Key Elements of a Commercial Contract: What You Need to Know

Commercial contract

Key Elements of a Commercial Contract: What You Need to Know

Disputes with clients, suppliers, or employees can lead to a disruption of business operations. As an entrepreneur, you need to look for ways you can avoid or minimise these conflicts. The answer is by having comprehensive business contracts.

We help SMEs draft or review a variety of commercial contracts including employment contracts, partnership agreements, agency agreements, master service agreements or framework agreements, as well as supply agreements. We can review and advise you as to the key risks such as termination, required performance to avoid breach, damages in the event of a breach , and potential exposure to liability or unforeseen costs.

Understanding a commercial agreement provides you with certainty. Such an agreement will deal with:

  • who needs to do what and by when,
  • what the fees will be for such performance,
  • the required level of standard/service,
  • any returns or refunds,
  • the payment terms,
  • what will happen if payment is not made or not made on time,
  • how will any disagreements be dealt with by the parties.

 

To understand what’s a business contract, you’ll need to break it into parts. The idea is to learn the elements of a contract that makes it legally enforceable. Understand the essence of each clause and the role it plays in case of a breach of contract.

Here are the key elements of a commercial contract that all entrepreneurs need to know.

Offer and Acceptance

An offer is a clear intention to enter into a contractual relationship with another party(s) bound by a set of conditions. You must communicate with this party(s) that has the power to accept your offer. An offer can either be verbal or written.

For example, your business can offer to sell a product X at £ 10.00 per unit to another company. Here you are expressing your interest in entering into a sales contract with this company. Also, the offer may have an acceptance window which if it elapses, the offer is withdrawn.

Conflicts are bound to arise when your offer is ambiguous. You’ll need to have specific terms for the offer to avoid the wrong interpretation. We have amazing business lawyers who’ll help you when making a verbal or written offer.

Acceptance is an unconditional agreement to the terms of the offer within the established period. It’s necessary to learn the elements that make an acceptance valid. For example, acceptance is only valid when you all agree to establish terms of the offer. It’s a mutual understanding between two or more parties to a contract on what’s expected of each.

Consideration

When your business offers a service or a product, it receives a payment in return; this is the consideration. However, know that consideration isn’t always monetary. Consideration in a business contract is anything of value you get in return for doing or refraining from certain activities.

An example of a non-monetary consideration is lowering the price for goods for customers who market your business. So, in return for charging less money for the products, the customers offer a service to your enterprise.

Capacity

Before you get into a business agreement with any party, you should consider the capacity. The goal is to check if the person(s) has the legal ability to enter a contractual relationship. Know that your business cannot form a contract with minors or persons with mental incapacitation.

Checking the capacity of other corporations may be tricky for many entrepreneurs. You don’t have a clue on the specific things to evaluate. Contact one of our business lawyers to learn more about capacity.

The idea is to avoid getting into a void or voidable business contract with a person(s) who lack legal capacity.

Termination of the Contract

Unexpected circumstances may happen which make a party to a business contract unable to fulfil the agreed terms. When this happens, you need to have provisions for terminating the commercial contract. The idea is to discuss the specific things that will end the agreement irrespective of the remaining time.

Without prior experience, you may omit the termination clause in your business contacts. Without this clause you are only giving room for numerous conflicts that you’ll struggle to resolve. The other obstacle is deciding the specific things to add to this clause.

Reach out to our business lawyers and get advice writing the termination clause. We’ll guide you on the importance of having this clause and the specific things to add. The goal is to avoid a situation where you are being forced to fulfil the contract terms and you can’t.

Provision for Damages

One of the parties to a commercial contract may fail to honour the set terms. When this happens, you’ll need to have provisions for the legal action to take. The objective is to compel this party to adhere to the established conditions. A well drafted contract will reduce the likelihood of a full blown and expensive court case.

The challenge many entrepreneurs face is determining what constitutes a breach of contract. For example, if you have a commercial contract with a supplier who delivers goods two days late, is this a breach of contract? You’ll need to learn more about the material and minor breaches of the contract.

You should implement measures in the business contract on how to handle various breaches. The idea is to decide the compensation the party that breaches the contract will pay.

Our business lawyers will educate you more on damages. Using the business agreement, you’ll discover the specific actions to take when the other party fails to do its part.

Legality

Before you sign a commercial contract, you must check whether it’s legally enforceable or not. For example, you cannot form a business contract for illegal transactions. The problem is that not all transactions are purely black and white.

Some of the business activities may be on the border on what is lawful. Without the right legal counsel, you’ll struggle to draft a contract for such activities. Contact our business lawyers for guidance on how to evaluate legality.

We’ll advise you on all the clauses to include in a business contract to make it lawful. The goal is to ensure that law will be on your side in case of a breach of contract.

Why Knowing the Elements of a Contract Matters to Your Business

Imagine failing to receive damages from a business deal gone wrong due to having a vague business contract. Your business will have to deal with this loss which will destabilise operations. For instance, a client fails to pay you for the products you supplied.

Also, it’s a headache to resolve conflicts with employees, suppliers, or customers when you don’t have a contract. You don’t have any document that offers guidelines on how to handle the disputes. It’ll take you weeks or months before you can reach an agreement, if one is ever reached.

You can avoid all these problems by having a legally enforceable commercial contract.

Contact us now and get help understanding the fundamental elements of a contract.