Clearing the Air on Commercial Contracts: An Easy to Understand Guide


The idea of a legal contract, drawn up between two commercial parties, might seem daunting at first. Finding the initial common ground and agreement can be challenging, but what happens if things change? What could happen if a business decides to move in a different direction? What happens if circumstances change?

To ensure your peace of mind and financial security, it is important that you understand how commercial contracts work, protecting your business and indeed allowing you to take advantage of change.

Topics to be answered in this article

What is a commercial contract?

A commercial contract is an agreement between two commercial parties. Often this business-to-business (B2B) agreement will contain a number of clauses and terms, which will activate if certain criteria are fulfilled or breached. The contract could be an agreement for a company to supply goods or services. It could be a business purchase agreement. Equally, sales, distribution, joint ventures, and agency agreements can be classed as commercial contracts.

Contracts like this are subject to common law and legislation wherever applicable in the contract, as well as any contractual terms that are set out within it. Contract law is a smaller part of commercial law, and a solicitor can assist you with understanding and advising you on the legal aspects of the contract.

Common examples of a commercial agreement

There are many areas of business where a clear, legally binding agreement is of benefit. Areas where it is common to find an agreement or contract include:

  • Business purchase or buy-out
  • Purchase and supply
  • Sales and distribution
  • Agency
  • Joint venture
  • Shareholders
  • Franchise
  • Non-disclosure or confidentiality
  • Employment or contracting
  • Intellectual property licence and assignment
  • Partnership
  • Loans and finance

What should a commercial contract look like?

Perhaps surprisingly, commercial contracts don’t necessarily have to be in writing, although it might be the easiest way to prove the existence of an agreement. Contracts can be agreed verbally and even simply implied, but the most secure way of avoiding disputes is to have a clear agreement in writing. This is something that we strongly recommend.

What should be included in a commercial contract?

The recommended written contract should include everything each business would like to see happen as a result of the agreement. For example, a distribution agreement should contain a clear set of terms as to how much and how often goods should be distributed by the party that has agreed to do so. It may also include a wide range of clauses, conditions, and other terms like “good faith”, “best endeavours” and “unfair”, which may become useful during a dispute. Be careful, as these terms have specific legal meanings. A good solicitor will be able to explain what they mean and more importantly, the implications of them.

Within the terms of the agreement should be clauses. These cover the penalties for failing to meet the associated terms, or conversely the compensation you will receive for the breach of trust. Dates are also essential when it comes to the contract. There should be a start date and usually an end date to the agreement. There is no limit as to how long or short the length of a contract can be, but the duration should be clearly specified, whether it is only for a fixed-term or otherwise.

How to produce a commercial contract?

Any agreement between two commercial parties is considered a contract. It is perfectly possible to create your own contract, or use a boilerplate agreement. Often, one party simply produces a ready-made contract for the other party to sign. Given the legal and financial implications that may be contained in such a contract, it is good practice to seek professional legal advice to ensure that what you think you are agreeing to, matches the contract itself.

When creating your own contract using a solicitor, let them know what key terms you want included in the contract and what you aim to get out of the deal. Your solicitor will then collate this information into a series of terms, conditions, and clauses which, following your approval, will be shared and negotiated with the other party. From here, any amendments can be made before finalising and signing the contract, at which point the conditions set out in the document will begin.

As we said before, it is possible to do this by yourself or as a business without the support of a solicitor, however it could cause complications in the future if there are any disputes, and the contract has not been created properly to cover all aspects.

Why would you need a commercial contract?

The obvious answer to this is that it is mutually beneficial to each business. It outlines the areas in which each business does their part to help and cooperate with the other. However, the main reason for a commercial contract is so you as a business have more than simply an agreement based on trust. One party might make a misstep that could cost both businesses substantially. In the event of a breach of trust such as this, you will want something to fall back on, and this is where a well-constructed contract can help protect you and your business.

Can you cancel a commercial contract?

If you change your mind about a particular contract, you cannot simply cancel it. Unlike consumer contracts, commercial contracts have no automatic cooling-off period. So, if you think a contract needs to have an early termination option, then it must be set out in the contract itself in the form of a clause.

Can a commercial contract be changed?

Circumstances change. Businesses support each other all the time, but it isn’t always feasible to sustain such a mutually beneficial relationship. However, something else that needs to be mutual is the decision to change or amend the contract. If one side wants a change, the other business must agree to it for it to happen, unless there is already a change clause in the contract. This is not uncommon, and a solicitor can help with the negotiations of that change, if required.

What can I do if there is a dispute?

If you reach or have reached a situation where you have a dispute, then the contract is the first place to look. If the parameters have not been set out clearly or there is still a disagreement there, then the evidence to fight your case should be overseen by a solicitor who will assist in resolving the dispute, potentially through use of the courts.

Many of these issues can be avoided with the proper construction of a commercial contract,  using the help of a solicitor. If it is clear there has been a breach of the contract then the courts probably won’t need to get involved, as this should be something that can be resolved between the parties. Even so, there is often something that a business will try to point out to avoid paying compensation, and support from a lawyer will make resolution as painless as it can be.

How can Goughs help?

Commercial contracts are a vital part of business life. Getting them right can help you protect your business and grow. Get them wrong, and you are introducing risk. If you need a solicitor to help produce a commercial contract, then contact our commercial team here at Goughs. We have a team of experts who can advise you on best practice and help you set up a commercial contract, or review a contract you have been given to sign.

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