By Yulia Barnes, Founder and Managing Partner of Barnes Law.
A well-written business contract is like an insurance policy, protecting you and your business in the event of something going wrong, and failing to have a written contract in place can be a costly mistake in the event of a contractual breach or a dispute.
Though in English law oral contracts are legally binding, a clearly expressed written contract provides a greater degree of clarity and certainty, protecting parties by defining their obligations and the consequences of a breach, while avoiding the cost and complications that result from a dispute.
Each contract will vary depending on its function and context, though there are practical legal considerations that must be kept in mind to ensure your contract provides the proper protections.
Key elements of a commercial contract
For a business contract to be legally binding and enforceable, it must contain several key elements, for example offer and acceptance, which requires an offer inviting to enter into a contract, which is then accepted by the parties involved. Once accepted, a legally binding contract is formed. Related to this is the requirement that all parties involved in the contract have the legal capacity to enter into a contract.
To ensure the contract is legally enforceable, there must be sufficient certainty contained within the agreed terms, which should be unambiguous.
Next is consideration, which represents what each party is bringing to the table in order to strike a deal. Depending on the context, this could be a monetary consideration, or services, or even a promise of refraining from specific actions. For a contract to be legally enforceable, each party must be providing consideration, and the contract must clearly define what form this takes.
Finally, a valid contract must contain the intention to create legally binding relations. This means that parties involved in the contract must have a clear intent to create a legally binding agreement between them.
Time and resource allocation
Commercial contracts are both resource intensive and time-consuming to draft in full. It’s therefore important to consider how much of both time and money you are willing to invest before beginning the drafting process.
This may mean carefully considering the allocation of internal resources, such as which teams or individuals to involve in the drafting process, and how they will communicate with one another.
Similarly, setting clear timeframes for each stage of a contract, from drafting through to negotiation and finally execution, will create a smoother experience for all parties involved, avoiding both delays and additional cost.
Contract negotiations
A certain amount of negotiation or back-and-forth is to be expected when drafting up a commercial contract. Deciding how you will approach these negotiations and the strategies you will use is an important element of securing favourable terms for your business while preserving a positive relationship with the other party or parties.
Ensure you enter into negotiations armed with knowledge of your bargaining power and the relevant market conditions, as well as the points you are willing to compromise on, and those which will be your deal breakers.
While it’s important to negotiate from a position of strength, it’s also necessary to maintain good rapport with the other party to arrive at a mutually beneficial agreement, and often this will require entering negotiations with a willingness to be flexible and open to compromise. With that being said, ensuring you have access to legal advice is key for safeguarding your own interests during negotiations.
Clarity and structure
Language can sometimes be vague and open to multiple interpretations. When it comes to drafting a contract, it’s essential that the language used is unambiguous, or you could be setting yourself up for costly disputes further down the line.
Using precise and clearly defined language, including industry-specific terms and jargon, will help to minimise the risk of misinterpretations. It’s also important that your contract clearly sets out the rights and responsibilities of each party involved, ensuring all parties understand their legal obligations.
The structure of a contract should aim to be easy to follow, logically flowing from general provisions to more detailed terms and clauses, and each of these should be carefully reviewed to ensure their impact is intentional and does not interfere with the overall validity or enforceability of the contract as a whole.
Final thoughts
Contracts are vital for mitigating the risks of entering into commercial relationships, and ensuring your interests are protected while fostering positive, long-term business relationships. They are, however, a rather complex undertaking. It’s therefore essential to have access to the right legal expertise during the drafting, negotiation and execution phase so you can have confidence in the certainty and enforceability of the final contract.
