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No matter what industry you are in, you can't do business on your own and so every company has to have various agreements and contracts in place.
These agreements are often between you and your customers, employees, suppliers and distributors. But the way all these business agreements are enforced is by creating a legally binding contract between the parties involved. Unfortunately, all too often when things start to go wrong we see businesses suddenly take an in depth look at their contracts only to find they are unenforceable or don't cover what everyone thought they did.
It doesn't matter what kind of formal transaction it is, whether it's an employee contract, partnership agreement, purchase order, or any other business arrangement , the agreement must be recognised legally by the courts for it to be enforceable if someone were to challenge it.
This is why it's important to understand the key components of a legally binding contract when drafting an agreement.
Offer and Acceptance of an agreement
A legally binding contract must include one party making a valid offer and the other party accepting it.
An offer is not quite the same thing as an invitation to make a deal, such as putting out a request to tender. A tender request for example, would not be recognised as an offer in English contract law. The offer that is accepted must be the exact terms of the offer being made. If the exact terms are not the terms being accepted, it would be considered a counter-offer, which the initial offeror must then agree to.
Intention to be legally bound
All parties agreeing to the contract must intend to be bound by the contract.
There is presumed intention to be bound with commercial agreements, unless there is what's known as an 'honour clause' in the contract that states otherwise. A court will look through all the factual and circumstantial evidence to determine if this is the case. It is therefore presumed both you and the business you represent have the intention to be bound to any agreements entered on behalf of the business entity.
Consideration and a 'Bargain'
Unfair Contract Terms
An often-seen unfair term is an 'exclusion clause' where one of the parties attempts to avoid the liability that comes as part and parcel of a contract.
Another common example of an unfair term are 'penalty clauses' where one party specifies a monetary amount that is payable upon breach of the contract which is disproportionate to the loss that the party would actually suffer due to that breach.
Does an agreement have to be in writing to be enforceable?
Steps to consider when reviewing a contract
Ensure a contract does what you think it does
Enforceability aside, a common issue that arises after a contract is signed is that the terms of the contract don't actually do what one of the parties thought it did.
It can be too easy to assume that what was agreed verbally has been translated perfectly into a written agreement. Often this isn't the case, and a party can be caught out by relying more of the 'sentiment' or 'spirit' of what was discussed rather that what made it into the written contract.
Add a Dispute Resolution clause
Hope for the best but plan for the worst.
Inserting a dispute resolution clause into a contract defines how the parties will seek to resolve differences or misunderstandings before they happen. To avoid litigation, a dispute resolution clause can point towards independent mediation or arbitration to settle the dispute in a fair and mutually agreeable way.
Proactively reviewing your contracts
It can be difficult for business owners and the uninitiated to draft a legally binding contract that covers what they want as well as protects their position. Therefore, it is always best that you have a solicitor draft or at least review your business contract before getting it signed.
Just don't wait until you need to enforce a contract before checking that it does what you need it to!
Things are changing for businesses that are owed money by individuals or sole traders.
Currently there is no 'Pre-action Protocol' for recovering debts, but this all changes on 1 October 2017 when the Pre-action Protocol for Debt Claims comes into force.
A Pre-action Protocol sets out the various steps that the court expects both sides to take before commencing legal action. Issuing proceedings should always be a last resort and both parties need to ideally try and settle their dispute without having to involve the court. There are already Pre-action Protocols for other types of civil claims such as personal injury, professional negligence and possession claims, but from October 2017 certain business debts will also need to follow a set 'pre legal action' procedure.
The Protocol is designed cover businesses claiming repayment of a debt or unpaid invoices from an individual, however the definition of an individual includes sole traders, so the Protocol applies to business to business debts when a sole trader is involved.
There are also a few exceptions where the debt protocol doesn't apply, mainly around claims where there currently is another Pre-action Protocol applies such as in construction and engineering or mortgage arrears.
Why is a business debt recovery protocol needed?
According to Part 2.1 of the Protocol it aims to:
What happens if a business doesn't comply with the debt protocol?
To quote the Protocol:
"If a matter proceeds to litigation, the court will expect the parties to have complied with this Protocol."
Failure to comply with the Protocol prior to commencing court proceedings may result in the court imposing sanctions against the creditor. The sanctions imposed are likely to be in relation to costs.
New requirements for businesses under the debt protocol
What happens when the debtor responds?
If the debtor states that they are seeking debt advice, the creditor has to allow the debtor a reasonable period for this advice to be obtained, at least a further 30 days. This may be longer if the debtor can provide a reasonable explanation as to why it will take time to obtain the debt advice.
If the debtor indicates in the Reply Form that time is needed to pay, the creditor and debtor should try to reach agreement for the debt to be settled by instalments. If a payment schedule or agreement cannot be reached, the creditor must confirm in writing why it does not accept the debtor's proposal.
If a partially completed Reply Form is received the creditor is expected to contact the debtor to discuss and obtain the further information necessary to understand the debtor's position.
A creditor ignoring the debtor's reply and their reasons is not an option.
Use of Alternative Dispute Resolution (ADR) in debt claims
If there is a dispute about the debt being owed then the parties should consider ADR rather than commencing court proceedings. This may be a formal process with an ADR provider or may simply take the format of a documented discussion and negotiations.
If agreement is still not reached, then the creditor should give the debtor notice of at least 14 days of the intention to commence court proceedings.
What does it mean for businesses trying to recover outstanding debts?
The new Protocol creates a more formal and paper heavy procedure for your business to collect money owed as it includes the need to provide additional documentation to the debtor.
There is then the potential for debtors to use the Protocol to delay payment, but even if they don't the new procedure is likely to be slower and increase costs compared to a pre-October 2017 time frame and Letter Before Action.
So now is the time to review your credit control procedures and assess at which stage the new Letter of Claim should be sent. You should also review the current position of any outstanding debts and if you have given the debtor plenty of opportunity to pay/raise issue with the debt. If nothing is forthcoming a decision may need to be made to take more formal legal steps to recover the debt as soon as possible.
Whether your business is small or large, if you employ staff you need to have some kind of grievance procedure in place.
Think of a Grievance Policy as a method of settling employee complaints as fairly and quickly as possible. Your staff will almost certainly come across problems in their day to day role and although most issues can be resolved informally with good people management, if this fails a set grievance procedure needs to be the next step.
Staff Grievances and the ACAS Code of Practice
ACAS, the Advisory, Conciliation and Arbitration Service is a public body setup to help businesses and employees prevent problems at work before they arise. The ACAS Code of Practice gives practical guidance for handling disciplinary and grievance issues in the workplace and should be followed and referred to at every opportunity.
While the ACAS code isn’t considered legally binding, failure to comply with it can end up costing your business.
If a claim from an employee went to an employment tribunal and was found in their favour the tribunal can increase the compensatory awarded if the ACAS code was found to have been ignored. For example:
Being a fair and transparent employer
Putting in place a grievance policy to avoid potential litigation costs might be all the reason you need, but a grievance process can be a valuable aspect of good employer-employee relations.
Having a documented procedure in place that employees are aware of and feel comfortable using gives them confidence that any grievances that they may have can be aired in a formal and professional setting. Without a clear policy, good employees may simply choose to leave your business rather than continue trying to deal with a serious issue informally.
What should a grievance procedure contain?
A grievance procedure doesn't need to be a standalone or lengthy document. It can be covered off in a section of your employment contract or as part of your employee handbook. However, to document the procedure fully you may wish to have a dedicated grievance policy that is easily accessible to staff.
Your grievance policy and procedure should comply with ACAS guidelines and cover the below broad areas:
Employment disputes can have a huge impact on a business, so building a working environment where team members can be open about problems should be a goal of every employer.
But when issues can't be dealt with informally, having a published grievance policy and procedure provides you the opportunity to resolve problems before they become detrimental to the workplace.