Contracts for Your Business

A straightforward guide to contracts and legal agreements

Charles Boundy

• Publisher: Harriman House
• Year: 2012
• ISBN:
  9781908003164
• Edition: 1
• Topic: Jura
• Subtopic: Vertragsrecht

When running your own business, it can be easy to believe that contracts can wait. But getting the best (or avoiding the worst) from contracts is often a major factor in how well and how quickly a business succeeds.This book, from legal expert and entrepreneur Charles Boundy, provides business owners and managers with everything they need to stay on top of contracts and avoid getting bogged down in legalese.The book gives an easy-to-follow overview of:- how to make or avoid making a contract- what to include and what to look for in contracts- how to have a contract achieve what you want at the price you have agreed- how to identify and manage major contract risks- how to approach the negotiation of key issues- how to draft and manage a contract to best effect- what to do (and not do) if things go wrong.A focused guide for the time-pressed, this is an indispensable tool for all businesses. Read it and stay successfully on top of the many contractual issues that businesses face every week.

Chapter 1. Basics Contract

1.1 What is a contract?

In practical terms, a contract is a legally binding agreement.

This requires:

• actual agreement on all the essential terms of the deal;
• sufficient clarity and certainty as to those terms;
• an agreed price or other exchange value (called ‘consideration’);
• the intention to have a legal commitment.

For the sake of simplicity it is generally assumed that there are only two parties to the transactions referred to in this book. The same principles nevertheless broadly apply to multi-party contracts.

1.2 What about the need for agreement?

Reaching agreement – Agreement is arrived at by one party making an offer to do something for the other on stated terms and the other accepting that offer. If the first offer is refused, that may be the end of the matter. If a counter-offer is made, such as a different price or other terms, that counter-offer cancels the original offer and creates a revised offer on the suggested new terms. That process can continue until the terms match.

• Stan Smith offers to sell Jenny Jones a computer system for her new business. He quotes a price, a delivery date and a fee for installation, commissioning and training.
• Jenny Jones thanks Smith for his offer, but says that whilst she would like to deal with him, she can get a better deal. That could be the end of the story.
• However, Jones goes on to say that she would buy from Smith if he reduced his price by 10% and included the additional costs within it. That is a counter-offer, open for Smith to accept or not. Note that if Smith refuses, Jones cannot go back to his original offer (unless Smith agrees), as this was cancelled by her counter offer.
• Smith might back away, but if he agrees Jones’s proposal, that can create a contract. If, however, he throws in the extras and proposes a 5% discount rather than the 10% Jones requested, that is a further counter-offer, open for Jones to accept or refuse in turn.
• Unless and until Smith and Jones reach agreement, meaning that offer and acceptance match one another on all the essentials, there will be no contract.

What are the essential terms that have to be agreed? – These are the terms that give sufficient certainty to the contract, such as:

• what goods or services are to be supplied;
• by whom and to whom;
• what quantity or quality standards apply;
• what price (or exchange value) is to be paid or provided, and
• when and how this is to happen.

1.3 Clarity and certainty – what happens if everything is not clear?

The effect of lack of certainty – Let’s take an agreement to buy goods; as a minimum a contract will need to specify the products, quantity and price. The delivery date may also be time-critical, but if the other terms are clear and certain, lack of an agreed date may not prevent a contract arising. In these cases the buyer is advised to specify the urgency and stipulate a date.

Implied terms – the principle

If a key term is missing from a contract, the law will generally not imply what that term should be. If the basics are not agreed, there is probably no contract.

Exceptions to the principle – Here are four main exceptions:

• terms implied by legislation – legislation (e.g. the Sale of Goods Act) may imply some terms, such as that the goods are in satisfactory condition and fit for purpose (#4.2);
• business efficacy – where all the main terms are agreed and there is clear intent to have a binding agreement, the courts may imply a term where it is necessary to make the agreement work commercially;
• previous dealings between the same parties – where a ‘course of dealings’ on previously agreed terms is established between the parties (#4.3); and
• terms implied by ‘custom and practice’ – a fall-back, but not to be relied on; each person’s understanding of normal trade usage can differ, so if it’s important to you it’s best to set out clearly what is expected.

It’s best to have all the important terms sorted out and agreed at the outset. If some terms are implied, they may turn out not to be the terms you thought; they could be much worse!

1.4 I understand price but what is ‘consideration’?

The need for value – Unless the agreement is in writing and signed as a deed (#1.7), there must always be value passing both ways in order to create a contract. This value element is what lawyers call consideration. So if Smith offers products to Jones, Jones must agree to pay for them in some valuable way in order for the commitment to be binding on Smith.

Price – Payment in money always satisfies the legal requirement for value. Payment may also be by exchange of goods or services which themselves have a value. Payment may even be nominal; provided there is some value. What is paid between businesses does not have to be fair value, as courts have no wish to get tied up in disputes over what is fair value in commercial trading. With sales to consumers (#4.2), however, the position is different and lack of overall fairness by the supplier may be heavily penalised.

1.5 Legal commitment

The final key contract ingredient is that both parties intend to make a legal commitment.

Commitment – This is present in most business deals at the point when the parties have agreed all the essentials. It is like a legal handshake, the point when the deal is struck, also distinguishing the business deal from the friendly offer to help out. This commitment is the glue that confirms and holds the contract together.

Gentlemen’s agreements – Not all business discussions are intended to lead to contracts. Conversations may be held and understandings reached which are no more than statements of hope or possible intention, never intended to be binding legal commitments. For a contract there has to be a genuine intention to be legally bound by both parties. Don’t assume the other party is committed. If you’re not sure, it’s worth asking direct. If they’re not committed, it is better to know, and if they are, they should not be offended by the inquiry. Likewise, if you don’t want to be legally bound, make this explicit, especially before any work starts.

‘To be agreed’ / Agreements to agree – It is always tempting to leave a tricky issue until later, but leaving something ‘to be agreed’ or ‘tba’ is a red flag. There may be a settled intention to make a legal commitment, but unless the structure of the relationship is sufficiently spelled out, there may still be no contract. If the point is not agreed, it may be precisely because it’s tricky, meaning greater risk of dispute about it later.

Don’t leave things to be agreed later; you may find you haven’t agreed the terms you thought or that you don’t have a contract at all. If work has to start but it’s really not practicable to agree all the detail up front, specify the essentials in an interim contract and set out what has still to be agreed plus how and by when it’s to be agreed. This will give a court something to work with if there is a later dispute.

1.6 When do I need to have a written contract?

The advantage of written contracts – If all contract essentials are present, a legally binding agreement can arise without writing. But if there is a later dispute, memories tend to differ as to what was agreed, requiring events to be reconstructed (including phone calls, meetings and emails) to work out what might have been agreed and when. If the dispute goes to court, the judge will have to listen to witnesses and sift through all the documents to work out whether there is a contract and, if so, what its terms are, which can be a painful, expensive and uncertain process. Having the terms set out on paper and signed by both parties helps reduce the risk of that pain. Indeed, it’s worth getting into the habit of putting things on paper (or email) from the start. If the other party is reluctant to do this you might reasonably wonder about their level of commitment.

For most practical business purposes email suffices as writing and em...