10 Key Points for Charities on Commercial Contracts
A contract is a legally enforceable agreement. Charities enter into more complex agreements, e.g. to fulfil their objects, to buy goods and services and to raise funds. Most of those agreements will take effect as contracts, even if the parties do not realise it.
An agreement does not have to be in writing in order to be a contract. However, where parties are agreeing something that is not very simple or which will continue for a period of time it is best to have a written contract.
A written contract can provide the important certainty of terms and stronger evidence of what the contract terms are. However, to do so contracts need to be clearly worded, otherwise they can confuse and obscure the parties’ intention, exacerbating disputes rather than easing them and damaging the parties’ relationship.
Here are some tips for you to consider when you review draft contracts that you receive or propose to issue.
(Please note that this briefing does not deal with the additional legal rules in relation to contracts with consumers.)
1. Process concerns
- Check that the other party is solvent, particularly if you are expecting the other party to pay you for something you’ve provided (and incurred cost doing so!).
- Get a first draft contract early. Starting the contractual process at the last minute may lead to the parties working together before a contract is signed, which is dangerous.
- Explain why you have made changes to the other party’s draft contract. An amendment with an explanation is more likely to be accepted.
- Notes on a draft contract will help the other party to understand what you are proposing or why you cannot accept particular wording. Communication is key.
- Do you understand the contract? If you do not understand wording, it may be incorrect.
- Include clear language and be specific. Consider including examples and avoid jargon.
- Wording saying the parties will agree something in the future (what we call an “agreement to agree”) is unenforceable in very many cases.
- Avoid the other party having the power to vary the contract terms without your input.
2. What is the contract’s scope?
- What are you expected to do?
- Does the contract state what you expect from the other party?
- Ensure that the contract sets out the goods and services to be provided.
- Does the contract refer to any standard conditions or another document that has not been provided? If so, ensure that all such documents are taken into account.
- Unless the characteristics of the goods and services are standard and obvious, there should be a clear specification describing them and what they need to conform to.
- Will there be any sub-contracting by you or the other party?
- Is the contract to be conditional on something else happening, such as needing a third party’s consent?
3. Money matters
- If the contract is silent on whether a price is inclusive or exclusive of VAT, by law the price will be deemed to be inclusive of VAT where the seller or supplier has to charge VAT. Getting this wrong can be an expensive mistake.
- Are there any hidden extra costs? These are often found in indemnity, guarantee or expenses provisions.
- Check the expenses provisions. Are expenses all recoverable? How are they to be proved and is there a limit on them?
- When is payment due?
- Are there any price variation clauses, e.g. for changes in what is to be supplied, or because of inflation, or at the option of the other party?
- Contractual “penalties” are legally unenforceable unless the amount of the penalty clause is a genuine pre-estimate of the injured party’s loss arising from a breach of contract.
- An indemnity is a promise to pay for another party’s cost or loss e.g. if you damage the other party’s property.
- Check what costs, losses etc any indemnities cover; e.g. do they cover breach of contract, TUPE claims or other employment matters?
- Do not automatically assume that it is appropriate to give an indemnity you have been asked for. Many factors will affect whether it is appropriate, including bargaining power and the fact that the other party may already have a damages remedy under ordinary contract law; so an indemnity may be unfair.
- Try to use a limitation of liability clause to cap contractual indemnities you agree to give.
- If you are agreeing to give an indemnity, consider whether it should be mutual so the other party gives an indemnity to you as well?
5. Limitations of Liability
- Consider the potential liabilities capable of arising in connection with a contract. In doing so it is useful to draw on past experiences with similar contracts.
- Are there any clauses, which seek to exclude or limit the liability of either party? For example, if supplying goods or services, you should seek to have your overall liability capped.
- Is your resulting exposure to liability justifiable in terms of your potential contractual reward? Are you happy with the overall balance of risk between the parties?
- If relying on limitation clauses, you need to ensure that such clauses are brought to the attention of the other party prior to contracting and that they are enforceable.
- The Unfair Contract Terms Act 1977 (UCTA) prohibits certain limitation clauses and requires others to be reasonable. Non-compliant clauses will not be enforceable.
- Consideration as to the application and impact of UCTA is complicated and should only be undertaken by a suitably qualified legal professional.
6. Representations and Warranties
- In this context by “representations” we mean pre-contractual statements (written or oral) by a contractual party and by “warranties” we mean contractual promises as to the truth of stated facts or circumstances.
- Consider carefully what representations you or the other party have made, whether they are being (or have been) relied on, and whether they are to be excluded by the provisions in the proposed contract.
- Consider carefully what contract warranties you should have in order to commit the other party to stated facts or circumstances that you are relying on being true.
- Consider what warranties you are giving and whether you are compliant with them.
- Commonly warranted matters in contracts for goods or services include, quality, time of delivery and the goods’ or services’ compliance with specification.
7. Terminating a contract
- What is the duration of the contract? Is it to have a fixed or minimum period?
- Can the contract be terminated on notice? If so, when can notice be given and how long does it have to be?
- Be careful that you are not locked in for a fixed or minimum period that is too long.
- Consider whether either party has a contractual right to terminate early and if so, on what grounds and what are the consequences of doing so?
- Always consider your initial costs of investment in light of any minimum or fixed contract period or early termination provision.
- Can you renew a contract term? If so, how and when? Is the contract expressed to continue automatically unless terminated?
- Termination provisions must be clear. When considering notice periods, certainty is required as to when, how and to whom notice should be given.
8. Miscellaneous clauses
- Force Majeure clauses – this type of clause says that a party is not liable to the other party if it cannot perform, or is delayed in performing, its obligations under the contract due to events beyond its reasonable control e.g. a fire, a flood, failure of a transport network, etc.
- “Time of the essence” clause – A clause stating that time is of the essence enables the party relying upon the clause to terminate the contract for late performance as well as claiming compensation for any loss suffered because of late performance, rather than only being able to claim compensation.
- Entire Agreement clause – This seeks to provide that only the contract and any documents expressly incorporated into it will form part of the contract. The effect of such clauses is not wholly certain, but at the time of entering into a contract this kind of clause should be taken seriously.
- Avoid clauses that state/imply agency unless the contract is intended to be an agency contract.
- Depending upon the terms of the agent’s appointment and how the agent is presented to other parties, an agent can contract on behalf of the company or other entity for which the agent works (the principal) and so bind the principal to contract with others.
- If you have agents working for you, you are liable for them.
- Various rights and obligations are implied by law into agency appointments relating to goods, including by the Commercial Agents Regulations 1993. Some of these implied terms can be excluded or modified by contract, others cannot.
- For example, where the Commercial Agents Regulations 1993 apply, if you terminate an agent’s appointment, you could be liable to pay the agent a substantial termination payment.
10. TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006)
- The TUPE regulations relate to the transfer of a business or business activity from one contractor to another, or an entity bringing a business or business activity in-house. So, for example, TUPE can be relevant when a charity takes over a contract from another contractor.
- TUPE is complicated. You should obtain legal advice on whether you will be affected by TUPE. For example, if you are affected, you may be liable for other employers’ past misdeeds.
- Where it applies, TUPE will operate to transfer affected employees from one business to another on the same terms of employment and will protect employees from dismissal in connection with the TUPE transfer. You cannot contract out of your TUPE obligations.
- There is an obligation to consult with employee representatives if it is envisaged that, in connection with a TUPE transfer of a business or activity, you or another employer involved will be taking measures in relation to any affected employees (not just those who transfer).
- Where TUPE applies, consider which employer has liability for which period of employment. Consider the use of an indemnity to allocate liability where it should be allocated, because TUPE itself does not deal with this aspect well.
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