The Step-by-Step Guide to Constructing a Legally Valid Business Contract

A specific and comprehensive contract can avoid a whole raft of issues. Business challenges between employees, suppliers and customers are all avoidable, with a clear contractual agreement that both parties are comfortable with.

There are several essentials that you should include in every business contract, including:

    • The actions required from each signatory.
    • Timescales involved.
    • Fees charged for delivery.
    • Clauses for returns or refunds.
    • Payment terms.
    • What happens if either party does not produce.
    • Late payment clauses and conditions.
    • The correct route to resolving disagreements.

While there are thousands of business contract templates online, they are rarely (if ever!) sufficient to protect the interests of your company.

Legally enforceable contracts make a world of difference when things go wrong, ensuring that every clause contributes to a factual instance of contractual breach.

Today The Law Firm Group looks at each element of a future-proof business contract to help you work through your documentation step-by-step.

1. Business Contract Offer and Acceptance

Contracts rely on evidence that each party intends to enter into a contractual relationship and agrees to be bound by the terms.

Offers can be verbal, but written contracts are much easier to prove in legal conflicts.

The intention must be clear since ambiguity can cause a challenge. Specific terms are key, as are records if you enter into a contract any way other than in writing.

Acceptance of a business contract must also be demonstrable, including an agreement to the established terms, with proof that every involved company took on the mutual understanding about what they, and the other parties, would deliver.

2. Establishing Contractual Consideration

Consideration means the payment made for services rendered or goods delivered. Payment doesn’t always have to be financial, but you need to evidence what you expect to receive.

For example:

    • Your business contract includes marketing of your enterprise in return for reduced price products.
    • The consideration is the reduction in revenue for the same item.
    • You need to prove that your customer has accepted the terms and agreed to provide marketing services in return for price reductions.

3. Entering Into Business Contracts With a Representative of Legal Capacity

Capacity comes into play if you end up with a conflict.

In essence, anybody who enters into a contract needs to have the authority and power to agree to the terms and commit the business to the agreement in question.

Examples include minors or individuals without the capacity to make informed judgements. Such a person cannot enter into any good faith agreement with an understanding of the commitment they are making.

It isn’t always easy to check the capacity of another enterprise, but a commercial solicitor can recommend steps to clarify whether your contract holds weight under this requirement.

The takeaway is that entering into a business contract with a person without sufficient legal capacity generally means your contract is void.

4. Commercial Contract Terminations

Whatever the nature of your contract, there should be provisions for terminating the contract. That means looking at:

    • Events or occurrences that mean either party cannot meet the terms.
    • Notice periods to request a contract termination.

Termination clauses are often overlooked but can give rise to numerous challenges, whereby you don’t have the legal grounding to dispute the termination without evidence in your business contract to back this up.

Another issue is deciding which scenarios to add to your contract and what exact situations would constitute a fair contract termination event.

The goal is to ensure you don’t end up in a situation where you are contractually obliged to fulfil a contract that you cannot.

5. Contractual Damage Provision

There is always a chance, even in the most long-standing agreement, one party to a business contract might fail to meet the terms, either intentionally or not.

Commercial contracts should always include a clause relating to damages, often precluding any necessity for formal court action but reinforcing your position if the other party does not meet their obligations.

This clause is a backup if things go wrong, but the aim is to encourage any party to meet the terms, thus avoiding legal action set out in the agreed contract.

Breaches of contract can be highly complex, so you’ll need to be precise. For example, is a delivery two days late a cause to claim damages? How about a week or a month late?

This decision means looking at material and minor contractual breaches, so legal advice is recommended.

As well as identifying situations where failure to deliver constitutes a breach, companies need to think about how they’d handle this situation.

The ideal is that the party that breaches the contract must pay damages equal to the costs and issues caused.

6. Establishing Commercial Contract Legalities

To hold weight under pressure, a business contract must be legally enforceable.

That means the transactions involved are legal without falling into a grey area.

If any transactions, agreements or processes are potentially unlawful, we recommend seeking legal advice. A contract that refers to any systems outside of regulated business activities may not be enforceable.

Understanding the Crucial Elements of a Business Contract

Template contracts and standard terms don’t cut it when it comes to putting arrangements in place of a commercially significant value to your business.

Vague contracts, the lack of a clear agreement, signatures from unauthorised representatives, and an absence of termination clauses can cause no end of headaches.

To be able to chase payments, seek damages or claim reparations for delays that have caused financial damage to your company, you must have a legally valid contract in place, compliant with each item on our step-by-step guide.

Comprehensive contracts may take a little time to construct. Still, they can be a saving grace when disputes arrive, giving no room for manoeuvre on what you expect and what the related business has agreed to deliver.

For more assistance creating exacting business documentation to ensure all your key contracts operate to the benefit of your business, please get in touch with The Law Firm Group.

Our capable commercial solicitors can advise on every aspect of contract law, setting you up for a successful future, whatever challenges come your way.

Call or email us to talk about it. 0300 303 3805

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