In business many people struggle when asked to review a contract or agreement that has been presented to them. After all when finalising a deal or new business relationship, you are more likely to be focusing on the logistics and implementation of the deal than the wording of the contract.
However quickly glancing at a contract and just signing it to 'get the ball rolling' should be done at your peril.
Getting professional legal help with the document is your safest option, but if you're in the early stages of going through an agreement we wanted to share a few contract review tips on how to read a contract like a lawyer.
A contract is simply a written agreement between two or more parties to do (or not to do) a particular action. When correctly drafted and signed, a contract becomes a legally binding agreement that both parties must comply with.
The most important aspect of any contract is to precisely articulate the arrangement that has been agreed between the parties that is in line with current law and legislation.
The remainder of the contract should then document how any foreseeable scenarios will be dealt with for the duration of the agreement. Such as implementation, timings, payment, failures, disputes, termination etc.
The major terminology or wording used should be specifically defined, either in the body of the contract or in the case of a lengthy document in a dedicated 'Definitions' section. Disputes often arise if a term isn't clearly documented and is just left for each party to interpret. For example, common terms such as:
Identifying parties to a contract .
The individuals or businesses that are entering into the agreement should be clearly defined. If only the name of a business or individual is documented, it may be considered ambiguous should you ever need to enforce the contract.
In the case of a limited company make sure their registered office and company number is recorded which precisely identifies them, and with individuals detail their home address and date of birth.
Duration, termination and renewal.
The duration that an agreement covers or remains in force is an important clause to consider. While the parties may not want to be bound to an arrangement forever, they also may not want to be entering into a new contract every few months. Therefore, each party needs to consider what is a reasonable period for the contract to cover and how any extension or termination is dealt with.
Indemnity clause and limitation of liability.
Indemnity is when a party agrees to protect and compensate another party from losses that may occur in the event of a specific breach or negligence. For example, a retailer may seek indemnity from a manufacturer in the event the products supplied are defective and a claim is made against them by a consumer.
A limitation of liability clause is used to restrict the amount a party pays in the event another party suffers a loss due to the contract. Without this term, a party may be liable for an unlimited amount of damages and financial compensation.
Both these clauses require careful and clear drafting if they are to successfully manage the risks posed by a contract whilst not impacting a party's statutory rights.
Governing law, jurisdiction and dispute resolution clauses.
There's little point in carefully drafting a legal document without specifying the law and jurisdiction under which it falls.
You may think this is only important when dealing with international agreements, however this isn't the case. The UK alone has three legal jurisdictions (England and Wales, Scotland and Northern Ireland) each of which has their own distinct legislation.
A contract should clearly define which legal system it operates under and the court any dispute will be handled in. On the subject of disputes, court action should always be a last resort, so it is also worthwhile to consider dispute resolution options as part of the agreement.
A simple alternative dispute resolution clause that requires all parties must first undertake negotiation or mediation in an attempt to resolve an issue can save both time and money should a disagreement ever arise.
Legal document checking.
If you are presented with a contract prepared by another party or their solicitors, there really is no substitute for getting your own legal advice on its content.
Your own solicitor will be able to advise on the contract with your best interests in mind, tailoring a review to focus on the risks you would be exposed to and suggest amendments or additions which may be beneficial.
There are very few people or businesses that don't need to borrow money at some point.
Traditionally banks, building societies and credit unions would be the source of funds and the products they offered would require the borrower to agree to various terms and charges. However, this tradition is changing with borrowers frequently now looking towards family, friends and business partners as a loan source.
In fact Aviva's Family Finances Report found that loans from family members or friends had overtaken overdrafts as a source of debt held by 18 to 35 year olds.
Loaning money to someone in need can often be of great help to them. Especially if they are unable to gain credit elsewhere and it avoids them incurring high charges that are associated with payday or doorstep loans.
While you may trust the borrower, be able to afford to lend the money, and have every confidence that you'll be paid back, you should still formalise the arrangement with a written loan agreement.
Agreeing and creating a loan agreement.
Most loans between family, friends and even business acquaintances are made informally and without anything in writing. While this is less than ideal from a legal standpoint, it doesn't necessarily mean that you have no legal options should a debtor decide not to pay you back (see our guide on being owed money without a contract or agreement).
But having something in writing is almost always better than having nothing, so drawing up a loan agreement is the way to go.
A loan agreement doesn't have to be a lengthy or overly complex document but having down on paper what the lender and borrower have agreed will provide protection should the worst happen and the borrower defaults (doesn’t pay back) on the loan.
A starting point in creating a loan contract is to first have an open and frank discussion with the borrower about how and when you want to be paid back. There’s little point in dictating a payment schedule that's unachievable from the outset and both parties need to be comfortable with any arrangement. For example, you may consider:
When you've agreed the amount, how repayments are to be made and the length of the loan, you then need to discuss what happens if things go wrong. Can the borrower accept the potential legal consequences and costs if they can't make the payments?
If at any point you are struggling to find common ground on what the contract should contain, you may need to reconsider lending the money at all. As differing positions at the outset could be an early sign of a potential dispute.
However, if all terms and conditions have been agreed it is time to get them down on paper, ensuring some key legal clauses are included.
At this junction it's also worth considering if you should seek legal advice from a solicitor who can take your agreed instructions and professionally draft the document for you.
Important clauses in a loan agreement.
At the very start of the agreement you should record the full name, address and contact details of the lender and the borrower. If there are multiple lenders and borrowers, all these should be detailed.
Amount to be Loaned
Clearly specify the amount that is being loaned, and to avoid any doubt or potential for error also record the amount in words as you would on a cheque. I.e.
£9,980.50 (nine thousand, nine hundred and eighty pounds and fifty pence)
Term of Loan
Define a period that the amount is being loaned over and when it needs to be paid back by. Even if you don't have a specific date or timeframe in mind, you should always specify a term (48 months) or a date (by 1 January 2022) when the loan should be fully paid back by.
Ideally this term needs to be no more than five and a half years from the date the loan is made to ensure that the debt doesn't become statute barred if you ever need to take legal action to recover your loan.
The agreement should specify what law and jurisdiction it comes under (e.g. English Law, England and Wales). This will be important should legal proceedings ever be required.
The agreement must be signed by both parties and ideally witnessed by an independent person.
Drafting a personal loan agreement.
Once the agreement is drafted you should print two copies, sign them and each party keep one. Only when the agreement is signed should you then actually make the loan which ideally should be via cheque or bank transfer so that you have a record.
All this may seem a little daunting, especially if your loan involves a significant amount or you are unfamiliar with the best way to execute the transaction. So, if you are in any doubt consider instructing a solicitor to draft your loan agreement to protect your position and provide piece of mind.
Being a business owner means that making agreements and signing contracts can be a regular occurrence. These formal agreements protect your business and ensure that suppliers, business partners and even customers uphold their end of the contract.
The clauses these contracts form the backbone of a business's operations, covering the supply of goods, delivery of services, timeframes for completion and when payments are due. As such not complying with any of the conditions in a contract will often lead to a dispute.
When a party fails to fulfil the terms and conditions in a written agreement, without a lawful or valid excuse, this is referred to as a breach of contract and you must decide how to deal with the breaking of the agreement.
But before you start filling out the court forms, a first step in dealing with a breach is to formally advise the other party with written notice, known as a 'Letter of Claim' or 'Letter Before Action'.
What is a Letter Before Action?
A Letter Before Action is the starting point of many forms of civil legal proceedings and basically sets out your legal claim. It's important to keep in mind that while a Letter Before Action is the first step in taking formal action, it should be the last step in trying to deal with the issue informally.
Calling in lawyers and involving the court at the first inkling of a problem usually won't be helpful. If an aspect of a contract hasn't been complied with or is outstanding, then a polite (but firm) enquiry to the other party on the reason and how they intend to resolve the should be your first act.
Then if informal discussions don't start the process to resolve the issue, sending a Letter Before Action is often a low-cost route to opening a dialogue with the other side to achieve a resolution.
What should a letter before action contain?
Background and context
The letter should start by referencing the specific contract or agreement that has been breached, when it came into force and what it covers. You shouldn't assume that the person who deals with the letter is aware of the existing business relationship and that an agreement in place.
Circumstances and facts
Briefly explain what has occurred and how it is considered to be a breach of the agreement. Ideally point to a specific obligation or clause in the contract and how this obligation hasn't been met. If the failure has resulted in a loss or damage that can be calculated, then this should also be included.
Remedy and resolution
State how the breach can be remedied and how the matter can be resolved to your satisfaction. This resolution will be down to the type of agreement and specifics of the breach, but could involve immediate payment of an outstanding amount, the return of a supplied product, cancelling of a service/contract or a monetary payment to cover a loss.
Timeframe and response
A reasonable period should be given for the other party to comply or at least acknowledge and respond to the letter. A timeframe of at least 14 days would be a minimum, and you also need to comply with any reasonable requests for additional information.
Consequences and legal action
Finally, the whole point of the Letter Before Action is to set out your claim and place the other party on notice that a failure to act could lead to you starting legal proceedings. This should be stated in the letter along with highlighting that you will also be looking to recover any additional costs that are involved with court action from them as well.
Legal Advice with a Breach of Contract Letter.
Before starting down the path of court action, it's always advisable to seek some initial legal advice. While the breach may be an obvious one, a contract dispute lawyer will be able to advise you on your prospects, how any damages would be calculated and what legal proceedings may cost.
Importantly they can also draft your Letter Before Action ensuring it accurately represents your claim and that it complies with the court's Civil Procedure Rules and Pre-action Protocols.
A well-researched and professionally drafted Letter Before Action is your best chance of achieving an early and cost-effective resolution to a contract dispute, so it's well worth getting a solicitor involved from the outset.
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
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