A Guide to Business Contracts

This is an important document in any transaction because it legally commits the buyer to purchasing the goods or services at the agreed price and in the timeframe stipulated.

A purchase order provides important protection to the supplier against the adverse financial consequences of the customer pulling out of the deal.

The document is also important from the perspective of the purchaser as it commits the seller to providing the items on time and at the stated price. This avoids, for example, the supplier demanding an additional payment before handing over the goods.

This serves to officially transfer ownership of an item from the seller to the buyer, providing proof that an agreement was reached.

On an everyday level, the receipt a shopper receives at a supermarket checkout serves as a bill of sale, demonstrating that they have paid the agreed price for the goods they are about to take out of the store.

In more specialised transactions, a formal bill of sale will often be used in the sale of goods such as vehicles to confirm that there has been a transfer of ownership.

A warranty is concerned with circumstances that would mean the transaction is void.

The most common example of this is where a product that has been supplied is faulty or is not capable of doing what the seller claimed.

In such a situation, the presence of a warranty would mean the customer was entitled to a refund on any payment they had made.

This is a common business contract in the case of someone who is to receive a loan from a financial organisation.

The agreement will specify items (such as a house, car or jewellery) which will be transferred to the lender should the borrower default on the loan.

It is vital that a business contract establishes who each party is so that all sides in the agreement appreciate their role and that of others.

For example, an agreement may state that an IT contractor is the service provider and a firm of accountants is the client.

At the heart of any business contract should be a description of the goods or services that are to be provided to the customer, the timeframe in which they are to be supplied and the payment that will be made by the customer.

It is imperative that the responsibilities of each party are set out in clear, unambiguous terms so that both sides know what they have agreed to and are able to seek legal redress should the other party not fulfil their obligations.

As well as setting out what the cost of the goods or services will be, it is vital that a business contract makes clear the terms by which the payment will be made. Issues to consider include:

who will be making the payment and to whom they will be making it

• how the payment will be made (for example, BACS, PayPal, direct debit)
• if a deposit is required, how much this will be and when it must be made
• if payment is to be made in instalments, how many there will be, the dates on
• which they will be made and how much each will be (including any interest payable)
• the supplier’s bank details so that payment can be made

This may simply be the dates on which the contract will begin and end. It is possible that the parties may also wish to include a clause outlining how the agreement can be lengthened if required.

Conversely, the business contract may also explain how either side can terminate the agreement early – for example, by paying a termination fee or giving a specified period of notice.

In addition, the contract may set out circumstances in which a party can end the deal and seek financial compensation from the other party – for example, should the supplier not provide the goods or services on time or the client be late in making a payment.

A supplier may wish to set a limit on the amount of compensation that they will be expected to pay should they fail to fulfil their obligations.

Such a clause may not be legally valid if it sets the amount at an unreasonably low level.

Many businesses ask customers to pay a non-refundable deposit when they place an order for goods or services.

This acts as a safeguard in case the client subsequently cancels the order and leaves the supplier out of pocket.

While this is generally considered an acceptable practice, businesses must not ask for an excessive amount as a deposit – it should only cover the money that they would lose in the event of a cancellation.

The deposit should also only be forfeited if it is the customer who cancels the transaction.

Regardless of the terms of the contract a court would be likely to consider it unfair should a business pull out of a deal and refuse to reimburse the client.

The same principles as above apply to contract terms which refer to situations where the customer wishes to terminate an agreement earlier than planned – for example, by paying off their mortgage early.

In addition to ensuring that any financial penalties are proportionate to the losses incurred by the business, the law also serves to prevent the business from enforcing the sanctions unfairly, such as by entering a customer’s home and seizing their property.

We have seen above how it is unfair of a business to cancel a customer’s order and retain their deposit.

Likewise, it would be likely to be considered unreasonable for a contract to prevent the client claiming compensation for any losses it incurs as a result of the cancellation.

A self-employed builder, for example, may find themselves unable to fulfil orders if their supplier reneges on an agreement to supply them with the materials they require.

A contract which seeks to enable a company to avoid making redress when it is at fault is likely to be considered unfair.

In particular, a contract cannot seek to take away a customer’s statutory rights which state that goods must match their descriptions and be fit for purpose, while services must be provided with a reasonable level of skill and care.

A variation clause gives a business the right to change certain aspects of a contract after the terms have been agreed with a customer.

Such changes must be reasonable, however, or they are likely to be considered unfair. While it may be reasonable, for example, for a company to raise its prices in line with the retail price index, it does not have the right to impose excessive increases above the rate of inflation.

Should a contract contain a clause that states it will automatically renew, this must be made explicitly clear to the customer – who should also be aware of how and when to prevent the agreement being extended.

A company should be transparent in the way it presents crucial points in a contract.

A court, for example, is likely to be unsympathetic to a business that uses complex language and legal jargon in agreements or which places crucial clauses in the small print at the end of the contract where they may be overlooked by the customer.