22
February
2024

A Guide to: Commercial Contracts

A well-drafted contract that reflects the intentions of the parties will help businesses of all sizes to mitigate risks, foster successful long-term business relationships and help ensure smooth operations.

Alena Makarevich | CORPORATE AND COMMERCIAL ASSOCIATE

At Primas Law, our commercial lawyers are experts in handling a range of commercial contracts to help protect your business.

In our “A Guide to” series we take a look at “Commercial Contracts 101” exploring some of these agreements and how they can be used in the business world.

Here, we also examine the fundamentals of commercial contracts, their types, function, and key terms to consider.

What is a commercial contract and why should you have one?

A commercial contract is a legally binding document setting out the terms of a commercial deal between two or more parties. It will deal with the parties’ risks, the consequences of a party breaching its obligations and what happens if things go wrong.

There is no legal requirement to have a written contract, so why should you choose to sign one over a handshake agreement? The main purpose of a written contract is that it gives certainty and clarity of what has been agreed between the parties.

Perhaps one of the most overlooked reasons to have a signed contract is that having them in place adds a huge amount of value to the business. We are seeing the benefit of this in corporate transactions when the business is sold, where the sellers lean on signed contracts to drive the value of the business and the buyers gain confidence and peace of mind, from seeing signed contracts as it proves that the business has stable commercial relationships.

Overall, a well-drafted contract that reflects the intentions of the parties will help businesses of all sizes to mitigate risks, foster successful long-term business relationships and help ensure smooth operations.

However, negotiation of a signed contract may be a time-consuming and costly process. For this reason, many businesses choose to contract on standard terms and conditions, particularly in the context of smaller and repeatable transactions. We discuss terms and conditions and their merits, as well as when businesses may wish to use terms and conditions over a signed contract in our guide to standard terms and conditions.

Contract formation

Under English law, a legally binding contract does not need to be in writing, but a well-drafted signed contract will reduce the risk of any disagreement between the parties or uncertainty down the line.

In order for a contract to be legally binding, there are four essential elements:

  • Offer: An offer is a promise by one party to enter into a contract on particular terms. For the offer to be binding, it must be specific, clear and complete. If a party decides to revoke their offer, this must be clearly communicated to the other parties involved, however the offer remains valid until the other parties are aware of the revocation.
  • Acceptance: A binding contract is formed when an offer is accepted, and the acceptance is communicated to the other parties involved. For an acceptance to be effective, it must correspond exactly with the terms of the offer with no variations.

If the proposed terms are not accepted by the other party(s), a counter-offer may be put forward, which the other party must accept for the contract to be formed.

  • Consideration: Typically, a contract cannot be formed without consideration (with the exception of a contract made by deed). This requires the parties to give each other something as part of the consideration.
  • Intention to create legal relations: For a contract to be binding, all parties must intend to bind themselves with the contract, which may be assessed by the court should a dispute arise.
  • Certainty of terms: All material terms must be agreed and certain. The parties must ensure that the contract is not vague or ambiguous.

Key terms in commercial contracts

The precise content of a contract will vary significantly depending on the type of commercial arrangement between the parties and individual requirements of the business, however the following provisions are typically included:

  • Commencement Date: This is the date that the agreement is effective from. It is important to identify the Commencement Date as in some cases it may be different from the date when the agreement is signed.
  • Parties: A contract must identify the parties to it. The person drafting the contract must ensure that each party’s details are correct.
  • Recitals: A contract will sometimes include background information setting out the purpose and context of the commercial arrangement. Although recitals are not contractual terms, including them in the contract will assist any person looking at the contract for the first time to quickly understand the general premise of the deal.
  • Operative provisions: this is the main part of the contract which typically sets out each party’s intentions and performance obligations, provisions relating to the price and payment any important timescales for the performance of the contract.
  • Limitations of liability: it is usual for commercial contracts to make an attempt to limit liability for a breach of a party’s obligations. The extent of each party’s liability will usually depend on the type of contract, the party’s risk exposure and its bargaining power.
  • Termination: this will set out various circumstances which may give rise to a party’s ability to terminate the contract before expiry of its term. For example, this may be because the other party committed a material breach or simply for convenience on notice.
  • Boilerplate clauses: Boilerplate clauses are included in the majority of commercial contracts and, in many cases, will be included as standard legal terms without the need for much negotiation between the parties. They include clauses such as non-assignment of the parties’ rights, force majeure and choice of law and jurisdiction.

We discuss some key terms applicable to the supply of goods in our step-by-step guide to contact terms for supply of goods.

Drafting of contracts

It is important that the commercial contract is drafted and negotiated carefully, reflecting each parties’ intentions.

The following points should be considered when drafting a commercial contract:

  • Specific and clear language: including defined terms within the agreement assists in creating certainty and consistency. It is important that precise language is used to minimise the risk of misinterpretation.
  • Logical structure: the format of the agreement should be logical and easy to follow. Typically, the general provisions will be set out first, including the purpose and scope, with more detailed clauses following.
  • Party requirements: The rights and obligations of each party should be set out in detail, including roles and responsibilities ensuring each party is aware of their duties, minimising the risk of disputes.
  • Termination provisions: It is important to set out the circumstances and processes for terminating the contract at the outset. This should include breach of contract and the available remedies to the aggrieved party.

Types of commercial contracts

There is a broad range of different types of commercial contracts. Depending on a business’ requirements, a contract can be industry standard or require detailed consideration and bespoke drafting. However, a commercial contract should always be tailored to the specific situation at hand. Some examples of common types of commercial contracts include:

  • Non-Disclosure Agreements (NDAs): NDAs serve to protect confidential information of the parties. See our guide to non-disclosure agreements for more
  • The Agreements for the Supply of Goods and/or Services: these are some of the most common types of agreements that set out the terms on which one party agrees to supply goods and/or services to the other. This type of agreement may be industry-specific and will vary greatly depending on the type and value of goods and/or services provided, the length of the supply arrangements and the individual circumstances of the parties. SaaS (Software as a Service) agreement is a type of service agreement, which we discuss in our SaaS contract guide.
  • Agency Agreements: Under an agency agreement, the ‘principal’ authorises the ‘agent’ to act on the principal’s behalf. There are several types of agencies, including introduction agency whereby an agent introduces customers to the principal for a fee or commission, a marketing agency for the promotion of the principal’s goods and services and a sales agency for the sale of goods or services on the principal’s behalf.
  • Distribution Agreements: This agreement is made between a supplier and a distributor, allowing the distributor to resell the suppliers’ products. A distributor will be appointed on either exclusive, non-exclusive, or sole basis. This type of agreement will require careful drafting as distribution arrangements may give rise to Competition Law concerns.
  • Franchise Agreements: A franchise agreement sets out the terms and conditions under which a franchisor grants a licence to a franchisee for the right to trade under the franchisor’s brand, using their proven business model. Take a look at our guide to franchise agreements for more information.

For more help or information on how to ensure your agreement is watertight, contact our commercial team today.

 

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