The team at Harper Macleod recently led discussion at an event with the brilliantly straightforward title, “Contracts – why are they important?”
Now, to a commercial lawyer the answer to that question may seem so obvious that it doesn’t need to be stated. However, we are not all lawyers!
The reality is that parties often get so caught up in the excitement of entering into contractual relations with each other, that little consideration (or none) is given to the desired mechanisms to be used for when things go wrong or how they will otherwise exit from the arrangements.
Here, we look at some of the main points that arose from our recent event, and some general considerations on the importance of getting contracts right.
So why are contracts important?
For business of all shapes and sizes (and consumers), contracts are likely to play a pivotal role in day-to-day operation and success. There is a common misconception that a contract does not exist where there is no written document in place between the parties, however it can when an oral contract exists between the parties, or where parties have acted in a manner that would suggest that a contract was in place – despite the lack of written agreement. A contract can also be formed through email correspondence between parties negotiating on the terms of goods and/or services.
That said, in most circumstances we would always recommend that parties enter into a written contract governing the relationship and the relevant obligations for the period of the contract (and beyond as the case may be). The primary reason for this is that a written contract will remove any ambiguity that may exist in the course of negotiations and makes it easier to prove what the contractual terms are. From a very basic perspective, a written contract will clearly identify the parties involved and will allow the parties to set out several important provisions, including recording explicit terms on what will happen in certain situations (for instance where there is non-delivery/performance of goods and/or services).
Common contract provisions
There is no “one size fits all” when it comes to contract formation and provisions that might be appropriate for one contract may have no relevance or place in another. It is also important to note that consumer contracts (being contracts between a business and consumer) will ultimately have different requirements when compared to business to business contracts. This is particularly true when considering contracts at a distance (for example online sales etc.).
Another example of where contract provisions may differ vastly from “base” provisions, is where the contract involves a public sector organisation. This is because public sector organisations have a variety of additional requirements to satisfy when entering into contracts (including in relation to matters such as anti-bribery, fair work practices and modern slavery).
Nevertheless, below are some of the most common contract provisions that should be considered when entering into contractual relations:
- Goods and/or Services: this may seem like an obvious one, however a written contract should be appropriately descriptive about the goods and/or services being provided under the contract. In some circumstances it may even be relevant or more desirable to annex a specification of the goods/services (particularly where there are complexities);
- Jurisdiction: what law will apply to the contract (and any dispute that may arise from the contract or its formation)? While this may be an easy question in some circumstances, other contracts may include parties in different jurisdictions (for example where a Scottish company formed a contract with a Belgium supplier). Ensuring that jurisdiction is dealt with appropriately here will be of considerable importance;
- Liability: the level of liability that each of the parties have under the contract will often be the most important contractual clause in the contract. Both parties will understandably look to limit their liability as much as possible within the law, and as a result, this can commonly be an area of disagreement or dispute;
- Payment: when and how will payment be facilitated through the contract (and what happens when there is non-payment of an invoice)?
- Risk and Title: where appropriate, when will risk and title in the goods pass between the parties? Will this be upon delivery for example, or will there need to be some kind of acceptance test provided for in the contract?
- Service Credits and Service Levels: where a service is being provided (such as for example a maintenance and/or repair service), the parties will likely want to agree on the required service levels (or response times) in relation to those services. Crucially, the parties will also want to agree on service credits, which come into effect when the agreed service levels are not met;
- Termination: what happens at the end of the contractual relationship? This is a very important (and often overlooked) provision of any contract. Will the contract provide for extensions? If so, will these extensions be options capable of exercise by both parties, or just by one party? Also, what are the provisions for when something goes wrong? Will one party (or both) be able to terminate in certain circumstances, or will either party be able to terminate for any reason on reasonable notice? There are lots of considerations here, and it is likely that both parties to the agreement will have different ideas on what is appropriate (particularly where one party tries to limit the others ability to terminate at all);
- TUPE: will the contract need to deal with the potential application of The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), perhaps where a service provision change may occur? While this will likely not be relevant to most contracts, this is a very important consideration nonetheless, and parties should be clear about whether or not TUPE applies at the outset;
- Data protection: the parties should be absolutely clear about their respective obligations in relation to the processing of personal data, and associated obligations;
- Intellectual Property: the parties should address what happens to intellectual property created during the period of the contract and how each may use the other’s prior existing intellectual property; and
- Assignation and Sub-contracting: to what extent should the parties be allowed to engage someone else to fulfil their contractual obligations or it is critical that the original parties are the organisations to provide the goods/ services/ works?
This is by no means an exhaustive list of the important considerations when entering into a contract, and the reality is that the contract will contain a whole host of other key considerations for the parties entering into it.
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Contracts play a pivotal role in business prosperity and overall success. If you have any questions in relation to contracts or any of the issues noted above, our experienced team are on hand to assist you.