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Common Contract Conundrums


Kahill SarronwalaĀ is a student at BPP Law School, currently completing the Legal Practice Course (LPC). Kahill also volunteers with the BPP Pro Bono Centre as a Student Advisor for the BPP Enterprise Clinic. With a keen interest in making Commercial Law principles accessible to all, Kahill has authored this article under the supervision of Angela Cahill, Supervising Solicitor for the Clinic.Ā The Clinic can provide free commercial legal advice on copyright law and how your business can comply. Please contact us on 0330 060 3633 orĀ blac@bpp.comĀ to book an appointment.

It is highly important for those who endeavour to run a business to have a basic understanding of the rules of contract law. This short piece will aim to answer some of the most common contract law related questions that we receive at the Enterprise Clinic.

Does a contract need to be in writing?

Most contracts can be verbal and are binding without the need for a written medium. However, in practice, it is a good idea to enshrine agreements in written contracts, thus increasing clarity and certainty. This is especially important when purely verbal agreements could have been made months or years ago. The certainty of the written word can save you the time and costs of a potential dispute as to the terms of a contract.

It should be noted that certain types of contracts require the agreement to be in writing. For example, a deed for the sale of land needs to be in writing. Similarly, guarantees of debts, jurisdiction clauses, and arbitration clauses (to name a few) all need to be put into writing in order for them to be valid and enforceable.

What is the difference between business-to-business contracts and business-to-consumer contracts?

As suggested by the name, a business-to-business contract concerns the selling of goods and services to other businesses. Whereas a business-to-consumer contract concerns goods and services sold directly to consumers.

The law gives more protection to consumers as they are seen as being more vulnerable; often being required to accept standardised terms without an opportunity to negotiate.

For small businesses dealing with consumers directly, they should be aware of the Consumer Rights Act 2015. The Act requires businesses to (amongst other things) make their identity and trading address clear to the customer, offer a 14-day cooling off period (for sales not made face-to-face), and offer repeat performances or a reduced price if the service provided does not accord with what was offered to the customer. Likewise, for a contract for the supply of goods, consumers may be able to request repair or replacement of unsatisfactory products.

Comprehensive guidance for small businesses regarding consumersā€™ rights can be found through the Governmentā€™s Business Companion website.

However, in business-to-business contracts, each party has much more freedom to agree what terms will apply. This is because parties are assumed to be on more of an equal footing and to have had an opportunity to read and understand the contractual terms.

For small businesses dealing with other businesses, they should be aware that there are no statutory cooling-off periods, and terms which would be considered unfair in a consumer contract may be considered fair and enforceable in business-to-business contracts. Examples include long minimum terms, non-refundable deposits, or additional costs that werenā€™t drawn to the businessā€™ attention at the start.

Am I bound by a contract I have not read?

When entering into any kind of contract, it is imperative that you are aware of what it is you are agreeing to, the obligations you are taking on, and your potential liabilities under the contract. This is because you can be bound to perform a contract even if you have not read it.

Previous case law has confirmed that where a document containing contractual terms (or a contract) is signed, then in the absence of fraud or misrepresentation, the party signing it is bound. It does not matter whether or not they have read the document.

Ā Does a term apply to my business if it was not drawn to my attention?

Quite often, the terms and conditions of a contract may be provided separately or contained on a businessā€™ website.Ā  Where contractual terms are not immediately visible, for instance, because theyā€™re contained in an unsigned document or are elsewhere, then it will be necessary for the business relying on them to prove that the recipient was aware, or ought to have been aware of the term, in order for it to be binding.

Provided ā€˜reasonable stepsā€™ have been taken to draw a term to the recipientā€™s attention, then that term will be binding. Ā Reasonable steps can include making references to the terms in advance. For example, stating ā€œterms and conditions overleafā€ or ā€œsubject to our terms and conditionsā€. Ā Therefore, taking a quotation for some goods or services for example, if the quotation itself encourages you to read the full document (which may include terms and conditions on the reverse) the recipient can be bound by those terms, even if they did not review the terms on the back of the document. Ā This would also apply to terms which are specified on websites and referred to in a quotation.

Despite the above, if a term is particularly unusual or onerous, the courts may well require more attention to be drawn to it for it to be binding on a party. This is known as the ā€˜red hand ruleā€™ (the judge in the particular case felt that some terms were so burdensome that they should be ā€œprinted in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient“). The idea is that some important terms should have greater emphasis placed on them through font size, bolding, or font colour. This suggests that on occasion, the courts are willing to be flexible and consider whether a recipient is bound by certain terms on a case-by-case basis.

Does it make a difference that Iā€™m a sole trader or a very small business?

Unfortunately, English contract law does not distinguish between sole traders, SMEs (small-medium enterprises), and larger companies when it comes to the standards which they are held to.

As a small business owner, you can be just as liable for a breach of contract as a large company. This is founded on the idea that agreeing to a contract must legally result in enforceable obligations. This is to ensure that people and businesses can enter into contracts with the certainty that they have some remedy if the opposing party fails to fulfil their contractual obligations.

In the Enterprise Clinic we see a number of clients who may be running a business by themselves, with little experience of commercial contracts and yet they are held to the same legal standard as much larger businesses which may have the benefit of legal advice or greater bargaining power.

Some companies advertising services to businesses can use pressured sales techniques, rushing small business owners into agreeing to goods or services that arenā€™t suitable for their business.Ā  Terminating these agreements can then be a costly and time-consuming exercise.

For this reason, we would recommend always taking care to read the terms and conditions of any contract your small business agrees to.

More information about contracts for your small business can be found through the Small Business Commissionerā€™s website.