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Business Contracts - An Overview
As this is my last edition as editor of the Commercial Brief I thought it would be appropriate to become slightly philosophical on a legal subject that is very close to my heart—commercial contracts. I have, over the years, seen and indeed drafted, very many of them. Some of them have been very good, some (not mine of course) truly awful.
Businesses enter into contracts every day—phoning and placing an order for some stationery for example. At the other extreme an arrangement between multiple parties to co-operate in the development of new technology and share the benefits would also be contractual. The first doesn’t really need a written document, the second most certainly does.
Legally, most contracts do not need to be in writing. All that is required is identification of the subject matter, the parties and the price, and “an intention to create legal relations”. That latter element is particularly relevant in unwritten contracts where disputes generally centre on whether there is a contract at all, before moving to what are its terms.
Whether the contract is written or not, some terms might be missing or incapable of being ascertained. In those circumstances the Court will sometimes assist by finding “implied terms”. For example that the goods should be delivered, and the price paid within a reasonable time, or if things go wrong, that the contract can be terminated on reasonable notice. It is just as likely to decide that, as so many crucial terms are absent, the parties did not intend to create legal relations so there is no contract. The rules on implied terms are strict and the Court will not rewrite a contract to change its apparent meaning.
On the face of it commercial contracts are intended, principally, to create legal rights, enforceable by one party against the other. In most cases however, that is not their primary purpose and many commercial contracts have other drivers:
- To demonstrate to third parties (particularly HMRC) what the transaction is.
- To limit the parties’ liabilities to one another in case things go wrong.
- To demonstrate compliance with the law—perhaps GDPR.
- To set out the procedures for the parties to follow.
- To remind the parties what they have agreed.
Of course, a good contract, once signed, can be put away in a drawer and need never be consulted again—until something goes wrong or the time has come to terminate it.
A bad (badly drafted) contract is likely to cause problems:
- If it lacks clarity the parties may have different expectations—a recipe for dispute.
- If there is a dispute, lawyers will have to spend expensive time advising on alternative possible meanings and will be unable to give definitive advice.
- As the outcome of litigation is uncertain, it is more likely to happen, as a negotiated settlement is less likely.
Even if perfectly clear, a contract can still be “bad” if the draftsperson has not dealt properly with the law:
- Inclusion of provisions which, under the law, are void—excessive restrictive covenants for example.
- Provisions intended to demonstrate regulatory compliance which do not.
- Limitation of liability clauses which do not achieve their intent.
Then there is “tone”. In contracting, as in life generally, there are “horses for courses.” Contracts can be collaborative or confrontational, long form or short, formal or informal.
Starting with a collaborative form of contract, trying to balance the rights and responsibilities of the parties, will generally reduce negotiating time and cost. It can also set the tone for the relationship.
Where the contractual relationship is complex, particularly in regulated environments, a longer form, formal contract will often be appropriate.
Short form contracts are always less protective of the parties. They should balance length/complexity against risk and instruct their lawyers accordingly. Lawyers tend to favour longer and more complex contracts because they are very risk averse.
Businesses engaging lawyers to prepare or negotiate commercial contracts should not leave it to the lawyers. The lawyers should be told what “tone” is required.
Business clients should read the draft contract and make sure that:
- It is clear and comprehensible and even a judge would understand the underlying relationship.
- The lawyers have explained the legal bits.
- It does what is required.
It may be helpful to ask someone who doesn’t understand the transaction to read it and tell you what they think it means.
I hope I have demonstrated that there are many elements of successful contracting (as well as the underlying deal) and that commercial contracts should not be viewed as just a formality to be entered into once the business people have done the deal. In my view, of those elements, one stands out as by far and away the most important and that is clarity. With clarity, disputes are far less likely and, if they occur, less expensive to resolve. Generally speaking a dispute is the worst thing that can happen to a contract and should be the one thing that the lawyers are working to forestall.
This article was originally written by Geoffrey Sturgess, who has now retired from Warner Goodman LLP. To discuss your business contracts with Brian Bannister or a member of the Company Commercial team call 023 8071 7717 or email firstname.lastname@example.org.
This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice. All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.