A commercial contractual agreement can be between two or more parties with reference to a commercial concern of mutual interest. To distinguish them from consumer contracts they can also be referred to as Business to Business (B2B) agreements or commercial contracts.
In the same way that there are a widely variable number of businesses, so there are a huge number of applications for commercial contracts. They can be used for many different purposes, such as:
- An agreement to buy a business.
- A document to regulate a supply of goods or services.
- A joint venture between two or more businesses.
- A sale and distribution agreement.
- The basis of a franchise agreement.
- In the modern era with information technology (IT) taking an increasingly important frontline position in the business environment, commercial contracts can act as agreements to regulate software licence agreements, clouds services, Master Software and Services Agreement (MSSA), Software as a Service (SaaS) agreement or Infrastructure as a Service (IaaS).
- Trading terms and conditions.
Business is reliant on interaction with other businesses. To ensure that the other parties you are dealing with understand the basis of your commercial relationship with them (and for your own peace of mind) it is vital to agree contract terms with those you are seeking to do business with and are doing business with.
The full importance of having a good commercial contract in place is not always fully understood by some business owners until something goes wrong.
What form does a commercial contract exist in?
A commercial contract can exist in several forms and does not always have to be in writing. For example, a commercial contract can exist as:
- A verbal agreement.
- An implied agreement.
- A written agreement.
It is possible for all the above types of contract to be legally binding. However, not surprisingly, it helps avoid disputes and confusion if the commercial contract is in writing. This is what most businesses would expect and it does reduce the risk of misunderstandings and raises the chances of the business relationship working in an efficient manner.
Contract and commercial law are complicated. This is why you should seek legal advice with regard to a commercial contract. The application of the law to a commercial contract varies according to the businesses involved.
There are some basic details that must be present for any contract to be legal and enforceable:
- Agreement: There must be an agreement that includes an offer and acceptance.
- Consideration: Each party must give something in the exchange. This basically defines that a contact exists.
- Willingness & Legal Capacity: All parties must have the legal capacity to enter into a contract. This can involve the age of the signatory, mental health and capacity to understand what they are entering into.
What standard terms should be put in a commercial contract?
There are generic terms within most commercial contracts and there a numerous site on the internet offering cheap or free contacts that can be downloaded. However, if the commercial contract you use does not fit your business model or cover what it needs to cover it may end up costing your business money if you need to depend on it to get paid or take delivery of the products/services that are addressed in the business relationship.
Usual clauses that are in a commercial contract:
As addressed above, contracts will vary from business to business and situation to situation. There are common areas that need to be addressed in nearly every business relationship and the main points will tend to be:
- Start Dates: i.e. when the contract commences.
- The Signatories: who are the parties signing up to the contract? To avoid any confusion use full names, addresses and company registered numbers where relevant.
- Definition of Technical or Legal Terminology: with an explanation of any specific terminology used.
- Background section: if required to set out any relevant history to the contract such as previous agreements etc.
- Conditions precedent: to explain how the fulfilment of any conditions will affect the contract (or parts of it) coming into force.
- Liabilities: this is a common section that details how risk is apportioned between the signatories and the limitations of the liability.
- Boiler plate clauses: These types of clauses include the non-assignment of rights, force majeure (which proved to be of particular interest in the recent pandemic), and the law and jurisdiction the agreement will be subject to as well as confidentiality provisions, termination, variation, waiver, severance, third party rights, arbitration and mediation.
How to agree a commercial contract:
- Initially discuss what you are trying to achieve with a commercial solicitor. Given the experience of an experienced solicitor, they will be able to encapsulate your objectives and ensure you are protected legally within the contract.
- If the other party provides you with their contract, ensure you read it and understand it. Again, a commercial solicitor will be able to provide expert analysis and identify any terms that could be disadvantageous to you or your business.
- If you have an existing contract that has been used in line with the type of business you are, use that, but get a solicitor to review it closely. Legislation changes and contract expectations can change, so ensure that you are not depending on out of date documentation.
Why you need professional legal advice:
The obvious answer to why you need professional legal advice is the same as to the questions ‘why would you see a surgeon if you need an operation?’, or ‘why use an accountant for your company tax returns?’. A commercial solicitor will have dealt with a lot of corporate contracts and will therefore be able to draft up a legal document that does what you want, avoids legal pitfalls and they can also advise on any existing documents you may currently be using.
With reference to commercial contracts, a commercial solicitor will usually advise on the following key areas:
- The key terms of the commercial contract in question.
- An approach to successful negotiation.
- Contract structure.
- Providing a review service for contract submitted from third parties.
- Amending or changing a contract which may be an existing document or one from another party.
- Dispute advice. This can involve, for example, considering if your business or another party involved with the contract has the right to terminate the contract.
- Breach of contract and the legal remedies.
- Resolution services when there are disputes.
It is not uncommon to come across the term ‘good faith’ in a commercial contract. It can appear to be a rather vague concept. It is basically a term that is open to interpretation by the courts.
The concept of ‘good faith’ only really becomes relevant if there is a dispute. One side (or both) may argue they acted in good faith and no deliberate intention to cause a breach of contract was meant. The court will look at the wording to see if the meaning of ‘good faith’ is clear in the contract. A commercial solicitor will be able to define what is meant by good faith and what actions and steps constitute ‘acting in good faith’.
A major concern for many businesses, particularly at the present time, is in ensuring that they get paid. The role of commercial contacts in this is obviously very important.
Payment terms need to be specified clearly and accurately in commercial contracts. There are specific considerations related to late payment legislation that need to be stated. Getting to the top of the client’s payment pile is important, particularly in difficult economic times.
A solicitor would usually advise you to include these terms in your payment terms:
- As an incentive to your clients to pay you promptly, Late payment penalties including how the rate of interest is calculated and what the related legislation is.
- Payment due date. This is important as it is the reference date from which late payment is calculated.
- Payment method. This sounds obvious but stopping payments getting lost in the post or within a larger organisation is important. Faster and easier routes to make payment, equal better cashflow.
- Cessation terms. If you are not getting paid you will probably want to stop delivering goods or services at a determined time. Clearly stating what you regard as an unacceptable breach of your contractual obligations avoids potential for a dispute. If the payment deadline is a term of the contract, payment failure gives you the option to terminate the contract early.
In commercial contracts, there is a freedom to agree to any terms in your contract as long as they are not illegal. However, you cannot add unfair terms (as described under the Unfair Contract Terms Act 1977) or terms that contradict government legislation such as consumer law or personal injury arising from negligence.
Commercial contracts vary from consumer contracts in a number of different ways. One of the differences is in how options to cancel or suspend a contract are dealt with. There is not what is regarded as a ‘cooling off’ provision in commercial contracts. Cooling off provisions allow consumers a certain grace period after they have signed a consumer contract, to withdraw from the contract. The cancellation or options for returning goods etc should be specifically and clearly stated within the contract terms.
Commercial contracts are not locked in perpetuity into terms agreed at the outset. Commercial contract terms can be amended if the signatories agree to the change(s). As a contractual variation may change the agreement fundamentally or alter the enforceability, it is best to take legal advice from a commercial solicitor.
Some commercial contracts include explicit terms about how the contract can be varied and how the amendment procedure takes place. Amendments to a contract usually have to be in writing.
Please contact rhw’s commercial team for legal advice on any aspect of commercial contractual agreements.