Depending on your business, you’ll be handling different types of B2B contracts on a frequent basis. With a diverse range of commercial contracts, comes different common practices and customs, as well as particular laws and legislation that you need to be aware of. A well-grounded understanding of the particularities of commercial contract law is essential for minimising risk of commercial litigation and disputes. In this article, we walk you through five different types of commercial contracts in the U.K. In this article, we take a look at what contexts they’re used in, essential terms and clauses, and what you should look out for.
What are commercial contracts under U.K. law?
A commercial contract under U.K. law is a legally enforceable agreement between two or more parties pertaining to a commercial issue. ‘Commercial Contracts’ is actually a broad umbrella term. It covers many different, more specific, types of contracts relevant to specific business relationships and contexts.
Some people refer to Commercial Contracts as Business to Business Agreements (B2B Agreements).
Read more in our guide to everything you need to know about commercial contracts
B2B contracts & Business
Business contracts underpin critical negotiations, agreements and transactions in most commercial contexts. A well-written and robust contract is crucial to clarify the rights and obligations of the contracting parties under the agreement, evidencing the agreed responsibilities and consequences of non-compliance, and guaranteeing the fulfillment of the agreed duties.
Although commercial contracts don’t technically need to be in writing to be enforceable and binding, our commercial solicitors will always advise you to draft a written contract. This is because a written contract provides critical evidence should a dispute or challenge arise.
It’s also worth noting that the use of template contracts isn’t always the best idea. A bespoke contract, tailored to the specific situation at hand, will always better serve you and protect your business’ interests more effectively.
Types of Commercial Contracts in the UK
As we’ve mentioned, there are a myriad of commercial contracts that are relevant to specific business contexts. Let’s take a look at five of the most common types of commercial contracts: Contracts for the Supply of Goods or Services, Agency Agreements, Sale & Distribution Agreements, Franchise Agreements and Agreements to Purchase a Business.
Note: the contracts discussed in this article are for use in the UK, there are also equivalent types of contracts for other countries and some of the specifications will be different depending on the governing law and jurisdiction.
Contract for Supply of Goods or Services
A contract for the supply of goods or services is exactly what it sounds like. An agreement for one business to provide a specific service or sell a particular item to another.
Here’s what will typically be detailed in a contract for the supply of goods or services:
- ‘Specification of the Goods or Services’, which essentially outlines details and description about the services or goods that will be provided
- How the goods will be manufactured, sourced and delivered
- The commercial relationship between the contracting parties
- What will happen in the case of defective goods being provided
- The price agreed for the services or goods and the payment structure
- Remedies for cases of late payment
- Warranties and indemnity protection
- Conditions for termination of the contract
- Boilerplate terms such as force majeure
Note that Supply of Goods and Services contracts are affected by the Sale of Goods Acts 1979 and the Supply of Goods and Services Act 1982. This means most Supply of Goods and Services contracts will have terms implied into them. This legislation implies terms that relate to the description, quality, and fitness for purpose of any goods sold, as well as the standard of care and skill and the time the work will take.
You can learn more about what these implied terms mean for your contract in our last article: Everything You Need To Know About Commercial Contracts.
Agency Agreement
An agency agreement authorises one party, ‘the agent’, by way of the contract, to act on another party’s behalf, ‘the principal’. In a commercial context, you’ll come across this if you’re employing someone to represent your business, broker deals and carry out transactions on your business’ behalf.
Remember, given that an agent acts on the principal’s behalf, you still bear the commercial risk and liability for transactions with third parties. As such, you may find yourself liable should your agent carry out illegal activity in your name. Plus, the principal is bound by all contracts that agents enter into on their behalf. This is why it’s absolutely fundamental that your agency agreement limits your liability as far as possible should your agent go beyond their authorised purview.
An Agency Agreement will detail:
- The duties and responsibilities of both the agent and principle
- Where the agent will be working
- Whether the agent is non-exclusive or exclusive
- The agreed fee and the payment structure
- Protection of trade secrets and confidential information
- How long the agency agreement will last
- Consequences for breach of contract
Note: your contract may be affected by The Commercial Agents Regulation 1993. This legislation only applies to supply of goods rather than services, and is designed to protect commercial agents vis-a-vis the principal.
The terms of The Commercial Agents Regulation Act are implied into all relevant commercial agency agreements. Some of these implied terms can be excluded with express contractual provisions. The implied terms cover remuneration, termination, indemnity, and compensation.
A sale and distribution agreement
You’re most likely to come across a Sales and Distribution Agreement when you’re expanding into new markets and territories. Under this kind of agreement, the supplier or manufacturer sells their goods to the distributor, who in turn sells them onto their customers.
In a distribution agreement, it’s essential to protect your interests and minimize the risk you’re exposed to. Some of the responsibilities imposed on the distributor will mirror those included in an agency agreement. You’ll also see some terms from a typical sale agreements. Here are some of the details that are usually included:
- Requirement for the distributor to obtain necessary licences or permits for the sale of the goods in their market
- Requirement for proper records of sales
- The agreed fee and payment structure
- Minimum quality of the goods
- When ownership passes from supplier to distributor
- Minimum target obligations
- Confidentiality provisions
- Outlining the commercial relationship and whether it is exclusive or non-exclusive
- Warranty and indemnification provisions
Franchise Agreements
A franchise is a means of distributing products or services involving a franchisor and a franchisee. The franchisor is the one who sets up the brand’s trademark and business system, while the franchisee pays the franchisor a royalty and an initial fee for the right to do business under that brand’s name.
The most common type of franchising agreement is a Business Format Franchise. Under this agreement, the franchisor provides the franchisee with its trade name, products and services, as well as the entire business infrastructure.
Franchising is a contractual agreement between the franchisor and franchisee (the licensor and licensee). Here are some examples of the typical terms included in a franchise agreement:
- The identity of the franchisor and the franchisee
- The rights granted to the franchisor and to the individual franchisee
- The duration of the franchise and how renewal would work
- The agreed fee and payment structure
- The marketing arrangement
- The operating requirements
- The franchisee’s right to sell the franchise
- What happens should the franchisee die or fall ill
- Consequences for breach
- Key obligations and restrictions after termination
In the interests of consistency, you should contract all franchises on the same terms.
Agreement to Purchase a Business
A Purchase of Business Agreement is a document that underpins the sale of a business between the two contracting parties. This type of agreement transfers ownership of a business from the seller to the buyer. Depending on the type of business and transaction, this can be a:
- Sale of Business Agreement
- Share Purchase Agreement
- Asset Purchase Agreement
- Business Transfer Agreement
You’ll need this type of agreement if you’re trying to sell assets or shares in your business, want to buy another existing business or assets in that business, or are undertaking a merger or acquisition.
These types of agreement typically include details surrounding:
- Terms of the sale
- The legal relationship between the contracting parties
- What is included in the purchase
- Warranties
- The agreed price and payment structure
- Any preconditions for the sale
You’ll also come across these restrictive clauses:
- Non-competition
- Non-solicitation
- Confidentiality
- Environmental Compliance
FAQs about Commercial Contracts
1. What’s the difference between an agent and a distributor?
Many people take these terms to be synonymous, but they’re not. Agents act on behalf of a principal. Generally, when an agent creates a contract, they’re creating it between the principal and the client. They’re not a party to this contract.
By contrast, a distributor contracts directly with the customer. A distributor buys goods from the supplier and then sells them on in their own right.
2. How do I draft a commercial contract?
Although you can try using an off-the-shelf commercial contract template, as we’ve outlined in this article, there are a lot of different types of business contract that are tailored to different situations. For this reason, we recommend consulting one of our expert lawyers here at 360 Business Law. Our team of highly-qualified lawyers are on hand to help you draft and negotiate a bespoke contract that will protect your business’ interests.
The best bit? Get unlimited access to our services for a flat monthly fee.
3. Should you set out payment terms in a contract?
It’s normally considered good practice to include payment terms in your B2B contract. Cash flow is an absolutely critical consideration for any business, and including payment agreements in your contract are just one way to ensure everyone is on the same page.
In your contract, you can stipulate the due date for the payment, how you’d like to be paid, how far in advance or behind you’d like to be paid, and penalties for late payment.
Here at 360 Law Group, our lawyers are always on hand to help you with your commercial contract. Get in touch to access our first-class legal services.