If you are in business (or planning to be) then you are likely to have to contract with others in some way. It may be the contract you and your business partner(s) draw up together to set out the ground rules, a contract with a customer or supplier, or an employment contract should you take on staff. Other types of contracts may be loans or credit agreements, leasing agreements or hire purchase agreements.
Some contracts will be a pleasure to negotiate – your first sales, perhaps, or your leasing agreement for your premises, whereas others may be more tricky; the agreement between you and your partners, should you have any, is essential but may involve some difficult discussions. When you are in the first flush of excitement about your new business venture, writing down formally what everyone’s responsibilities are and what will happen should something go wrong can feel odd and awkward. Nonetheless, it is an essential step – and could only be more difficult if things had already started to go wrong.
Although many types of contract exist, the legal requirements are the same for all.
The majority of contracts are simple in structure; they outline an agreement that confers a benefit on both parties. For example, if Company A sells goods to Company B for the sum of £500, then Company A loses the goods but gains £500 and Company B loses £500 but gains the goods.
Also included is an exchange of promises; Company A promises to sell and deliver goods by a certain date and Company B promises to accept and pay for them, also by a certain date.
The majority of contracts have a basic structure that includes:
- Names and addresses of the parties.
- Date that the contract is signed/effective from.
- Preamble providing some background information about who the parties are and the purpose of the contract; for example, Company A is a small business selling fashion clothing over the Internet. Company B hosts websites and facilitates e-commerce. Company A wish to retain Company B to host their website and facilitate their e-commerce operation.
- Undertakings by each party, describing what each will promise to do. At its simplest, this could be Company A promises to provide ten computers and Company B promises to accept and pay for them.
- Deadlines, stating by what date work must be completed or goods delivered. If time is critical, then it is a good idea to include the phrase ‘Time is of the essence’. Then, should the worst happen and the deadline be missed with consequences for your business, any legal action taken by you has a better chance of success.
- Duration, stating how long the contract will remain in effect. For example, Company A will retain the services of Company B for a period of 12 months.
- Confidentiality, covering what may or may not be divulged to a third party by any of the parties directly involved in the contract.
- Assignment rights, stating whether any element of the work may be sub-contracted.
- Payment details, which should state what is due and by when, including details of any instalments or deferred payment.
- Termination conditions, detailing under what conditions either party may terminate the contract.
If you are writing your first contracts, take advice from your business adviser or mentor. You may also find further information from:
- Business Contracts Kit for Dummies, Haroch, John Wiley and Sons, 2000.
- Understanding and Negotiating Business Contracts: Master the Small Print and get a Better Deal, Jonathan Rush, How To Books, 2002.
- A Practical Guide to Business Contracts, Gavin Sinclair, Business Network Publishing, 1997