A number of questions frequently come up when considering commercial contracts in England and Wales. Below are the answers to some of the more common questions but please get in touch to discuss your specific commercial contract queries.
Does a contract have to be a formal written agreement?
In general, a contract does not need to be in writing and can be formed verbally or through an exchange of emails (subject to certain exceptions such as transfers of land or the assignment of certain intellectual property rights).
Can a business contract under a trading name?
A business can contract under its trading name. However, it is vital that the legal identities of the parties to are clearly set out in the contract. If the business wishing to use its trading name is a company, it must also state its registered name, registered number and registered office (as recorded at Companies House) in the contract.
When does a contract start?
This depends on the intentions of the parties and the wording of the contract. For example, the contract may state that it commences on the date the last party signs the contract. It could also start on a future date or before the date that it was signed.
Can you enter into a contract with a group of companies?
It is possible to enter into a contract with a group of companies but this can cause problems if careful consideration is not given as to which group companies are the contracting parties. The parties’ respective rights obligations and liabilities need to be carefully set out.
Can a third party enforce a contract even if it isn’t a party to the contract?
English law provides a mechanism whereby third parties can enforce or rely on provisions of a contract to which they are not a party. This happens where the contract states that they may or the particular term purports to confer a benefit on them. This statutory position is usually excluded in contracts to prevent third parties from enforcing and relying on the contract.
What does “time of the essence” mean?
Making “time of the essence” in respect of performing a duty or exercising a right has severe consequences. If contract specifies that time is of the essence and then if there is a delay (however minor) this will give the non-defaulting party a right to terminate the contract and claim damages.
Are any terms implied into contracts?
Implied terms are terms that have not been expressly agreed by the parties but are implied into the contract by a Court. Terms can be implied on the basis of custom, previous course of dealings or by statute. For example, the Supply of Goods and Services Act 1982 (SGSA) implies into all business to business contracts for the supply of services that the supplier will carry out the service with reasonable care and skill. Where a contract is silent as to time for completion and price, the SGSA implies terms into the contract that the supplier will carry out the service within a reasonable time and for a reasonable charge.
Are contracting parties required to act in good faith?
There is no general doctrine of good faith in English contract law. However, the parties can expressly agree that they will act in good faith. In relational contracts such as distribution agreements there will be an implied obligation to act in good faith. What is expected when acting in good faith depends on the circumstances.
Can you include penalty clauses for non-performance?
Under English law, if a clause is a penalty it will be unenforceable. Whether a clause amounts to a penalty will depend on the facts. Consequently, parties often seek to include liquidated damages clauses which pre-set the damages recoverable for a specified breach (such as late or defective performance). If properly drafted, these will usually be enforceable. A penalty clause for non-performance could be included in a contract but this may be challenged and ruled by a Court as unenforceable.
Can a party unilaterally increase the price to be paid under a contract?
Generally, this will depend on whether the terms of the contract permit a unilateral price increase. If the right is contained in a party's standard terms, the right may be restricted by English law if it can be shown that this differs from the intention of the parties at the time the contract was made. If there is no express right in the contract, a unilateral notification of a price increase by one party to the other will not constitute a variation of that contract.
Is it normal for a party to limit and exclude liability for breaches of contract?
Contracts will usually have clauses which seek to limit and/or exclude liability. The parties will need to negotiate the extent of the limitations and/or exclusions. English law has statutory rules and case law which must be considered when drafting and negotiating these provisions to ensure that the clauses are effective. It is important that you get this right otherwise the clause could be unenforceable which could leave you without any exclusions or limitations on liability under the contract.
Is it normal to provide an indemnity for breach of contract?
Specific indemnities against specific losses caused by a particular breach are common. Some parties seek to include a general indemnity against all breaches of contract. Whether such indemnities are given will be a matter of negotiation between the parties.
Are you free to subcontract contractual obligations?
The general position is that you are free subcontract your obligations unless you are prohibited by the contract. The terms of the contract should be checked carefully as to whether there are any restrictions on subcontracting. Even if the contract is silent as to subcontracting, it should be checked as to whether the contract requires the main contractor to perform a particular obligation personally as this may have the effect of restricting subcontracting.
Can a party assign its rights under a contract?
As with subcontracting, the general position is that in the absence of express drafting, the contract will be freely assignable (as long as it is not a personal contract). Clauses that seek to restrict the assignment of invoices in business to business contracts for the supply of goods, services and intangibles entered into from 31 December 2018 are ineffective in relation to the assignment of invoices (subject to limited exceptions).
What does force majeure mean?
The term force majeure has no established meaning or consequences in English law. Consequently, the definition will vary from contract to contract. The purpose of a force majeure clause is to excuse a party from performance of the contract following the occurrence of an event beyond its reasonable control. If a force majeure event occurs, it may also provide for suspension of obligations under the contract and/or for termination.
How can you change the terms of a contract?
Subject to the terms of the particular contract, the parties may vary the terms by agreement. The variation may be written or oral (unless the contract to be varied is required by law to be in writing or the contract contains a clause prohibiting oral variations). However, if there is a set process in the contract for variation (sometimes referred to as change control), this should be followed.
Are consumer contracts dealt with differently than business to business contracts?
Yes, contracts with consumers (i.e., anyone who’s not acting wholly or mainly in connection with their business, trade, craft or profession) are treated very differently from contracts between businesses only. Whereas business are free (within reason) to strike whatever bargain they want, consumer contracts are heavily regulated to ensure consumers are not taken advantage of. Businesses need to be very careful when dealing with consumers as failing to comply with consumer law could lead to civil and/or criminal action as well as significant reputational damage.