Commercial contracts: What to look out for
Why do I need a commercial contract?
Contracts are vital to business, and necessary from all levels from the conceptual ideas to the end product or service and everything between.
Contract law is increasingly regulated by statute and European law. The average business is now left with is a myriad of confusing and contradictory rules determining how and to what extent contracts should be enforceable. Here are a few pointers to help you understand some of the key aspects of commercial contracts.
What is a contract?
There are some concepts which are central to all types of contract without which a contract cannot exist. In legal terms these are offer, acceptance and consideration, as described below:
- Subject to various exceptions, as a rule of thumb, contracts can be verbal as well as written. While it is highly advisable to set out the contract in writing, a verbal contract is equally binding and equally enforceable. The main problem with verbal contracts is proving what the terms are from an evidential point of view.
- The offer made by either party needs to be clear and contain sufficient terms that, on acceptance, enable the courts to identify the intention of the contract. The absence of key terms (such as price) can be fatal to a contract.
- Acceptance must be definite. In the absence of an agreement including all key terms, there is no binding contract.
- Rejection of some terms is likely to be regarded as a counter-offer and therefore not a binding contract.
- If the contract is only partially performed it is difficult for a court to establish what the terms of the contract were.
- When businesses rely on standard terms and conditions, offers are made on the standard terms of one party and accepted on the standard terms of the other.
What is ‘Consideration’?
Consideration is something of value passing both ways between the parties and is essential for the contract to be binding on the parties. The courts will not assess the adequacy of the consideration as this is a commercial decision of the parties involved, and there is no requirement for the value of the consideration passing each way to be equal but there must be consideration for a contact to be enforceable (unless it is made in a deed).
When is a contract not enforceable?
Aside from lacking the key elements above, special circumstances such as fraud, illegal contracts and contracts obtained by means of duress or if one of the parties does not have capacity – because of their age or health – will render contracts void and unenforceable.
Contracts can be affected by mistake and misrepresentation in that if a party enters into a contract under the influence of a mistake of fact or law or due to a misrepresentation, the contract may be subsequently rescinded (annulled) even if the contract would otherwise be enforceable.
How can I change the terms of my contract?
Contracts are an agreement. They can be altered, renewed or replaced at any time by a new agreement between the same parties. In some circumstances, the law implies changes based on uncontested conduct of the parties over a period of time.
There are various ways in which terms can be incorporated into contracts however it is not possible to incorporate additional terms after the offer has been accepted without the agreement of the other party. A common mistake is where companies include printed terms and conditions on their invoices.
What is a Consumer Contract?
The traditional English approach to contracts has been severely curtailed in the area of consumer contracts due to the influence of the European Union. Commencing with the Consumer Credit Act 1974 with the addition of the Unfair Terms in Consumer Contracts Regulations 1999, the position in respect of consumer contracts is almost the opposite to commercial contracts. Courts are taking an increasingly consumer biased approach and will interfere in almost any contract which has resulted in unfair liability on the consumer. Key areas to watch out for include:
- If you are offering any products on credit, it is essential that all consumer credit laws are complied with. These can be very complex and you should take specialist advice on this area of law.
- The regime under the Unfair Terms in Consumer Contract Regulations 1999 is weighted heavily in favour of the consumer. There are detailed guidelines as to what is and is not an unfair term and any unfair terms are deemed void. Special care should be taken when contracts are made on your standard terms of business to ensure that you do not fall foul of these regulations.
- The ‘cooling off period’ is a concept with which English businesses have to become increasingly familiar. Consumer Credit agreements and agreements affected by the Distance Selling Regulations carry prescribed cooling off periods in most circumstances. This allows the consumer to cancel the contract without incurring any liability for a statutory period – usually 7 days after it is signed.
- Jurisdiction. Although a jurisdiction clause is advisable in a commercial contract, it is unlikely that this will help you in a consumer contract. The primary jurisdictional rule is that if you are suing a consumer, you bring the claim to them in the country of their residence. This can be altered by express agreement however in practice such an agreement is unlikely.
Do I need to be careful about any specific areas of commercial contracts?
There are specific types of contract which can present specific difficulties and complexities. Areas which have specific regulation include contracts of employment consumer credit act contracts, e-commerce contracts commercial agency contracts and contracts relating to interests in land.
Do I need to review my contracts?
There is no doubt that businesses have to deal with contracts. It is also necessary for businesses to try, as far as possible, to trade on their own terms and conditions which understand. Businesses should not assume that their standard terms and conditions will be appropriate for all contracts for the indefinite future. They should be reviewed and updated at regular intervals, particularly when new consumer legislation comes into force.
If notice of a dispute comes your way, you should seek specific legal advice prior to taking any steps. Beginning to construct your own defence may well be counter productive.
What is the likely future for contract law?
The Government is proposing to redraft the statutes to consolidate UCTA and the Unfair Terms in Consumer Contract Regulations 1999. It is not possible for the application of the Regulations to be limited without European intervention as these are based on European Law. It is highly likely that the protection enjoyed by consumers will continue and the protection enjoyed by businesses will be extended at least in part to match.
How can Barcan+Kirby help me with my business contracts?
Our commercial solicitors take time to get to know you, and how your business operates. This gives us the opportunity to be able to advise you appropriately on the documentation you should have in place that governs how you do business and which afford you greater protection.
Businesses quite rightly do not wish to litigate on contract law, and the courts are reluctant to delve too deeply into the commercial affairs between businesses so it is vital that you get the right documents in place at the right time.