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Understanding common clauses in a commercial contract

A commercial contract, often called a business agreement, is all about buying and selling products and services. The commercial terms of the deal and the corresponding legal detail will vary enormously from contract to contract, but there are a number of clauses which are likely to appear in some form or other. These are some of the common provisions:

Date

Commercial agreements are commonly dated at the start. This will normally be the date it is signed and certainly shouldn’t be earlier than that. The date is important for a number of reasons – it is often when the agreements starts, or may be when rights or obligations start. If the contract is to apply to any period before it is signed that should be dealt with as a separate issue in the document. Likewise if the agreement will only come into effect later, for example when some required condition is fulfilled, that should be covered separately in the document.

Parties

All persons or companies entering into the commercial agreement should be accurately identified by name and address. If a business is not a limited company, the sole trader or all the partners in the business should be identified by their name and home address.

Background

Many commercial contracts have an introductory section which sets the scene and explains what the agreement is about – sometimes called recitals or preamble. It is not an essential component, but can be helpful. Although it is often stated not to be an operative part of the agreement, care should nevertheless be taken to ensure that it is accurate to avoid any ambiguities.

Definitions and interpretation

A useful device found in most commercial agreements is a section defining key terms used throughout. This avoids the need to keep explaining what is meant by the term on each occasion it appears and helps bring some consistency. It is therefore most important that the terms are given appropriate definitions at the outset and that they are then used consistently throughout the agreement. The section also often contains some statements about assumptions to be made when reading the document, again to avoid repetition and to aid uniformity. An example commonly seen is that any headings which appear are purely for convenience and do not affect the meaning of the document. If there are other documents which relate to the agreement in question it would be sensible to consider an order of priority which is to apply if there is any conflict or ambiguity between them.

Main subject of the contract

The subject matter of commercial agreements will vary enormously, covering a wide range of goods and services. The content of each contract will need to be specifically tailored to deal with what each party is to do, how and when those obligations are to be performed and so on. Considering that detail and documenting it will be a key part in the success of the business relationship. The content which will be appropriate for each contract will need to be considered on a case by case basis and drafted accordingly. Although dealt with here in a short paragraph, depending on the type and complexity of the arrangement, it is clearly vital that the detail of the commercial deal be thoroughly and properly documented.

Price and payment

This will be the section of most interest to a business: what is to be paid, when and how. You may come across the expression ‘consideration’ in some legal documents. That is simply a legal word for the price or value to be paid. From a business point of view the agreement needs to set out clearly what each party is to pay or receive for the products or services. If the price is not a fixed sum, set out how it is to be calculated. State how and when the price has to be paid and whether there are any extras to be added such as expenses. If the payment is not made on time, set out any potential consequences such as a right to charge interest or suspend delivery.

Limitation of liability

An important area needing careful consideration, especially for suppliers of goods or services, is whether, and to what extent, their liability under the contract can be limited, or even excluded, rather than being left completely open-ended. Without such limitations, the supplier of a faulty component worth only a small amount might find itself on the receiving end of a large claim based on the value of damage to an expensive product in which that component has been used. Even if such a claim can be successfully defended, it can be expensive and time-consuming for the supplier to deal with. It is far preferable to agree a suitable limitation in the contract at the outset.

There are restrictions on the extent to which liability can be excluded or limited. Some types of liability cannot be excluded or limited at all, e.g. death or personal injury caused by negligence. For them to be effective, such clauses need to be carefully drafted with proper advice where necessary. Although this article concentrates on business contracts, it is worth pointing out that a business dealing with consumers faces greater restrictions on the extent to which it can limit its liability, so caution needs to be exercised in such cases.

Termination

If a contract is ongoing for an indefinite period, there will need to be a provision setting out how and when it can be brought to an end. Even if a contract is for a set period of time or for a specific purpose and so has a defined duration, it will usually still be appropriate to set out events which will trigger termination either automatically or giving the ‘innocent’ party the right to terminate the agreement. Such provisions will also be relevant to indefinite contracts. Circumstances where a wronged party may want to be able to terminate the contract include where the other party is in breach of its obligations under the contract or is in administration, receivership or some other type of insolvency-related situation.

General provisions

Many commercial contracts contain provisions, often towards the end, sometimes grouped into a section called general or miscellaneous provisions. These provisions cover a range of matters such as the law and jurisdiction which applies to the contract, force majeure, severance, entire agreement and so on. For an explanation of these legal concepts and others, see Commercial contracts jargon busted.

Signature section

For certainty, most commercial contracts will include a section, usually at the end, or before any appendices, for the contract to be signed by the parties to it. This is why it is important to identify the exact legal form of all the parties and, if they are not individual people, to establish who can sign on their behalf. Although the days of sealing wax are long gone, some contracts have to be signed in a particular way for them to be valid, e.g. deeds, in which case the appropriate form of words will need to be used.

This article introduces some of the main areas to be found in most commercial agreements. Each deal will have its own particular requirements to be addressed. For assistance in drafting, reviewing or understanding any commercial agreement please contact Sue Mann, business contracts solicitor.

Article added: 19 September 2012 © Cousins Business Law

This article is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.

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