A Small Business' Guide to Checking Contracts

A Small Business' Guide to Checking Contracts

LawBite's Diane Pearce shares her expert knowledge on how to check legal contracts as a small business owner, along with exploring the commercial implications of Brexit

By Diane Pearce

As a small business owner, you'll need to carefully read contracts that you may be required to enter in to, such as with suppliers, customers, employees, or business leases. Although it's advisable to seek legal advice where possible, we've covered some tips below to help you check contacts yourself:

1. Get it in writing

There will be occasions when a verbal contract can be legally binding and enforceable. Even an inferred contract can be drawn from unofficial documents such as emails, but the reality is that these are particularly difficult to challenge in Court and the legal fees would escalate quickly whilst trying to enforce this. As such, it's always best to enter into a written agreement signed by both parties and ensure there are signature pages at the back.

2. Read carefully

Check that the contract is in line with the scope of what has been agreed between the parties post-contract. This may seem like an obvious thing to do, but having a good understanding of the contract will help to prevent a future dispute, because you will have a clear idea of what is expected of you and what your obligations are. It also means that you will have had the chance to revise anything which isn't accepted or to address any key terms that are missing.

3. Check all parties' details  

Again, this may seem like a simple thing to do when checking a contract, but it's often overlooked. Check the registered office address on Companies House for each company to ensure that all parties’ details are accurate. An incorrect address or trading name could mean the contract isn't valid in the event of a dispute.

4. Keep it simple

Often clients make the mistake of drafting their own versions of contracts and underestimate the importance of creating a formal contract. Contracts don't need to be overly legalistic, but they do need to set out the parties' intentions, what their respective obligations will be and what the consideration will be. These should all be recorded in separate numbered paragraphs. 

5. Other key clauses

You should check to see if there are other key clauses included in the contract which could impact how the contract will be performed. This could include whether intellectual property needs to be assigned as part of the services, confidentiality obligations, data protection obligations in line with GDPR, or other issues such as if there will be an exclusive arrangement between the parties.

6. Timings

Ensure that any time restrictions are noted in the contract. If there are no time restrictions, include a clause which states that “time is not of the essence.''

7. Check the payment terms

Check the contract has adequate provisions for payment of the services or goods to which the contract relates to. It's also advisable to have default provisions that allow the right to recover interest if payment isn't made on time and the right to recover legal costs.

8. Termination provisions

Ensure the contract has adequate termination provisions set out within it. You don't always have to include a clause stating each party can terminate at their own convenience, but you should include default termination clauses such as if one party breaches the contract, fails to pay when payment is due or enters into an insolvent situation.

9. Think about what happens if there is a dispute

Nobody wants to enter into a contract with the underlying thought that things might go wrong in the near future, but disputes are sadly more common than you might think, and as the economy dips, we see a rise in contract disputes.

It's therefore important to include a dispute resolution clause that compels the parties to negotiate in the first instance of a dispute and then to facilitate a mediation or arbitration before asking the Court to intervene.

10. Brexit

Brexit isn't likely to have any impact on existing contract law in England because it's underpinned by common law that has been around for centuries. However, it will have some commercial implications so bear this in mind before entering in to a contract.

Having been subject to European law, English courts may have previously been more lenient on the wider approach to interpretation of contracts. Brexit may well result in the English Courts becoming much stricter on the interpretation, so having a contract which creates certainty will minimize the risk here.

It's also worth considering the commercial impact, such as the profitability of the contract, freedom of movement of people (if relevant), exchange rates in currency etc. Avoid any reference to the EU since this will not include the UK post Brexit.

Bear in mind that it may be more difficult to enforce a judgment by the English courts in some EU member states if the UK ceases to be covered by the recast Brussels Regulation (1215/2012/EU) and replacement arrangements are not made.

11. Law and jurisdiction

Check that the contract has a clause that adequately deals with both the law and jurisdiction. It's recommended that the contract should be subject to English law and the jurisdiction of the English courts.

If you are looking at an international contract, then consider what law applies. Many countries have vastly different legal systems and rules on contracts, so where possible use English law.

12. Boilerplate provisions

Check whether the contract has boilerplate clauses - this refers to the operational provisions of any contract, rather than the legal ones. However, you should find the standard clauses found in most contracts at the back of any good contract.

In addition to the points above, be aware of any indemnities or warranties that you are being asked to enter into, and ensure you fully understand what these mean and what their implications might be. If in doubt, always seek legal advice. 

About the Author

Diane Pearce is a LawBrief at LawBite, the UK’s leading online legal portal powering a fully SRA regulated and insured UK law firm that specializes in commercial law for business. Diane is a qualified Solicitor with over 16 years’ experience in advising businesses. She is passionate about business and uses her insight to provide comprehensive and commercial advice to find business-focused solutions.