No matter what industry you are in, you can't conduct business on your own. So every business has to have various agreements, contracts and terms in place.
These agreements can be between you and your customers, employees, suppliers or distributors, and are usually formalised by writing legally binding contracts 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 agreements only to find that they have an legally unenforceable contract or the agreement they signed doesn't cover what everyone thought it did.
It doesn't matter what kind of formal transaction it is, whether it's an employee contract, partnership agreement, purchase order, or terms of business with a customer, 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.
Unenforceable Contract Terms.
Legally binding contracts must include a 'bargain'. This is to say one party doing something in exchange for the other party doing something else; which is typically paying money.
But the exchange could also be exchanging services if money is not involved. The consideration has to be significant, but it does not necessarily need to be adequate. There is no law saying that a bargain must be of equal value, just that it must have some value.
Insufficient consideration could be when a contract allows for one party to avoid damages for failing to fulfil their end of the bargain which isn't mirrored by the other party.
Top industries for contract claims & disputesIACCM study on the Most Negotiated Terms & Conditions
Unfair or Unenforceable Contract Terms
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?
Legally binding contracts do not necessarily have to be written agreements, with a few exceptions such as property purchases/sales, so there are many oral or verbal contracts made everyday.
However, you should understand that it is always best to have an agreement written down and signed by all parties.
If not, you will be stuck with the burden of proving that the verbal contract exists and what the specific terms of the contract are. It is also more difficult to prove the 'intention to be bound' in an unwritten contract.
This is why it is always best to put agreements clearly in writing along with being signed and witnessed, so there will be less room for interpretation should you end up enforcing the contract.
How to avoid unenforceable contracts & agreements.
Ensure a contract does what you think it does
It can be all 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 than what made it into the written contract.
Therefore take time to speak to a solicitor about the purpose of the business arrangement and then ask them to review the wording of the draft agreement. The solicitor will then be able to firm up your contractual position and ensure the contract is fair.
Add a Dispute Resolution clause
Inserting a dispute resolution clause into a contract defines how the parties will seek to resolve differences or misunderstandings before they turn legal. 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.
But even if alternative dispute resolution isn't an option for your type of agreement. If you operate in the UK, checking there is a clause stating that the contract is governed by the courts of England and Wales will ensure that any legal action takes place in your local jurisdiction.
Proactively review your contracts
You don't want to be in the position of relying on a contract's wording before checking that it does what you need it to.
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
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