We are all settling into the New Year with businesses in Lancashire taking on a flurry of new work. We have seen that the Lancashire market is going strong with many new business opportunities arising. Our question is, have you thought about whether you need a contract to help harness the best from those opportunities?
You may think that lawyers are overly cautious (in fairness, we often are), but it really is necessary to have contracts in place. Why? In order to protect your business.
A contract is an enforceable agreement between two or more parties and, if well drafted, provides certainty and clarity as to the party’s intention. Therefore, allowing your business the protection it needs if a dispute were to arise.
While oral promises and even email exchanges can be binding, it is always advisable to prepare a written contract rather than relying on relationships or a gentleman’s agreement. If a contract is not written down, you could face the difficult task of proving: (1) that a legally binding contract existed between you and the other party and, (2) what exactly were the obligations and rights under the contract.
Key terms
Each contract will vary somewhat, but each contract whether it is a set of standard terms and conditions or bespoke, should include exactly what each party would like to happen as a result of the arrangement. At a minimum, it should set out the terms in three key areas: payment, contractual obligations and liability.
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Payment
One of the best ways to preserve the financial health of your business is to have clear payment terms within your contract.
Each contract should clearly set out the expectations on when a right to payment is triggered; whether that is upon completion of certain milestones, at the end of each month or otherwise. It is also important to consider what the procedure is for late payment and the calculation of interest. Equally, would late payment trigger a right to terminate the contract?
Providing for appropriate payment terms between the parties will assist with improving the cashflow in your business and help you to enforce your rights if payment is delayed or withheld.
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Contractual Obligations
A well-drafted contract should clearly set out what each party is obligated to do under the arrangement.
Generally, contractual obligations will come in the form of completion of certain tasks, avoidance of certain acts, supply/delivery of goods or services and payment terms. The subject matter of the contract will influence the specific obligations.
In each case, the contractual obligations will form a promise from each party. If either party were to fail to perform its obligations, it would be considered a breach of contract that could potentially lead to an award of damages. Knowing what you must do, what you can’t do, and what the other party must and must not do, avoids arguments and frustration from the outset.
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Liability
A liability clause is a crucial part of risk management in commercial transactions. Excluding or limiting the amount payable in respect certain risks or defaults helps to ensure the risk of a contract is appropriate for the reward you expect to receive from it. If a contract does not feature a suitable liability clause, there is no limit on the damages that a party can ask for. In effect it can be a blank cheque.
It is important to ensure that the liability clause is well drafted and enforceable. If a dispute was to arise, a Court has the ability to intervene and limit the extent to which a party can avoid liability. There are also certain statutory restrictions on what can be excluded that if incorporated into a contract, will not be held up in Court. It is counter intuitive, but you don’t want to have too low a limit on liability.
If you are looking at entering into any new contracts or arrangements with suppliers, customers or anyone else, our Commercial Team can take the pressure off by advising on, reviewing or drafting contracts to protect your business, based on your individual needs. For more information, please contact a member of our Commercial team.
