoid a dispute or potential litigation, vague drafting of such terms may threaten successful enforcement of the contract.
A business contract must satisfy the basic requirements of contract law. There must be an agreement between the parties being an offer and acceptance and consideration in respect of the same being payment and or something of value being exchanged between the parties.
In addition to the express terms being those negotiated by both parties a contract can contain implied terms which are inferred into the contract to give if business efficacy. To ensure that parties clearly understand the terms of the contract rather than rely on implied terms it is safest to include them as express terms. Furthermore some business contracts include implied statutory terms such as the Sale of Goods Act 1979 and unless these are expressly excluded these will form part of the contract.
As stated a contract does not have to be in writing, you may enter into an oral agreement with a party which is recognised as a valid contract and legally enforceable however the lack of tangible evidence to support the agreed terms and conditions of your agreement can create problems should a dispute arise making it very difficult for a third party to adjudicate who said what.
Consideration of a Business Contract
When entering into a contract with a party you should consider the commercial implications of doing so. As a business owner you need to be conscious of your ability to meet the contractual terms of the contract and consider any risks that may be involved. In consideration of which you should consider the following:
- Contracting parties
You should understand with whom you are entering this contract are they individuals or a company and do they have the capacity and authority to do so. It is advised that you conduct a due diligence exercise which may include credit checks and trade references.
- Your Ability to Perform the Contract
In consideration of the contract can you meet the terms of the contract be it supplying a number of widgets in a prescribed time or completing a task? This is of paramount importance whereby you need to consider not only your ability to perform the contract, the costs of doing so and also any external factors which may have an adverse effect on your ability to perform and the risks and liabilities should you fail.
It may be necessary in order to fulfil the contract that a party may need to subcontract work to third parties it is advisable that provisions are included to permit this which would deal with any risks and indemnities.
Remember that you are usually in in business to make a profit therefore you must consider the price and cost. You may make a commercial decision to enter into a contract at a price where in the first instance you just break even in order to establish a relationship with a party with a view to future profitability. In consideration of which ensure that the other party is aware of the reason for these favourable terms and that future contracts reflect any amended price.
Depending of the nature of your business you may be able to offer or are offered more favourable terms on price, for example for larger orders which can be included in your contract however you must ensure that this is costed correctly and monitored throughout the contractual term.
- Payment Terms
You must ensure that the payment terms are suitable for your business as the period between an invoice date and actual payment or receipt of funds may have a detrimental effect on your cash flow.
- Term of the Contract
The length of the contract may be determined by the completion of a specific matter or it may be a run continuously however there should be specific provisions regarding the duration as to when and how parties may terminate the contract.
- Trade Regulations
You should be aware of any trade regulations which may affect how you trade in consideration of which you may need to ensure that any appropriate Trade Regulations and legal provisions are included within the contract.
- Liability and Risk
You should consider including what might happen if something goes wrong. Where will liability lie and what if any are the limits on liability? The inclusions of such provisions will seek to protect parties should an event occur.
Such limitation can be indicated in what is and is not included in the service or product you provide. Some parties will have an unreal expectation of what they think they should receive exceeding the commercial reality and intention of the contract therefore this seeks to curtail those expectations.
It is important to note that should something go wrong and you end up in court you should not assume that a judge will seek to fill in the gaps in your contract. You may feel that by leaving an element of flexibility with the contract meets your commercial needs however you may also be exposing your business to risk and also that the contract is unenforceable.
As a prudent business owner would insure that their contract are in writing it would be advised that a prudent business owner would also take legal advice on the same.