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Companies across the UK need to enter into well-drafted and thorough business contracts. Entering into a contract that lacks specific terms and conditions or does not correctly spell out your obligations as a business can lead to disputes. You may also encounter legal action as a result. Whether you are a small business or a large enterprise, all organisations need to know the key terms to include in a standard business contract. This article will walk you through the main terms you should include in your business contracts.
What is a Business Contract?
Business contracts are legal arrangements made between two entities that generally dictate the sale and purchase of goods or services. If you engage in contractual relationships with another party, it is advisable to have a well-drafted written contract in place to ensure you can enforce payment for the fulfilment of that contract, while also protecting your businesses’ assets if any disputes arise from the failure to perform that contract.
Business Contract Terms
It is important to note that when drafting a business contract, you will need to be as detailed and as thorough as possible. This will ensure you and other parties to the contract are clear on the obligations created by that legally binding agreement. If confusion arises around the performance of those duties, you may face legal action from another party to that contract.
There are several key terms each business contract should have in place to protect your business interests. These include:
- definitions on the contracting parties involved in the contract;
- descriptions on the services and duties you have agreed to provide;
- the term or duration of the contract;
- payment terms;
- termination provisions;
- limitations on liability; and
- dispute resolution mechanisms.
Definitions of All Parties to the Contract
Defining each party involved in an agreement is a necessary part of any commercial contract. It can ensure that parties clearly understand their role in the agreement, and that gives greater clarity on the obligations the contract bestowed on each party to the agreement. For example, a servicing agreement might define a cleaning company as a service provider, clarifying who must perform the servicing functions under the agreement.
Services You Will Provide
The next and perhaps most important part of any contract is to describe the contract’s primary purpose. For example, party A will provide party B with a specific item on a certain date in return for payment of X. It is important to be extra detailed in this section to ensure both parties are clear on what obligations are being given to them under the contract.
For example, in the building industry, contractors are often instructed to initiate works on a development project. Their contract will include a schedule of works that will clearly instruct them on what services they must perform.
Payment Terms
For a contract to become a legally binding agreement, you must transfer consideration from one party to another. Consideration is a legal term for payment of value. If you do not exchange a form of payment, the contract will not be legally enforceable. For that reason, it is vitally important that business owners insert payment terms into their business contracts.
Payment terms should clearly state:
- how much money to pay;
- who is paying who;
- how to make that payment, i.e. bank transfer, cash, direct debit; and
- the bank details of the party who is due to receive the payment.
Payment terms can also describe situations where you make payments in instalments or on a retention basis. For example, mobile phone companies are often paid in instalments to provide mobile phone services. If you are writing a contract that will require you to make payments in instalments, you may want to include provisions on how much interest to add on each instalment.
Length of the Contract
It is important to state the contract’s start date and end date in the agreement’s terms and conditions. You may also wish to include extension clauses to the contract, for example, if both parties wish to continue the relationship further.
Limitations on Your Liability
Contractors may also want to limit how much they will be liable for if a dispute arises under a contract. Liability is an obligation placed on one party to compensate another for a breach or non-performance of services. As there is a great risk of liability arising in contractual disputes, you will want to insert clauses into your business agreements that cap the amount a court will fine you if you have to pay damages for a breach of contract.
Termination Provisions
It is important to be able to create legally enforceable contracts. Furthermore, it is important to absolve yourself from them if you no longer wish to be a part of that arrangement. Early termination provisions are another important part of any contract that give parties to that agreement the right to end that legal relationship, provided they perform a set of functions, like paying a termination fee or giving parties notice of termination.
Termination provisions can also include grounds for when you can terminate contract for a breach of the contract’s terms. Generally, termination provisions will state that if either party breaches the contract terms, then the other party can terminate the contract and seek damages. For example, those conditions can include provisions on late payment, failure to perform all your obligations under a contract, or late completion of the contract.
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Key Takeaways
It is important for businesses to enter into legally binding contracts that are thorough and include key provisions that will protect your organisation from the threat of legal action. You should also get a lawyer’s advice when drafting or negotiating business contracts. If you need help understanding what terms you should insert into your agreements, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Standard business contract terms will usually include a definition of the goods or services that parties will provide. They will also include a term for the duration that contract will last for. Additionally, they will include a term for what payment the parties will exchange for those services.
A business contract is an agreement typically made between one or more organisations and establishes an obligation to provide goods and services in exchange for payment.
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