Contract Lawyers EM Law London

Contract Lawyers – If You Can’t Afford One Then At Least Do This

Contracts can be simple (for example a low value supply of services contract) or complicated (for example, a contract to explore for oil). You can read about different types of contracts by clicking our contract law page. But no matter what the subject matter or level of complexity is in a contract there are certain fundamentals that should be addressed. If they aren’t then one or more of the parties to the contract could be signing something they later regret, or the contract may not even be legally binding.

So, what should you look out for before signing on the dotted line?

Know who you are contracting with

With over 5 million businesses registered in England and Wales, it is important to check that you are contracting with the correct party. If the party you’re contracting with is a limited company, you can look them up for free at Companies House. You can check their name, registered office, and company number and you should make sure that these details are included in the contract. Why? Because if you don’t include at least the name and registered company number it can be difficult to establish later on exactly which business you contracted with. Not ideal if you are trying to enforce your rights under the contract. A company can change its name and registered office as many times as it likes but it cannot change its registered number.

Be clear about what is being sold

Most contract disputes arise because the contract is unclear about what is being supplied. It is easy to get bogged down in other legal or more technical aspects while forgetting that the fundamental point of a contract is to describe clearly what goods or services are to be supplied. It is also easy to be lazy and to think that a short description of the goods or services will suffice. It may do but bear in mind that if you fall out with the other party that other party’s contract lawyers are going to exploit the lack of detail or ambiguity in the contract. It is so much better to avoid this from happening in the first place and describe the goods or service to be supplied in detail.

Set out the payment terms clearly

For one of the parties, payment will be the whole object of the contract. Although seemingly obvious, many contracts are unclear about how pricing and payment mechanisms work. Ensure that your contract is clear about what is payable and when, and how prices can be changed. For example, if a consultant is being paid a “day rate” how many hours constitutes “one day”? If commission is being paid based on profit should that be gross profit or net profit? The contract should define what exactly “gross profit” or “net profit” means.

Start date and termination

Contracts should have a clear start date, whether that is the date that both parties sign the contract or a different specified date. Even more importantly, the contract should also contain a termination date or a mechanism that provides for how the contract can be ended. If termination is not dealt with then you are left relying on common law rights such as the right to terminate the contract for “repudiatory breach” i.e. serious breach of the contract or the right to terminate the contract on “reasonable” notice. What constitutes “reasonable” notice will depend on various factors relevant to the specific contract – bottom line, the position will be unclear. So avoid the problem in the first place and put in clear start and termination provisions.

The top four points are crucial – read on for some others that you should also think about….

Limiting and excluding liability

After dealing with the questions of who does what, and who pays what, you should think about whether your liability under the contract should be limited. If you are supplying to consumers then limiting liability is hard – we are not going to discuss that here – get in touch with our contract lawyers about this. If you are a supplying to a business then it would be standard for you to include a limit of liability clause so include one! The usual limit of liability that customers accept is the total cost of your goods / services or 12 months’ worth of those costs. You can also exclude liability for things such as loss of profits but you cannot exclude liability for causing death or injury, for fraud or fraudulent misrepresentation or breach of the terms implied by section 12 of the Sale of Goods Act 1979 or section 2 of the Supply of Goods and Services Act 1982. Limitation and exclusion of liability clauses should be carefully worded if they are to work properly so if it’s really important for you to include these clauses in a contract get in touch with one of our contract lawyers and pay for some advice! If it’s not that important for you then you can find example contracts on-line. Hopefully you won’t get inspiration from a poorly drafted one.

Intellectual property rights

Unless the contract says otherwise - if you are signing a contract with anyone other than an employee, that other party will own the intellectual property rights in whatever they supply to you. If, say, you are engaging a freelancer or consultant to carry out some creative work or software development work then having that other party own the intellectual property rights in the work they supply to you will not be ok for you – they will be able to hold you to ransom if you use their work in a product that turns out to be a money spinner or if you supply that product on to a client and you don’t want that client suing you. Same point as above: intellectual property rights clauses should be carefully drafted so either use one of our contract lawyers or hope for the best by seeing what you can find on-line.

Data Protection/ Confidentiality

You should always think about data protection / confidentiality and the extent to which these things should be provided for in the contract. If you will be disclosing sensitive information about your business or clients to the other party then you will need to include confidentiality clauses. If you will be sending or receiving personal data belonging to individuals who are not your staff or the staff of the other party then you should work out who is the data controller / data processor and include appropriate data transfer / data processor clauses in the contract. Sorry, but you will need one of our contract lawyers for that unless you are very confident that you know what you are doing – data protection compliance is hard. If you are not supplying / receiving other people’s personal data i.e. it’s just your and the other party’s staff that are exchanging their own personal data (name and contact details) when they email each other then you don’t need to worry so much about what is in the contract. You do though need to think about whether this type of exchange is covered in the privacy notice you have given to your staff – we aren’t going to go into more detail about GDPR / Data Protection Act compliance in this note.

Choice of Law/ Jurisdiction

Specifying that the laws of England & Wales apply and that the English courts have exclusive or non-exclusive jurisdiction is not so important in a contract where all the parties are based here. However, if you are signing a contract with a party who is based overseas it is crucial to include such provisions. If you don’t and there is a problem then you will have an argument with the other party as to which law should apply which you may lose and you may find yourself having to sue or defend in a foreign court.

Final thoughts

Our contract lawyers will ensure that you have proper contracts in place that not only protect you from risk but which help you do deals (because they are clear and balanced) and they will make you look professional (sorry but contracts prepared by businesses who have cobbled them together themselves tend to look pretty awful apart from anything else).

However, if you really need to cut corners then we hope that you find this a useful guide. If you focus on points 1 – 4 and then bear in mind points 5 – 8 you should be ok until your business takes off and then you can get in touch with us!

If you do want to talk about your contracts or any other legal support we can help you with please contact Neil Williamson.


EM Law Contract Lawyers London

You want to sign a contract before your company is incorporated? Think again!

This blog explains the problems with pre-incorporation contracts and sets out what you can do if you find yourself in this situation.

What is incorporation?

A company does not legally exist until it is incorporated. Incorporation is the process by which a new or existing business registers as a company. Once a company is incorporated, it will receive a certificate of incorporation confirming its existence and showing the company number and date of formation. Before a company is incorporated, it cannot enter into commercial contracts. Consequently, nobody can sign a contract for that company as an agent. A contract entered into by a party on behalf of a company, where that company has not yet been formed, is called a pre-incorporation contract.

The law

The
general rule relating to pre-incorporation contracts is set out in section 51
of the Companies Act 2006. The section states that:

“A contract that purports to be made by or on
behalf of a company at a time when the company has not been formed has effect,
subject to any agreement to the contrary, as one made with the person
purporting to act for the company or as agent for it, and he is personally
liable on the contract accordingly.”

This means
that anyone who signs a contract on behalf of a company before that company is
incorporated will be liable as if they were the contracting party. Section 51
also has dual effect, as confirmed in the case of Braymist Ltd v Wise Finance.
As well as having personal liability, the person who signs on behalf of a
company can personally enforce the pre-incorporation contract.

What exactly is an "agreement to the contrary"?

There has
been some disagreement over the years as to the exact meaning of “agreement to
the contrary”. Thankfully, case law has provided some clarity. If you can prove
that there is an “agreement to the contrary” you may be able to negate
liability and get yourself off the hook.

In
Phonogram v Lane, Lord Denning took the phrase “subject to any agreement to the
contrary” to mean that for a person to avoid personal liability the contract would
have to expressly provide for his exclusion.  

In Royal
Mail Estates Ltd v Maples Teesdale, Mr Johnathan Klein took a similar but even
more restrictive approach. Mr Johnathan Klein stated that an “agreement to the
contrary” would only exist if it could be established that, by relevant words
properly construed, the parties intended that the contract would not take
effect as one made with that person. In other words, there was only a contrary
agreement if there was found to be an agreement between the parties by which
they intended to exclude the effect of section 36C(1), which is now section 51
Companies Act 2006.

In the
case the defendant firm of solicitors signed the contract “for and on behalf of
the buyer”. The contract related to the sale and purchase of a property in
London and included a clause which stated that the benefit of the contract was
personal to the buyer. As both parties were unaware that the company in
question had not in fact been incorporated Mr Klein concluded that the contract
was not drafted with section 36C(1) in mind. The terms in question were clearly
intended for a different purpose, which was to prevent or restrict a third
party from becoming a buyer by way of an assignment of sub-sale.

The fact that
the defendants here were a firm of solicitors shows just how easy it is to be
caught out by section 51. Proving that there was “an agreement to the contrary”
is a high hurdle to overcome.

What can I do to avoid liability?

As the
saying goes, prevention is better than cure. As the risk sits with the person
who has signed the contract, it is extremely important for that person to carry
out appropriate checks to confirm that the company in question has been
properly incorporated, and continues its corporate existence, before a contract
is concluded. If you have already signed a pre-incorporation contract on behalf
of a company, and you cannot prove an “agreement to the contrary”, you may
still be able to avoid personal liability as explained below.

  • Novation

A novation
is a three-way agreement that extinguishes one contract and replaces it with
another, in which a third party takes up the rights and obligations of one of
the original parties. In this scenario, the third party taking up those rights
and obligations would be the company. All parties to the original contract, as
well as the company, must consent to a novation for it to be valid. In
addition, consideration must be provided. The various promises between the
parties to the novation are generally regarded as adequate consideration
however some parties may prefer to novate under a deed just to be sure.

  • Ratification

Ratification
is a process by which a party can give retrospective authority to someone who
has entered into an agreement on their behalf. Although some commentators
suggest that ratification may be of assistance in these circumstances, we do
not consider that ratification is possible in the case of pre-incorporation
contracts. There are a number of conditions that must be met for an action to
be capable of being ratified. One of these conditions is that the principal
(here, the company) must be in existence at the time of the contract. As a
company is not legally in existence before it is incorporated, these conditions
will not be satisfied.

Final words

This blog should serve as a timely reminder of the risks of signing documents on behalf of a company; and in particular where a company itself is not in existence. If you have any questions about pre-incorporation contracts or contractual issues more generally please contact Neil Williamson or Joanna McKenzie or you can find out more about our legal services by clicking here.