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Tips on Understanding your Contracts

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by Startacus Admin

Debbie Serota is a Partner & experienced commercial law solicitor at Darlingtons Solicitors and writes for Startacus on the importance of understanding your contracts. 

Unfortunately, contracts are often misunderstood and therefore misinterpreted. This can then lead to mistakes being made which can cause business contractscomplications and loss. In order to avoid such complications, it is important to ensure that you understand the provisions contained in any contracts that you are involved in, whether they be contracts of employment or business contracts.

Legal label may not be conclusive

In some instances, the “label” put on a contract is not decisive. You may as landlord believe that you are only granting an occupier a licence to occupy and not a lease, and may have assigned licence agreement, but in fact, a court may find that the reality is that the relationship creates a lease. Another common example of this is employment relationships. Many businesses now prefer the flexibility and cost saving of utilising consultants and have consultancy agreements. However, if the reality is that the consultant and you behave in a way which is more like employer and employee, it may well be that if tested, the relationship would be found to be the latter.

Problems with enforcing a contract you don’t understand

If you do not understand your contracts it is difficult and risky to seek to enforce or to know when the contract may be variable or cancellable without serious consequences, creating greater risk in the event of a dispute.

Regardless of the nature of the business, it is also important to appreciate that as well as understanding what your contracts say, you should have an understanding of any relevant contract law regulations covering sales, particularly in consumer contracts and when selling online. These may override terms which you seek to include in your contract and which you may believe, wrongly, protect you from liability.

By having an understanding of the contractual provisions contained in your contract you are limiting the risk of contractual uncertainty and ultimately contractual disputes. Be aware also that in the event of a dispute, even where you are the wholly innocent party, you do not necessarily have the right to cancel the contract and if you act in the wrong way as a result of the dispute, you can make very costly mistakes and may not be able to recover the level of damages you believe you have suffered and/or you may even face a counterclaim from the party in breach.

Off the shelf contracts

Off the shelf contracts are inexpensive templates which cover the main contractual provisions relevant to a particular type of contract or industry.

The standard and availability of such contracts has improved greatly. It would be easy for us to advise that they are not sufficient for purpose, and they are rarely ideal, but we are realistic and understand that sometimes they are all that a new business can afford. Perhaps the best approach to using such contracts would be :-

  • If you buy them for costs saving reasons when you start your business, be sure to get bespoke contracts or at least get them reviewed properly when your business grows and you have more available cash
  • If you don’t understand the contract, see if you can find a lawyer for a fixed fee session who is willing to explain it to you, which may be cheaper than using the lawyer for the whole process. It is not ideal though.
  • Carefully read any explanatory notes that come with the template or are available on the website you obtain it from
  • If the contract refers to statutes, familiarise yourself with what these mean by searching for the statute provision referred to and the topic on the internet
  • Take the time to understand basic contract law so that you don’t make the mistake of simply relying on your contract without understanding that whatever it says may not result in the outcome you think it will have
  • Be aware that the other party you may deal with, whether a buyer, supplier or otherwise may seek to negotiate on your contract and it’s terms. An attitude of “take it or leave it” can work if you have a product or service which you believe the other party wants or needs so much, and can’t get elsewhere, that you can adopt this approach, but it may be that you aren’t in that position and will need to be flexible.
  • Some forms of contracts with very generic clauses will have a schedule which is effectively blank where the service, cost and other variables will be included. In many cases, describing the service to be provided is very important and in itself needs careful thought. In that situation, it is dangerous to proceed with a standard form contract and you are best advised to have bespoke legal advice.
  • Always weigh up the overall importance of the contract, whether general terms and conditions or a specific contract for a specific type of issue (such as perhaps a non-disclosure agreement or agency agreement) or it’s value against the risk of going cheap. Then more important the contract to your business, the more important it is to get bespoke advice.
  • Be particularly careful about issues such as licences, intellectual property, confidentiality, liabilities, indemnities and termination.

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Published on: 13th May 2013

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