Businesses are operating in increasingly challenging times and that means when you negotiate a business agreement you can't simply rely on a handshake. Understanding the implications of the commercial contracts you enter into across your business, and some basics of the law involved, will help you better protect your business and reduce the risk of costly disputes.
In this article we answer some of the questions we’re most frequently asked on commercial contracts, with a view to helping you build your business and simultaneously protect your interests.
For a contract to be the foundation of a fruitful business relationship it will need to be more than a basic template. This is where our team of expert commercial solicitors can help with negotiating, drafting, or reviewing any business contract. We consider the industry or sector you operate in coupled with your specific requirements now and in the future to ensure any agreement is fit for purpose.
Jump to individual FAQs:
- What is a commercial contract?
- Does a commercial contract have to be in writing?
- What clauses go into a commercial contract?
- What law and principles govern commercial contracts?
- What’s the process of putting a commercial contract in place?
- Should payment terms be set out in a contract?
- What does ‘good faith’ mean?
- Can you cancel a contract?
- Can contracts be changed or updated?
- How long does a commercial contract last for?
- What termination period should go into a contract?
- What happens if there is a dispute?
What is a commercial contract?
It’s the document that sets out the detail of an agreement between two or more parties on a commercial issue.
The term ‘commercial contract’ can cover any number of agreements, including
- An agreement to purchase a business
- An agreement to supply goods or services
- A sale and distribution agreement
- A joint venture agreement
- An agency agreement
- A specialist information technology agreement such as a software licence agreement, clouds services contract, master software and services agreement (MSSA), Software as a Service (SaaS) agreement or Infrastructure as a service (IaaS) contract
- A franchise agreement to operate a business under the franchise model
- A master service agreement
- Trading terms and conditions
You’ll sometimes see them called ‘B2B’’ or ‘business-to-business’ contracts.
Does a commercial contract have to be in writing?
There is no legal requirement for a contract to be in writing - it can be verbal or implied as well as documented.
However, when details of the arrangement are not written down, if there is any misunderstanding or dispute you will have nothing to fall back on. Our commercial law solicitors strongly recommend that your contracts are in writing so you’re not left in a situation of ‘your word against theirs’.
What clauses go into a commercial contract?
Every contract will be slightly different to reflect the specifics of the arrangement between the two parties. However, some clauses are standard and cover matters such as:
- the parties’ details,
- the commencement date,
- what is and how it is to be provided/performed,
- how payment will be calculated and made,
- representation and warranties,
- events of default,
- limitations of liability,
- and governing law.
Some of these may appear as an appendix or schedule instead of the main body of the agreement (for example, the method of calculating payments).
Solicitors will often refer to these ‘standard’ clauses as boilerplate clauses. For further reading, this article provides the definitions for over 50 common boilerplate clauses for use in commercial contracts.
What law and principles govern commercial contracts?
Contract and commercial law is complex and its application to a commercial agreement depends very much on the individual circumstances. Commercial deals are subject to:
- The contractual terms, providing it is a binding commercial contract
- Common law unless it has been expressly excluded in the contract
- Legislation that is often specific to the nature of the commercial contract save for legislation that governs unfair terms in business to business contracts, The Unfair Contract Terms Act 1977 (UCTA).
What’s the process of putting a commercial contract in place?
There are a number of ways you can begin the process of putting a commercial contract in place.
- Do you have a contract to use? Get your solicitor to review and amend it to reflect this current deal.
- If you don’t have a contract and need to provide one? Ask your solicitor to send you a draft based on what you have agreed so far.
- If you have been sent one to sign? Read it yourself to see if it reflects what you think you have agreed. Then send to your solicitor for review and negotiating advice.
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Should payment terms be set out in a contract?
The payment for goods and services provided are the key consideration in any contract. It is far better if they are agreed and clearly documented right from the start.
This level of detail needs to be included:
- Payment due date from delivery of invoice or the preferred billing method.
- Late payment penalties including the rate of interest and how it’s to be calculated.
- Arrears or advance clause detailing how far behind or ahead the payments are to be made for the goods or services.
- Payment method specifying to whom and where the payments should be made, and in what format (eg. bank transfer).
- Suspension rights so you can stop work or cease delivering goods or services without being in breach of your contractual obligations if the other party fails to pay on time.
- ‘Time of the essence’ wording - if the payment deadline is made a ‘condition’ of the contract, a failure to pay on time can result in your having the option to terminate the contract early (if you follow the correct procedure in the termination clauses).
Negotiating tip: the stronger the payment terms the more likely it is that your counterparty will want to negotiate strict and detailed terms for the delivery of goods or the provision of services.
What does ‘good faith’ mean?
‘Good faith’ is a concept rather than a defined term and is open to interpretation by the courts.
If the wording ‘good faith’ is included in your contract and there’s an argument over whether one party acted in ‘good faith’, a court would take into account the circumstances of the contract provided that the good faith wording in the contract isn’t too vague for the court to interpret its meaning.
If ‘good faith’ is to be included, both parties will need to agree on exactly what it is to mean and what actions/steps each party will take (or not take) to be deemed to be in ‘good faith’.
For more information read our article about the use of good faith clauses in business contracts.
Can you cancel a contract?
Unlike consumer law, there is no protection of a ‘cooling off’ period in B2B contracts. If you want to be able to cancel orders or return goods, then this should be clearly set out in the contract before signature.
Can contracts be changed or updated?
Contracts can be changed/updated provided that both parties agree. Solicitors tend to refer to this process as varying a contract.
If your counterparty doesn’t agree to change then consider how long the contract has to run and/or whether you can give notice to terminate. You could then re-negotiate a new deal and contract or go to an alternative supplier and negotiate better contractual terms.
NB Take advice before you try to vary a contract as if you don’t follow the correct process (this may be set out in the ‘Amendment’ or ‘Variation’ clause) or if you don’t have the grounds to terminate, you could suffer financial and legal penalties.
How long does a commercial contract last for?
A contract can last as long or as short a time as you both agree. It can be expressed to be:
- for a fixed term with automatic termination on the expiry of the fixed date. No notice will be required for the end of the term. You would be better to re-negotiate than allow it to run on.
- for an initial fixed term and the contract then requires notice of termination at some point after expiry of that term if the relationship is to continue.
- on a rolling subscription so the contract is for a fixed period which automatically renews for consecutive fixed periods unless terminated by notice.
- no specified term and the contract can be terminated by giving notice.
You need to be clear about the end date and the triggers for termination.
If the contract will continue unless notice is given, this should be kept under review so that it doesn’t run on or get renewed automatically against the interests of the business.
What termination period should go into a contract?
Termination is when a contract expires or is brought to an early end. It can be complicated and is frequently the subject of business disputes ending up in expensive court litigation.
The termination clause should be clear and set out any notice periods. These might be different depending on why you are giving notice (for example, termination for a serious breach of contract may be immediate, whereas termination without fault on the part of the other party may result in a lengthy contractual notice period).
You should check the whole contract to understand the correct procedure and requirements for successfully giving notice (and having the termination notice accepted by the other party).
Fail to follow the correct procedure could make your notice invalid. In turn, this may mean that you have ‘repudiated’ the contract and could be liable for any losses incurred by the other party.
If the contract doesn’t have a termination clause, it can be terminated by either party giving ‘reasonable notice’ but it can be difficult for both parties to agree on what is a ‘reasonable’ notice period.
For more information read our article on terminating commercial contracts.
What happens if there is a dispute?
The commercial lawyers at Harper James are not only experts at drafting and negotiating clear commercial contracts to avoid disputes arising in the first place, they also specialise in business dispute resolution if a conflict does arise. For more information, please don’t hesitate to contact the Commercial Team who would be delighted to help.