Contract lawyers aren’t cheap. So if you can’t afford one or if you just want to get some insight into the basics of how to check a contract – read on.
Contracts can be simple (for example a low value supply of services contract) or complicated (for example, a contract to explore for oil). You can read about different types of contracts by clicking here. But no matter what the subject matter or level of complexity is in a contract there are certain fundamentals that should be addressed. If they aren’t then one or more of the parties to the contract could be signing something they later regret, or the contract may not even be legally binding.
So, what should you look out for before signing on the dotted line?
Know who you are contracting with
With over 5 million businesses registered in England and Wales, it is important to check that you are contracting with the correct party. If the party you’re contracting with is a limited company, you can look them up for free at Companies House. You can check their name, registered office, and company number and you should make sure that these details are included in the contract. Why? Because if you don’t include at least the name and registered company number it can be difficult to establish later on exactly which business you contracted with. Not ideal if you are trying to enforce your rights under the contract. A company can change its name and registered office as many times as it likes but it cannot change its registered number.
Be clear about what is being sold
Most contract disputes arise because the contract is unclear about what is being supplied. It is easy to get bogged down in other legal or more technical aspects while forgetting that the fundamental point of a contract is to describe clearly what goods or services are to be supplied. It is also easy to be lazy and to think that a short description of the goods or services will suffice. It may do but bear in mind that if you fall out with the other party that other party’s contract lawyers are going to exploit the lack of detail or ambiguity in the contract. It is so much better to avoid this from happening in the first place and describe the goods or service to be supplied in detail.
Set out the payment terms clearly
For one of the parties, payment will be the whole object of the contract. Although seemingly obvious, many contracts are unclear about how pricing and payment mechanisms work. Ensure that your contract is clear about what is payable and when, and how prices can be changed. For example, if a consultant is being paid a “day rate” how many hours constitutes “one day”? If commission is being paid based on profit should that be gross profit or net profit? The contract should define what exactly “gross profit” or “net profit” means.
Start date and termination
Contracts should have a clear start date, whether that is the date that both parties sign the contract or a different specified date. Even more importantly, the contract should also contain a termination date or a mechanism that provides for how the contract can be ended. If termination is not dealt with then you are left relying on common law rights such as the right to terminate the contract for “repudiatory breach” i.e. serious breach of the contract or the right to terminate the contract on “reasonable” notice. What constitutes “reasonable” notice will depend on various factors relevant to the specific contract – bottom line, the position will be unclear. So avoid the problem in the first place and put in clear start and termination provisions.
The top four points are crucial – read on for some others that you should also think about….
Limiting and excluding liability
After dealing with the questions of who does what, and who pays what, you should think about whether your liability under the contract should be limited. If you are supplying to consumers then limiting liability is hard – we are not going to discuss that here – get in touch with our contract lawyers about this. If you are a supplying to a business then it would be standard for you to include a limit of liability clause so include one! The usual limit of liability that customers accept is the total cost of your goods / services or 12 months’ worth of those costs. You can also exclude liability for things such as loss of profits but you cannot exclude liability for causing death or injury, for fraud or fraudulent misrepresentation or breach of the terms implied by section 12 of the Sale of Goods Act 1979 or section 2 of the Supply of Goods and Services Act 1982. Limitation and exclusion of liability clauses should be carefully worded if they are to work properly so if it’s really important for you to include these clauses in a contract get in touch with one of our contract lawyers and pay for some advice! If it’s not that important for you then you can find example contracts on-line. Hopefully you won’t get inspiration from a poorly drafted one.
Intellectual property rights
Unless the contract says otherwise – if you are signing a contract with anyone other than an employee, that other party will own the intellectual property rights in whatever they supply to you. If, say, you are engaging a freelancer or consultant to carry out some creative work or software development work then having that other party own the intellectual property rights in the work they supply to you will not be ok for you – they will be able to hold you to ransom if you use their work in a product that turns out to be a money spinner or if you supply that product on to a client and you don’t want that client suing you. Same point as above: intellectual property rights clauses should be carefully drafted so either use one of our contract lawyers or hope for the best by seeing what you can find on-line.
Data Protection/ Confidentiality
You should always think about data protection / confidentiality and the extent to which these things should be provided for in the contract. If you will be disclosing sensitive information about your business or clients to the other party then you will need to include confidentiality clauses. If you will be sending or receiving personal data belonging to individuals who are not your staff or the staff of the other party then you should work out who is the data controller / data processor and include appropriate data transfer / data processor clauses in the contract. Sorry, but you will need one of our contract lawyers for that unless you are very confident that you know what you are doing – data protection compliance is hard. If you are not supplying / receiving other people’s personal data i.e. it’s just your and the other party’s staff that are exchanging their own personal data (name and contact details) when they email each other then you don’t need to worry so much about what is in the contract. You do though need to think about whether this type of exchange is covered in the privacy notice you have given to your staff – we aren’t going to go into more detail about GDPR / Data Protection Act compliance in this note.
Choice of Law/ Jurisdiction
Specifying that the laws of England & Wales apply and that the English courts have exclusive or non-exclusive jurisdiction is not so important in a contract where all the parties are based here. However, if you are signing a contract with a party who is based overseas it is crucial to include such provisions. If you don’t and there is a problem then you will have an argument with the other party as to which law should apply which you may lose and you may find yourself having to sue or defend in a foreign court.
Our contract lawyers will ensure that you have proper contracts in place that not only protect you from risk but which help you do deals (because they are clear and balanced) and they will make you look professional (sorry but contracts prepared by businesses who have cobbled them together themselves tend to look pretty awful apart from anything else).
However, if you really need to cut corners then we hope that you find this a useful guide. If you focus on points 1 – 4 and then bear in mind points 5 – 8 you should be ok until your business takes off and then you can get in touch with us!
If you do want to talk about your contracts or any other legal support we can help you with please contact Neil Williamson.