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.
Contracts and agreements
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.
- 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 is 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.
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.
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 has not 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:
- MOJ Mediation: * England and Wales; use the Ministry of Justice online directory
- Northern Ireland – use the Law Society of Northern Ireland website
- Scotland – use the Scottish Mediation Register
- International court of Arbitration
- For information about contract terms visit ‘Unfair terms explained for businesses: full guide’ on the GOV.UK website
- For information on where to find legal advice contact The Law Society
- For information on working with public sector bodies such as local authorities visit the Local Government Association (LGA) website, or the Crown Commercial Service (GOV.UK) website