Signing a contract is serious for any party – these are legally binding agreements and the content must protect your interests, even if things go wrong. You need to consider exactly what goes into contracts you sign, whether with suppliers, clients or other third parties. David Gordon, of DG Law, explores how to write a watertight contract to ensure your business is protected at all times.
What is it?
To create a watertight contract the first question you have to be confident about is “what exactly is a contract”? In short, it’s an agreement between two or more parties which, if valid, is binding on the parties and enforceable by the courts. In other words one party can sue the other if they don’t do what they said they would do in the agreement. So it’s pretty important to get it right from the outset and avoid you or your business getting embroiled in needless litigation.
How to make a contract
A contract doesn’t need to be in writing. There are plenty of contracts entered into every day which are not in writing. For example, you wouldn’t enter into a written contract buying something from your local shop. You ask for something, it’s given to you and you pay for it. Alternatively, you pick something off the shelf, and take it to the till where you pay for it. In both instances there is a contract for sale. There is an amusing case which debated whether two farmers writing the terms of a contract on the side of a cow was a valid contract. The judge, whose patience must have been great, decided that so long as it was legible and clear what the terms were, then yes it was a contract!
In business of course it’s more likely that you will have a written contract than a verbal one. Nowadays email and internet allow for them to be formed electronically, dispensing with ink and paper. More information can be found below about the essential contents of a contract, but in a nutshell while it’s better that a business contract is in writing, it doesn’t need to be. There are exceptions to the rule though: watch out for contracts which must be in writing, for example those which affect land and buildings. To be valid they absolutely have to be in writing.
You will also need to negotiate with the other party before you put the contract into writing to make sure that it is mutually agreeable.
“Must haves” - contract essentials
There are some absolute musts which must be in a contract no matter how it is created. These include the following:
- Offer and acceptance - in short someone has to offer to do something and the other party has to agree to that offer (on those terms). Simply placing an offer in a window or writing a letter or placing online is not enough to bind another party. The other party needs to take a positive step to agree to it. Whether that positive step is responding to the offer or clicking an “acceptance” button. It can be a complex area and there are hundreds of cases looking at the nuances of this concept. But if you have a written contract with two parties then chances are you have overcome this hurdle.
- Consideration - sounds scary, but simply means the exchange of “money” or “money’s worth”. In a business contract it is assumed that someone would not normally do something for nothing. They are either going to pay someone else to deliver goods and/or services or they are going to provide goods and/or services in exchange. In other words a contract could say “we will deliver x” and “you will pay us £y”. That doesn’t mean to say it has to be at market value. Some contracts you will see use the term “in consideration of a £1”. This for example is often the case in contracts transferring intellectual property rights. The term is a device to make sure there is some acknowledgement that there was a reason for one party to perform its obligations. Without consideration, even only for £1, the agreement becomes simply a “promise” – and at risk of not being enforceable.
- Parties - make sure it’s clear on the face of the agreement who are the parties to be bound by it i.e. who is doing what to whom. A good tip to remember is that if it’s a company, include their registration number as this never changes, whereas their name might. If it’s an individual include their full name and latest address so you know where to send court papers come the day (hopefully not) you have to serve notice on them and/or you sue them. If a third party has obligations make it clear whether or not they are bound by the contract.
- Key rights and obligations - the parties are likely to have both rights and obligations under the agreement. A right in the hand of one may be an obligation in the hands of another. To put this into plain English: the party paying money has an “obligation” to pay, the party entitled to receive the money has a “right” to receive it. Another example would be: the party delivering goods/services has an “obligation” to deliver these, while the other party has the “right” to receive them. In drafting the contract make sure it’s clear what each party’s responsibilities are to the other. Most contracts will contain between three to five key rights and obligations which form the essence of the contract. These key rights and obligations, above all else, have to be clear and understandable.
“Nice to haves” for good contracts
- Date - this helps parties determine when the rights and obligations become effective.
- Definitions - this helps parties agree what jargon actually means. Remember that in a worst case scenario a judge, who knows nothing about your industry, is going to have to understand what you have agreed on.
- Conditions - are there any critical steps that need to happen before the contract comes into effect e.g. a granting of a licence, or a third party permission?
- Termination - what happens if the other party does not do what they promise and the affected party wants to end the relationship?
- Intellectual Property - increasingly this is a key point to confirm who owns what e.g. domains, trademarks and who can use what, and when.
- Plain English - often forgotten or overlooked. Don’t use language that you are not familiar or comfortable with. Put the rights and obligations in a way that you understand. Above all else, avoid words that you think sound legal e.g. using Latin or herewithbeforenotwithstandings. Remember, two farmers had a written contract on a cow approved; I don’t think much Latin or legalese was used in that instance.
“Don’t haves” - contracts
- Jargon - as above with definitions. You may know what you mean, but the people down the line who have to put the contract into effect may not.
- Copy and paste - avoid at all costs the temptation to copy someone else’s contract. The age of the computer has made this all too easy, but it’s a sure fire way to disaster. Start your agreement with what are the important points and then build out from there.
Beware implied terms
Have at the back of your mind the question – are there any statutes (laws) that are automatically implied into the contract no matter what you write? For example, employment contracts imply all the various Employment Acts. Which explains why they are difficult contracts to write without professional help. Consumer contracts and most business contracts imply what are known as UCTA77 and amendments – or "Unfair Contract Terms Acts." In short, this means that B2C contracts need to be “reasonable” while B2B can’t waive all liability. Again, this is somewhat more technical so if you have concerns consult an expert.
In conclusion, provided you follow the principles above you will greatly increase your chances of putting together a contract which will make sure that the person you have agreed to do business with knows exactly where they stand. And in turn it is hoped this will avoid costly litigation.