What is the purpose of a business contract?
A business contract is a legally enforceable agreement between two parties (who could be either individuals or organisations) relating to the supply of goods and services.
The agreement specifies what will be provided and the terms on which it will be supplied. They will include elements like cost, time scale and the consequences of either side breaking the contract.
For any business that will be providing goods or services as part of a commercial transaction, it is advisable to have a robust contract in place so that it can enforce payment if necessary and defend itself against unfair claims and accusations from the other party.
The absence of such an agreement has the potential to lead to legal disputes which could be disruptive to operations as well as being financially and reputationally damaging.
Due to the serious consequences that can result from the lack of a well-drafted business contract it is recommended you seek expert legal help should you have any concerns on the issue.
What are the most common types of contract used in business?
There are numerous types of business contract used in commercial transactions. The most common are:
This is an important document in any transaction because it legally commits the buyer to purchasing the goods or services at the agreed price and in the timeframe stipulated.
A purchase order provides important protection to the supplier against the adverse financial consequences of the customer pulling out of the deal.
The document is also important from the perspective of the purchaser as it commits the seller to providing the items on time and at the stated price. This avoids, for example, the supplier demanding an additional payment before handing over the goods.
Bill of sale
This serves to officially transfer ownership of an item from the seller to the buyer, providing proof that an agreement was reached.
On an everyday level, the receipt a shopper receives at a supermarket checkout serves as a bill of sale, demonstrating that they have paid the agreed price for the goods they are about to take out of the store.
In more specialised transactions, a formal bill of sale will often be used in the sale of goods such as vehicles to confirm that there has been a transfer of ownership.
A warranty is concerned with circumstances that would mean the transaction is void.
The most common example of this is where a product that has been supplied is faulty or is not capable of doing what the seller claimed.
In such a situation, the presence of a warranty would mean the customer was entitled to a refund on any payment they had made.
This is a common business contract in the case of someone who is to receive a loan from a financial organisation.
The agreement will specify items (such as a house, car or jewellery) which will be transferred to the lender should the borrower default on the loan.
What is an example of a business contract?
A business contract with which many people will be familiar is the mortgage agreement they have with a bank or building society regarding their home. The agreed contract will specify issues including:
- the value of the mortgage
- the property to which it relates
- the time over which repayments will take place
- the length of any fixed term and the payments that will be due during this period
- the arrangements that will apply should repayments not be made on time
The contract can be seen to provide important safeguards to both parties with the financial institution having a guarantee that it will be repaid (or have the right to take possession of the property) and the individual knowing that they will not lose their home as long as they continue to make the repayments.
What goes in a business contract?
Definition of parties
It is vital that a business contract establishes who each party is so that all sides in the agreement appreciate their role and that of others.
For example, an agreement may state that an IT contractor is the service provider and a firm of accountants is the client.
Goods or services to be provided
At the heart of any business contract should be a description of the goods or services that are to be provided to the customer, the timeframe in which they are to be supplied and the payment that will be made by the customer.
It is imperative that the responsibilities of each party are set out in clear, unambiguous terms so that both sides know what they have agreed to and are able to seek legal redress should the other party not fulfil their obligations.
As well as setting out what the cost of the goods or services will be, it is vital that a business contract makes clear the terms by which the payment will be made. Issues to consider include:
who will be making the payment and to whom they will be making it
- how the payment will be made (for example, BACS, PayPal, direct debit)
- if a deposit is required, how much this will be and when it must be made
- if payment is to be made in instalments, how many there will be, the dates on
- which they will be made and how much each will be (including any interest payable)
- the supplier’s bank details so that payment can be made
Arrangements for starting and ending the contract
This may simply be the dates on which the contract will begin and end. It is possible that the parties may also wish to include a clause outlining how the agreement can be lengthened if required.
Conversely, the business contract may also explain how either side can terminate the agreement early – for example, by paying a termination fee or giving a specified period of notice.
In addition, the contract may set out circumstances in which a party can end the deal and seek financial compensation from the other party – for example, should the supplier not provide the goods or services on time or the client be late in making a payment.
A supplier may wish to set a limit on the amount of compensation that they will be expected to pay should they fail to fulfil their obligations.
Such a clause may not be legally valid if it sets the amount at an unreasonably low level.
Can I write my own business contract?
There can be a considerable risk to writing your own business contract – particularly for transactions involving significant amounts of money.
As we have seen above, a business contract can provide valuable safeguards to both sides in a deal.
This depends, however, on a contract having been drafted in a precise and unambiguous manner so that it is able to stand up to legal scrutiny. While an individual may believe that the contract supports their position, the crucial test is what a court would decide in any subsequent legal hearing.
In addition, a contract may also be judged invalid if it gives one side an unfair advantage in a transaction. Issues to consider in this respect include:
Many businesses ask customers to pay a non-refundable deposit when they place an order for goods or services.
This acts as a safeguard in case the client subsequently cancels the order and leaves the supplier out of pocket.
While this is generally considered an acceptable practice, businesses must not ask for an excessive amount as a deposit – it should only cover the money that they would lose in the event of a cancellation.
The deposit should also only be forfeited if it is the customer who cancels the transaction.
Regardless of the terms of the contract a court would be likely to consider it unfair should a business pull out of a deal and refuse to reimburse the client.
Early cancellation fees
The same principles as above apply to contract terms which refer to situations where the customer wishes to terminate an agreement earlier than planned – for example, by paying off their mortgage early.
In addition to ensuring that any financial penalties are proportionate to the losses incurred by the business, the law also serves to prevent the business from enforcing the sanctions unfairly, such as by entering a customer’s home and seizing their property.
Causing financial loss to customers
We have seen above how it is unfair of a business to cancel a customer’s order and retain their deposit.
Likewise, it would be likely to be considered unreasonable for a contract to prevent the client claiming compensation for any losses it incurs as a result of the cancellation.
A self-employed builder, for example, may find themselves unable to fulfil orders if their supplier reneges on an agreement to supply them with the materials they require.
A contract which seeks to enable a company to avoid making redress when it is at fault is likely to be considered unfair.
In particular, a contract cannot seek to take away a customer’s statutory rights which state that goods must match their descriptions and be fit for purpose, while services must be provided with a reasonable level of skill and care.
A variation clause gives a business the right to change certain aspects of a contract after the terms have been agreed with a customer.
Such changes must be reasonable, however, or they are likely to be considered unfair. While it may be reasonable, for example, for a company to raise its prices in line with the retail price index, it does not have the right to impose excessive increases above the rate of inflation.
Should a contract contain a clause that states it will automatically renew, this must be made explicitly clear to the customer – who should also be aware of how and when to prevent the agreement being extended.
A company should be transparent in the way it presents crucial points in a contract.
A court, for example, is likely to be unsympathetic to a business that uses complex language and legal jargon in agreements or which places crucial clauses in the small print at the end of the contract where they may be overlooked by the customer.
Can a business contract be handwritten?
A handwritten business contract can still be legally binding provided that it meets the requirements of any agreement that we have seen above.
Many businesses, however, find that having well-presented documents drawn up by experts provides the reassurance that they are legally protected – and presents a professional image of their company.
How much does it cost to draw up a business contract?
The cost of drafting a business contract will vary according to the complexity of the arrangement. It is important, however, to balance the cost against the potential consequences that a poorly written contract can cause in operational, financial and reputational terms.
At Wilson Browne, we pride ourselves in providing a high-quality service at a value-for-money price.
Our first discussion is completely free and after that we offer total transparency over charges. Just as the business contract we draft for you will be tailored to your particular requirements, so our range of payment options enables you to choose the most appropriate one for your needs.
Do I need a solicitor to draw up a business contract?
Having your advice on business contracts by a legal expert provides you with the reassurance that your commercial dealings are based on a solid foundation.
Wilson Browne’s team of award-winning company and commercial solicitors work with the highest standards of professionalism and integrity to ensure your contracts are fair, compliant and clear cut.
With offices in Corby, Higham Ferrers and Rushden, Kettering, Leicester, Northampton and Wellingborough we can offer a friendly face-to-face meeting at a convenient location.
For more information, please call 0800 088 6004 or complete our online contact form.