The importance of a legally sound contract
Commercial contracts and commercial agreements are an everyday part of business law, serving a vital function in ensuring that many aspects of a business are legally effective.
It is important to make sure that all of your business contracts are drawn up professionally and are legally watertight, since it is essential that both parties understand the terms included and are aware of the rights and responsibilities afforded by the contract. Poorly worded contract terms could have serious implications for both parties and their stakeholders.
What are business contracts used for?
Commercial contracts can cover:
- Terms and conditions of sale
- Terms and conditions of purchase
- Trading agreements
- Distribution agreements
- Agency agreements
- Franchise agreements
- Facilities management agreements
- Joint ventures
Generally, a contract should be drawn up for a specific situation, carefully considered to reflect an agreement between two parties and include an offer, acceptance, consideration, and the intention to create legal relations. Thusly, it is not advisable to rely on precedent when making a contract, as every agreement is different and therefore it is worth consulting a legal specialist when creating agreements.
Usually, the following are included in commercial contracts:
The names and addresses of all the contracting parties should be clearly stated.
Definitions and Interpretations
Explanations of the specific meaning of any terms defined in the contract.
Outlines the exact price to be paid for the goods or services provided, with the date or dates for payment to be made clearly set out.
Description of goods or services
A specific description of the goods or services that will be provided under the contract, including the level of service if the contract is for services.
Term of contract
Specifies the length of the contract.
The specific timescale for the project, including any deadlines that have to be met.
Limitation of liability
Establishing the extent of the legal responsibility of each party to the contract. For example, "Neither party shall have any liability to the other party for a claim of loss of profits...".
Sets out the circumstances under which the parties can terminate the contract.
Change of control
The procedures for change of ownership/controlling interest, etc. For example, if the first party wishes to transfer a controlling interest to a competitor of the other party.
Sets out the procedures in the event of the parties having a dispute.
There should be confidentiality clauses drafted in the contract which identify the information being protected and the circumstances in which it can be used or disclosed.
Intellectual property rights
States who owns such rights to products provided under the contract.
It is common for the party providing goods or services under a contract to provide certain warranties in relation to the delivery of the goods or services.
Indemnity clauses are an express obligation to compensate the indemnified party by making a money payment for some defined loss or damage.
This clause should cover situations where performance of the contract is impossible through no fault of either party. For example, if there is a natural disaster or civil unrest.
Assignation (Scotland) / Assignment (England/Wales)
If there is an option for one party to transfer their contractual rights and responsibilities to another party, this should be set out in the contract, along with the procedure to be followed. If there is no right to assign the contract, this should also be noted.
There should be a clause indicating which law governs the contract. For example, "This Agreement shall be governed by and construed in accordance with the laws of England".
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