Understanding commercial contracts

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A guide to commercial contracts

Contracts drawn up between two commercial parties can be confusing at times. Agreements can be difficult to find in the first place, let alone if any situation changes and the businesses decide to move in different directions. To ensure your piece of mind and security if things ever get rough, it is important that you understand how commercial contracts work so you can avoid or win any potential dispute that comes your way, if it hasn’t already.

Questions to be answered in this article

What is a commercial contract?

A commercial contract is an agreement between two commercial parties, more often than not business to business (B2B) with a number of clauses and terms which will activate if fulfilled or breached. They set the parameters within which a wide range of types of agreement are made. This could be an agreement for a company to supply goods or services. It could be a business purchase agreement. Sales, distribution, joint ventures and agency agreements can also be considered commercial contracts. They include but are not limited to these as they can be any form of B2B agreement.

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, more details of which can be found on the legislation section of the GOV.UK website. A solicitor will assist you with understanding the legal side of things, meaning they will look at areas such as this and advise depending on your specific situation.

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 it. Contracts can be agreed verbally and even simply implied, but the most secure way of avoiding disputes down the line would be to have it in writing. This is something that we strongly recommended that you do.

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. If it is a distribution agreement then there should be 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. This is just one example of the type of term that may be in a document like this. It may also include a wide range of clauses, conditions and other terms like “good faith” and “unfair” which may become useful during a dispute, but a solicitor will guide you through these specifics.

Within these terms should be clauses. If the agreement isn’t met then your business should receive some sort of compensation for that breach of trust. This links very nicely on our next question you may have.

Dates are also essential when it comes to the contract. There should be a start date and probably 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 type of deal should be specified, whether it is only for a fixed-term or otherwise.

If you are confused as to exactly what should go into a commercial contract, then it is always best to go through this with your solicitor as it is drafted up.

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How to produce a commercial contract?

To ensure the least amount of complications initially and down the line, a solicitor’s help is much advised, although it is not essential. What you should do is let your solicitor know what key terms you want included in the contract or 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 say, 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 any disputes arrive and the contract has not been created properly to cover all bases.

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 the other. However, the main reason to get one is so you as a business have a trust agreement in the way that you are supporting each other. One side of the agreement may 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 should come into play.

Can you cancel a commercial contract?

If you change your mind about a particular contract, you cannot cancel it no matter how soon after the contract is signed. Unlike consumer contracts, commercial contracts have no “cooling-off period” meaning you can’t cancel the contract without any disputes within a time frame of the initial agreement. So, if anything needs to be changed or you need a way to get out of the contract, then it must be set out in the contract itself in the form of clauses.

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. 

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 overcoming the dispute, potentially through the courts.

Lots of this can be avoided with the proper construction of a commercial contract, with the help of a solicitor. If it is clear that 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 always something that a business will point out to avoid paying any sort of compensation, and support from a lawyer will make this process as painless as it can be.

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.

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