A guide for drafting good business contracts
It goes without saying that a good contract is important, given it is a legally binding document that both parties agree on to ensure that they are appropriately compensated for their work, money or goods. Writing a business contract which accurately reflects the intention of the parties is critical to its success.
So without trying to do ourselves out of a job we have put together some top tips to help you with business contracts. However, it is useful to understand the pitfalls of commercial contract drafting, it is always advisable to ask a solicitor to draft or review an existing one, particularly if it contains technical or complex provisions, or if the agreement is intended to be used for a long time.
Define your terms
You need to take care when using defined terms in a contract. They are important because they save time and can create certainty and consistency in a contract. However, you should only use them if you are happy that the term is to have a specific meaning in every instance where it is used.
Battle of the forms
If each party to a contract states that its own terms and conditions will apply, generally speaking, the last party to make that statement will take precedence, unless there has been an express agreement to the contrary. However, this may be difficult to show evidentially. If you do not want to contract on another party’s terms, you have to make it clear at every opportunity that the contract is based upon your terms and conditions.
Having signed the contract, act in accordance with its terms
Once a contract is concluded and signed, you should ensure that you act in accordance with its terms and that you do not vary them orally or by your conduct.
In a recent case an exclusive supply agreement contained a clause that said it could only be amended by a written document signed by both parties. The court decided that such a clause did not stop the parties from varying the contract by oral agreement or by conduct. It said under English law parties can agree whatever terms they wish (subject to public policy limits) whether in a document, orally or by conduct. Accordingly, such a clause does not prevent the parties from later making a new contract, which varies the original one, by oral agreement or by conduct.
Should you include restrictive covenants?
You need to take great care in drafting restrictive covenants/ non-compete clauses. If you get them wrong the meaning of the contract will be uncertain and the restrictive covenants could be unenforceable. If they are drafted too widely or are too onerous the courts will not be keen to enforce them.
Differing rules will also apply depending on the type of contract in which the restrictive covenants are included. For example, the courts are willing to accept a longer period of time in which the restrictions will apply in a share purchase agreement (where the buyer will have paid for the goodwill of the company) as opposed to restrictions which are placed into an employment agreement or settlement agreement.
Disclaimer: Please note that this fact sheet is for guidance only and is not intended to replace legal advice.