Commercial Contracts – What’s the need?

In the famous parable of the wise and foolish man, the wise man always built his house upon the rock, yet many business owners overlook the importance of written agreements and build their businesses upon the sand.  In this alert we look at why written agreements are so important to the success of a business.

For most business owners, their business is their livelihood and as such should be afforded as much protection as possible.  Yet despite this, far too many business owners expose their business to risk and ruin, either because they do not have in place well written contracts to protect their businesses from unforeseen consequences; or they have failed to read the contracts that have been issued to them before signing them.

Terms and conditions are the foundations that determine the obligations, liabilities and potential benefits of any trade.  No one would dream of building a house without detailed drawings and proper foundations, yet many people build businesses without documenting the relationships with customers, clients, suppliers or other third parties.  The very relationships that go to the heart of the business.  Each party within those relationships will have expectations with regards to what they will provide, what they want to receive and what risks they want to take.  Ensuring that those expectations are written down, in the form of a written agreement or a set of terms and conditions, is essential for the following reasons:

1. Creates certainty

Having your agreement written down provides the parties with certainty.  Oral agreements are, in theory, just as enforceable as written contracts.  However any dispute based upon an oral agreement will quickly descend into a ‘he said/she said’ argument in court which can be costly and difficult to resolve.  There is also a risk with oral agreements that the parties forget what terms have been agreed through the passage of time.

Agreements which are created through a string of email correspondence can also create difficulty when trying to ascertain what has been agreed.  In the event of a dispute, it is much easier to have a written contracts to hand which clearly sets out the position on all important matters.  It will also reduce costs if lawyers don’t have to plough through numerous chains of emails to work out the terms of the agreement.

2. Minimise disputes and aid enforcement

A clear set of written terms will reduce the risk of disputes as the terms of the agreement should be clear on what the position is.  Furthermore a breach of the terms by a customer should be easily identifiable and due to the certainty created by a well drafted written agreement, should be easier to enforce.

Well drafted contracts can also set out effective dispute resolution provisions which allow the parties to sit down and discuss any disputes or complaints.  By allowing for mediation or arbitration, parties may be able to resolve any dispute faster and at less cost.

3. Improves business reputation

If the expectations of your customer are not aligned to that of your own, then disaster could ensue.  For example, if your client is expecting a product to be delivered within 2 days, but you actually need 2 weeks to import that product from overseas, the result will be a disgruntled customer who is unlikely to use you again.  If, however you have spelled this out clearly in a set of terms and conditions, you can manage your customers’ expectations and prevent later complaints.

Written contracts can also provide your business with an air of professionalism, which gives customers confidence in the service that they are acquiring.

4. Allow for limitation of liability

Every commercial transaction carries a risk of liability.  When performing a contract, a business will risk claims for breach of contract, negligence, misrepresentation, infringement of intellectual property rights, to name but a few!  In the absence of a limitation of liability clause in a written agreement, there is no financial limit on the damages that a party can claim and recover.  This could result in significant financial pain, but worst still, could put you out of business completely.

It is therefore vital that when entering into any commercial agreement you include some form of limitation of liability clause.  Care does need to be taken though when drafting such clauses, to ensure that they are both effective and enforceable.

BUT REMEMBER, as well as ensuring that you have written agreements in place, if you fail to read and scrutinise the contents of them, you will set yourself up for a fall.  If you don’t read them, then how will you know:

  • what you have committed to;
  • what your obligations are; and
  • what penalties will apply if you fail to meet your obligations.

Furthermore, how will you ensure that they are written, as much as possible, to your advantage?

If you need help drafting or reviewing terms and conditions for your business, then please contact our corporate and commercial team on 01524 548494 or 01228 552600.

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