Your guide to commercial contracts
Every business relies on contracts, whether it’s a supplier agreement, a service agreement or terms and conditions. However, many business owners assume a signed document is all it takes to be legally binding.
Contract law has clear rules about what makes a contract enforceable. In this guide, our commercial lawyers explain some of the key aspects of commercial contracts and how understanding them can save your business time, money and disputes further down the line.
What is a commercial contract?
A commercial contract is a legally binding document that sets out the terms of a deal or relationship between two or more parties. A contract outlines each party’s risks, the consequences of a breach of that contract, and what happens if the professional relationship breaks down.
Do I need a commercial contract?
Businesses are not legally required to have a written commercial contract. However, contracts are vital to business and necessary at all levels, from the conceptual ideas to the end product or service and everything in between.
The value of a business contract becomes most evident when things go wrong; for example, one party fails to meet their obligations or performs them poorly. But a contract is also beneficial when selling a business, as it shows that the business has solid commercial relationships.
How a contract is formed
There are some concepts which are central to all types of contracts, without which a contract cannot exist. In legal terms, these are:
- Offer
- Acceptance
- Consideration
Subject to various exceptions, contracts can be verbal as well as written. While it is advisable to set out the contract in writing, a spoken contract is equally binding and enforceable. The main problem with verbal contracts is proving what the terms are from an evidential point of view.
1. The offer
The offer is essentially where one party promises to enter into the contract on specific terms. For this offer to be legally binding, it 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 detrimental.
2. Acceptance
This is when the offer is accepted, and it makes the contract legally binding. Acceptance must be definite. In the absence of an agreement including all key terms, there is no binding contract.
If terms are rejected, this will likely be regarded as a counteroffer 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.
3. Consideration
Consideration is something of value passing both ways between the parties and is essential for the contract to be binding.
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. However, there must be consideration for a contract to be enforceable (unless it is made in a deed).
When is a commercial contract not enforceable?
Aside from lacking the key elements above, special circumstances will render contracts void and unenforceable. For example:
- Fraud
- Illegal contracts
- Contracts obtained by means of duress or if one of the parties does not have capacity because of their age or health
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. It’s important to note that usually the ‘mistake’ must be a mutually held mistake of fact or law. In commercial contracts, one party can’t abandon contractual obligations simply because they failed to do their due diligence, or properly assess the risks before contracting.
Can I change the terms of my contract?
Yes. Contracts 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 the 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 when companies include printed terms and conditions on their invoices.
Can AI write me a legally binding contract?
A contract written by AI will be legally binding if both parties agree to those terms. However, these agreements routinely fail to provide sufficient protection for your business, as they often miss out important clauses or confuse the normal clauses used across different jurisdictions.
If you are using AI to draft contracts, the legal responsibility rests with you for their accuracy, and any ambiguity in the contract wording will be resolved in favour of the other party (i.e. the party who didn’t draft the document). AI usage agreements explicitly exclude liability for legal reliance by you on its output, so if there is a problem with the AI contract, you have no recourse.
The words used by AI are often impressive to the untrained eye, but can present a huge risk to your business if not drafted correctly, and those errors will be costly when a dispute arises over the contract later down the line. A commercial lawyer will provide a better quality, bespoke set of contract terms for your business needs and ensure your business is protected.
Read more about the risks of using AI for legal advice here.
Do I need to review my contracts?
Businesses should not assume that their standard terms and conditions will be appropriate for all contracts for the indefinite future. Commercial contracts should be reviewed and updated at regular intervals, particularly when new consumer legislation comes into force.
If a contract dispute comes your way, you should seek specific legal advice before taking any steps. Beginning to construct your own defence may well be counterproductive.
How can Barcan and 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 affords you greater protection.
For further information or to discuss any related issues with our commercial lawyers, call 0117 325 2929 or complete our online enquiry form.
