Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children "It doesn't get easier, it just changes", so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.
With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business's life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.
We've already discussed various topics, such as, set up, directors, funding, employment and shareholder-related matters, but now let's concentrate on Commercial Contracts.
Commercial Contracts: Key Features
The principal purpose of a commercial contract is to set out the terms which have been agreed between the parties. Some of the terms may vary depending on the legal framework of the contract (for example, whether it's a B2B (business-to-business) or B2C (business-to-consumer) contract), while others may depend on the type of contract in question (for example, whether it is a supply contract, a distribution agreement or some other type). Certain terms may be subject to negotiation between the parties, whereas some terms may be agreed extremely easily. What is important is that the parties completely understand exactly what they are agreeing and that the contract clearly sets out the terms agreed. This can reduce the risk of disagreement, and (potentially) costly litigation, at a later date.
In this article, we take a brief look at some of the key commercial terms. (Note that the legal requirements to create an enforceable contract are not discussed).
1. Consideration
This is the price payable for the goods or services. It can be calculated in a number of different ways, for example, a cost per item, payment per month, a percentage of turnover or by reference to other parameters.
If a price needs to be calculated, the calculation mechanism should be clearly expressed in a way that can be easily worked out. Including a worked example, which has been agreed between the parties, may be advisable where a particularly complex pricing mechanism applies. In such a situation, we strongly advise speaking to your legal advisors who will be able to assist you in the drafting of such provisions.
There may be different components which are either included or excluded from the price (for example, delivery costs, certain maintenance services, upgrades and so on) and it is important to ensure that the contract accurately reflects these. Separately, there is the issue of VAT; generally, if a contract is silent on VAT, a stated price is deemed to be inclusive of VAT.
The timing of any payment should also be considered and set out.
2. Services
The obligations of each of the parties to the contract and the services to be delivered will need to be agreed and included. These can be extremely detailed and lengthy and, in such a case, they may be included as a schedule to the contract.
The obligations on a party can vary by degree, from absolute obligations that must be carried out, through to a party agreeing to try to carry out certain obligations by agreeing to use "reasonable endeavours" to do so. In some cases, a party may have a discretion as to how and when it must meet an obligation.
The parties should think about the level of obligation agreed and the consequences of any breach. For example, where the breach is particularly serious or the obligation is so important that a breach would render the contract pointless, the non-defaulting party may want the ability to be able to terminate the contract immediately. In other cases, a refund of part of the fee, the provision of an alternative option or the remedying of the breach at no cost to the non-defaulting party may be sufficient.
3. Term
The term is the time period for which the contract applies. Contracts can be for a fixed term (for example, 12 months following which the contract will automatically terminate) or a rolling term (for example, an initial 12-month term which automatically renews for successive 12-month terms until one of the parties actually terminates the contract) or both(!) depending on the nature of the contract.
Where parties are entering into a new contractual relationship, for example, a new supply contract, it may be advisable to initially agree a short fixed term, thereby limiting the risks inherent in a new relationship. Conversely, there may be certain contracts that require consistency and continuity and so a longer term may be preferable.
4. Termination
Contracts can provide expressly for circumstances in which the parties can terminate a contract. These may apply in addition to, or to the exclusion of, any other rights of termination that arise in law.
The parties should carefully consider and agree the circumstances in which a party can terminate the agreement. Common provisions include termination for breach, if a party suffers insolvency or where there is no cause but reasonable notice is given (the length of the notice period is often set out in the contract).
There may be circumstances in which certain actions are needed to be carried out on termination of the contract or shortly thereafter. These could include, for example, having to provide final accounts, a handover process, being obliged to return certain information, etc., and any such requirements should be clearly set out in the contract.
Termination of a contract may not necessarily terminate every provision in the agreement; there may be certain clauses that the parties intend to continue even though the contract has otherwise terminated (for example, limitation of liability clauses, confidentiality provisions and restrictive covenants).
5. Indemnities
This is an agreement by one party to "make whole" another party in respect of any loss that other party suffers, either in specific circumstances under the contract or generally.
A party should consider carefully whether it wishes to give an indemnity and the consequences of the same. If an indemnity is to be included, the parties need to ensure that the wording accurately reflects what is agreed between them and the party providing the indemnity may want to include certain safeguards, such as financial caps, and ensure that the provision is tightly drafted.
6. Limitations on liability
Most contracts will contain provisions that seek to exclude or limit a party's liability under the agreement, such as stating that a party's liability shall not exceed a total sum of £x, specifying the type of claims a party can (and cannot) make, setting time limits within which claims can be made and so on.
These clauses are often heavily negotiated as the parties are on opposing sides of the discussion and the result will go to the level of financial protection that each party will have during the contract term.
Wider considerations are also likely to come into play as such provisions are often subject to other legal controls. For example, the exclusion of liability for certain losses may be prohibited by law or a limitation clause could be void if a court considers it to be unreasonable.
Ultimately, the terms of a contract will vary from contract to contract and the emphasis will be different depending on the substance of the commercial agreement. Taking legal advice when drafting such contracts or putting in place a template contract or set of terms and conditions is recommended and will ensure that the key terms are covered, are drafted clearly and correctly and that any "legal" issues are dealt with.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.