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Contracts: avoiding the pitfalls

You don’t need to be a lawyer to avoid some of the main pitfalls when it comes to contracts. Solicitor and author Jon Rush offers some practical tips on how small businesses can protect their legal position:

Get it in writing
Try not to start work until you have a signed, written agreement. Both legally and commercially, you will generally be in a much stronger position if you can point to a formal contract setting out exactly what has been agreed e.g. what the price is, when the work must be done by and so on. Where you are dealing with larger organisations, make sure that the person signing the contract is authorised to do so. Mark all draft documents “Subject to contract” until you are ready to do the deal.

Don't leave it until the last minute
It’s worth thinking about what you want to appear in the contract at an early stage of the negotiations. For example, it’s easy to spend a lot of time debating the price at the expense of other important issues like termination rights (e.g. how much notice one side has to give to the other in order to bring the contract to an end) or what should happen if things go wrong (see below).

What does the work involve?
The contract should state clearly what the work involves. Don’t assume that this is obvious just because you have discussed it with the other side – always get it down in writing. Here are some things you may want to include:

  • details of the location where the work is to be carried out (if relevant);
  • quantities, measurements and other technical specifications;
  • any minimum standards which the goods or services must meet (e.g. relevant industry standards).

Buyers should also ensure that the contract explains what the goods or services are for and should refer to any special or unusual requirements (e.g. that the products must be compatible with certain other products).

When does it have to be done by?
Buyers: If it is important that work is done by a particular time, make sure the contract says that “Time is of the essence” – if the supplier fails to deliver on time, this may allow you to terminate the contract and find another supplier.

Suppliers: Unless you are confident you can deliver on time, you should resist any attempt by the buyer to make “time of the essence” (see above) and make it clear that any delivery dates are merely estimates.

How much is it going to cost?
Buyers: Try to agree a fixed price, most of which is payable only after the work has been done to your satisfaction. Check that the price includes everything you are expecting to pay and that the supplier cannot charge you for hidden extras, such as travel expenses or delivery charges.

Suppliers: If you want to charge extra for VAT, delivery charges and so on, you need to say so in the contract. Try to agree payment in instalments, payable as work progresses - especially if you have concerns about a customer’s ability to pay. Say that “Time for payment is of the essence” and make it clear that you are entitled to stop work if the buyer fails to pay on time.

Promises? What promises?
Buyers: Make sure that, at the very least, the contract contains promises (usually called “warranties”) that any products will be “of satisfactory quality” and “fit for their purpose” and that any services will be provided with “reasonable skill and care”. Although these promises are normally implied into the contract by law, suppliers are sometimes allowed to exclude them, so it’s best to have them written down in the contract. You should also get the supplier to include a promise that he will either replace or repair any faulty goods, at your option – otherwise you may only be able to claim financial compensation (when what you really want is to have the faulty goods put right).

Suppliers: Don’t expect to get away with giving no promises at all about the quality of goods or services – but equally, don’t promise to meet standards that are beyond the capabilities of your business. It is usually worth including wording such as “All other warranties, whether express or implied, by statute or otherwise are excluded to the fullest extent permitted by law”. If you are a reseller of goods, look at the promises given by your own supplier about the quality of the goods; try to avoid promising anything more than that in contracts with your customers.

What if things go wrong?
Think about what should happen if things don’t go according to plan. For example, if the supplier delivers late, should the buyer be able to terminate the contract ? If the work proves more expensive than expected, who will bear the extra cost? By dealing with these issues in the contract, you will reduce the risk of getting into a costly and time-consuming legal dispute about what should happen if things go wrong.

Suppliers should always ensure that they have limited their liability to their customers in the event that something goes badly wrong. Any exclusion or financial limit of liability is normally expected to be “reasonable”. This depends on factors like the amount of insurance cover you have (e.g. professional indemnity or products liability policies) and the resources available to your business. If you cannot afford insurance, then as a very general rule of thumb, you should go for a figure which is likely to cause your business some pain but without making you go under. Whilst there is no guarantee that this will work, you lose nothing by trying. Finally, remember that you cannot limit or exclude your liability for fraud or for causing death or personal injury.

Selling to consumers
All the tips given above assume that you are dealing with another business. If you are selling to consumers (i.e. individuals buying from you in a non-business capacity), much tougher rules apply about what you can put in your contract. In particular, the contract will need to be written in plain English and strike a fair balance between your business and the consumer. For more details, visit the websites of the Office of Fair Trading: www.oft.gov.uk (look under “Business Information” and “Unfair Terms in Consumer Contracts”) and the Competition and Consumer Policy unit of the Department of Trade and Industry: www.dti.gov.uk/ccp.

Jon Rush is a solicitor and author of “Understanding and Negotiating Business Contracts” (How To Books, 2002), which is written specifically with small businesses in mind and includes sample wording – for more information, see www.howtobooks.co.uk. This article is only intended to give you a general
idea of the issues likely to arise when negotiating contracts – it is not meant to be a substitute for detailed legal advice.