As a business owner, you’ll come across commercial contracts in every aspect of your work. However, navigating and negotiating, let alone understanding, commercial contract law can sometimes seem impossible. 360 Business Law is here to help. In this quick and easy guide, we’ll give you a basic picture of everything you need to know about commercial contracts.
And if you need advice on contracts, get in touch with us to get access to our first-class legal services.
What is a commercial contract under U.K. Law?
A commercial contract is a legal agreement between businesses.
You will also see commercial contracts referred to as Business to Business (B2B) Agreements.
What do you need for a valid and enforceable contract?
For a commercial contract to be valid and enforceable, it must fulfill four key elements. Those are: agreement, capacity, consideration, and intention to create legal relations.
Agreement
Agreement covers the two stages of offer and acceptance.
Offer
An offer is an expression by one party to another of willingness to be contractually bound on certain terms.
Importantly, an ‘invitation to treat’ is not the same as an offer. An invitation to treat simply invites the offeree to make an offer but is not contractually binding.
Acceptance
Acceptance must be an unqualified and unconditional agreement to the terms of that offer and must be communicated to the offeror.
If the offeree responds with negotiated terms, this constitutes a counter-offer, not acceptance.
Capacity
Capacity means all contracting parties must be capable of understanding the terms and obligations of the contract. They must also be able to give their free consent to the contract.
Consideration
For a contract to be binding, the contracting parties must exchange some value. Note that the consideration does not have to be adequate, but it must be sufficient.
Intention to Create Legal Relations
For a contract to be enforceable, there must have been an intention to create legal relations. This means both parties wanted to enter into a legally binding contract.
In the context of commercial contracts, there is a presumption that the parties intended to enter into the contract.
Does a commercial contract have to be in writing?
Under commercial contract law in the U.K., there is no legal requirement for a commercial contract to be in writing. That is to say, a commercial contract in the U.K. can be verbal, implied, or written.
All three types are legally binding (if they fulfill certain criteria). However, our commercial solicitors will always recommend that your commercial contract is in writing. This reduces the risk of misunderstandings or disputes, as it is easy to evidence what has been agreed.
Implied terms in commercial contracts
Under U.K. commercial contract law, parties are mostly free to contract on whatever terms they like. However, U.K. statute does govern certain types of contracts by implying terms into them.
As a result, in B2B contracts, you must consider terms implied by the Sale of Goods Act 1979 , the Supply of Goods and Services Act 1982, and the Unfair Contracts Terms Act 1977.
Applies to contracts of sale of goods. This is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration.
- s.12 – the seller must have the ownership and right to sell the goods.
- s.13 – the seller must sell goods that correspond to the description given.
- s.14(2) – The goods supplied under the contract must be of satisfactory quality.
- s.14(3) – The goods must be reasonably fit for a specific purpose. This only applies if the purpose has been brought to the seller’s attention by the buyer.
- s.15 – The seller must ensure the goods are in the same condition as shown to the buyer from a sample.
Applies to contracts for both goods and services. The SGSA 1982 implies similar terms to the SGA 1979, in addition to the following:
- s. 13 – The supplier will carry out the service with reasonable care and skill.
- s.14 – If the contract does not stipulate the time frame in which the service is to be carried out, they will carry it out within a reasonable time.
- s.15 – Where consideration is not stipulated by the contract, the services will be priced at a reasonable charge.
The Unfair Contracts Terms Act applies to transactions between businesses. However, it only applies to contracts on written standard terms of business (s.3(1)), not to bespoke, negotiated contracts. It governs clauses that seek to limit or exclude liability in B2B contracts.
- s.2 – A person cannot exclude or restrict their liability for death or personal injury resulting from negligence.
- s.3 – Unless reasonable to do so, a person cannot use an exclusion clause that:
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- Excludes liability for breach of contract
- That allows a contractual performance that is substantially different from anticipated
- That allows for no performance at all
- s.6 Liability for the breach of obligations arising from s.12 of SGA 1979 (that the seller has the right to sell the goods) cannot be excluded or restricted.
- s.6(1(A)) liability for breaches of s.13-15 of the SGA 1979 cannot be excluded or restricted unless it is reasonable to do so.
- s.7(3(A)) liability for breach of obligations under s.2 of the SGSA 1982 cannot be excluded or restricted.
- s.7(4) liability in respect of the right to transfer ownership of goods or to give possession, as well as the assurance of quiet possession (freedom to enjoy property undisturbed) cannot be excluded or restricted unless reasonable to do so.
- s.8 misrepresentation – any term of a contract which attempts to exclude or restrict liability for misrepresentation will not be valid unless it is reasonable.
Can you exclude liability in U.K. commercial contracts?
Under U.K. commercial contract law it is possible to exclude an implied term in B2B contracts as long as the exclusion clause satisfies the reasonableness test, as laid down by the UCTA 1977.
Under Schedule 2 of the UCTA, the guidelines that help to determine ‘reasonableness’ are:
- The strength of the parties’ relative bargaining positions.
- Whether the customer received an inducement to agree to the term.
- Whether the customer knew or should have known about the existence of the term.
- If a term seeks to exclude liability if a condition is not complied with, whether it was reasonable to expect compliance with that condition.
- Whether the goods were manufactured, processed or adapted specifically for that customer.
When do you need a commercial contract?
If you’re dealing commercially with a third-party business, whether that’s in the purchase or sale of products or services, you need a commercial contract.
A water-tight commercial contract is critical. A good contract will help to:
- Protect your business’ interests
- Secure your rights under the contract
- Ensure you receive appropriate damages should the other party breach
- Mitigate your own liability
Types of Commercial Contracts in the UK
There are many different types of commercial contracts in the U.K. Here is a small selection of examples:
- Terms and conditions of trading
- Purchase and Sale of Goods or Services
- Employment Contracts
- Distribution Agreements
- Bill of Sale
- Non-Disclosure Agreement
- Introducer Agreements
- Indemnity Agreement
- Partnership Agreement
Additional Resource: 5 Key Types of Commercial Contracts
How is a commercial contract drafted?
Commercial contracts should always be in writing to capture what the parties have agreed. This will include details such as:
- Who is entering into the contract
- What products / services are being sold
- How much and when the customer is going to pay
- When and where delivery will take place
- Any other obligations.
Using a standard ‘off-the-shelf’ commercial contract can seem like an easy option. Especially since there is an abundance of sample contracts that can be downloaded from the internet. However, it really is worth investing in contracts that are specific to you. Generic documents are unlikely to be tailored to your particular needs and context and can miss out key provisions and protections.
Here at 360 Business Law, our first-class lawyers offer the best commercial and contract advice. They will guide you through the process of drafting a bespoke template commercial contract to suit your needs.
We are also very aware that some customers will insist on pushing their contract terms onto you and these are often ‘not suitable’ to the products/services you are offering. We will assist you with amending and negotiating such terms.
Our qualified commercial solicitors can:
- Discuss your needs and any commercial terms you think you might need in your contract
- Discuss any ambiguities or concerns
- Suggest other clauses and terms that it would be advisable to include
- Review your customer’s draft contract and highlight aspects of the document that are not favourable
- Suggest reasonable compromises
In addition, it’s worth noting that you may go through several stages of re-drafts and negotiations before you are able to finalize the contract. It’s is not unusual for your customer to involve their legal department or an external lawyer in this process.
What key clauses should go into a commercial contract?
A poorly worded, ambiguous, or weak commercial contract can seriously undermine your business. It can also leave you vulnerable to liability – that’s why a thoroughly drafted commercial contract is so valuable.
Although all business contracts will differ slightly, there are some elements that are absolutely key to commercial contracts in the U.K.
Key clauses:
- Offer
- Mutual Consideration
- Acceptance
- Transaction details
- Parties detail
- Definitions, explaining any terminology
- Recitals or Background section
- Limitations and exclusions (which must pass the ‘reasonableness’ test as laid out by the UCTA 1977)
- Standard ‘boiler plate clauses’, such as force majeure
- Schedules and appendices
- Execution clause
Additional Resource: Important Clauses Found in Commercial Contracts
There is also a common custom and practice in commercial contracts of including the following:
- Arbitration clause
- Choice of law clause
- Confidentiality clause
- Indemnification clause
- Severability clause
FAQs about Commercial Contracts
1. What does good faith mean in a U.K. commercial contract?
You may come across the phrase ‘good faith’ in your commercial contract, but what does that actually mean? The meaning of ‘good faith’ has developed through case law and heavily depends on context. Good faith can refer to:
- ‘Honesty in performance’
- ‘Loyalty to the parties’ bargain’
- ‘Acting within the spirit of an agreement’
The test for giving meaning to ‘good faith’ was laid out in Mid Essex Hospital Services. It asks: ‘would the conduct of the parties be seen as commercially unacceptable by reasonable and honest people?’.
2. How do I get out of a B2B contract?
To ‘get out of a B2B contract’, you would need to terminate the contract. You might want to do this if:
- The other party has breached the contract
- The contract is no longer profitable
- You no longer need the goods or services provided
When you terminate a contract, it is discharged, so any future primary obligations owed by the contracting parties fall away.
At common law, the following three reasons would justify termination of contract:
- Breach of a condition or implied term.
- A sufficiently serious breach of an intermediate term.
- A refusal to perform.
For instance, commercial contracts also often include express termination clauses. These specifically provide for termination in certain contexts. For example, an ‘event of default’ is an event specified in a commercial agreement that gives the non-defaulting party the right, amongst other things, to terminate the agreement.
3. How long does a commercial contract last for?
A commercial contract can last as long as the parties want. There a four different types of duration for a commercial contract:
- Fixed term, whereby the contract automatically terminates on the fixed date.
- Initial fixed term, where there must be notice of termination before the end of the term.
- On subscription, where the contract is for a fixed duration that automatically renews unless terminated by notice.
- Not a fixed term, and the contract can be terminated by giving notice.
4. What should I do if there is a dispute over a commercial contract?
Consult your 360 Business Law solicitor. They will help you understand the nature of the dispute, gather evidence, and negotiate a resolution.
5. What is the battle of the forms?
The ‘battle of the forms’ is where two businesses are in the process of negotiating the terms of a contract, and both want the contract to be on their own terms.
To sum up, the ‘battle of the forms’ is ‘won’ by the party that ‘fires the last shot’. That party will put forward their terms and conditions last, without receiving an explicit repudiation.
Final Thoughts
In conclusion, ensuring your commercial contracts are robust and serving your business’ best interests is absolutely critical. Therefore, having the guidance of a first-class solicitor is always advisable. This is the case even if you have a good grasp of commercial and contract law.
Lastly, here at 360 Business Law, we ensure that your commercial transactions are easy and affordable. Our innovative subscription legal services models means that you can access unlimited legal services. That includes in the U.K. and abroad, all for a fixed monthly fee.
Get in touch to learn more about how to instruct one of our lawyers.