Business contracts and the law

Business contracts and the law

Businesses sell goods and services between themselves and they therefore require contracts. Commercial law is often used to refer to the legal principles that govern contracts between businesses.

The law of contract is a central element to the formation and construction of commercial contracts; however, a number of commercial transactions are also governed by their own set of rules, which modify general contract law, for example the Sale of Goods Act 1979.

You should be aware that when buying goods or services as a business, it is important to check in advance what terms and conditions you are agreeing to.

For a business contract to be valid, it must satisfy the basic requirements of contract law: an agreement (offer and acceptance), consideration (there must be something of value exchanged between the parties), both parties must be of sound mind, the terms must be clear and the contract should be in its proper form (evidenced in writing if required by law) and properly executed.

Business contracts can contain both express terms (those negotiated by the parties) and implied terms (those inferred into the contract to give it business efficacy). However, for commercial contracts, it is best to incorporate terms expressly, rather than rely on implied terms.

In addition, many business contracts contain implied statutory terms, which provide a framework of terms for particular types of contract, such as the sale of goods. Unless these terms are expressly excluded, they will form part of the contract and will relate, for example, to the description, quality and fitness of the goods. As such, express terms are often used to modify or negate terms, which might otherwise be implied, or to provide for contractual remedies.

Exclusion clauses judicial and statutory control

An exclusion clause is an important type of express term that seeks to limit or exclude liability for breach of contract, negligence or misrepresentation. However, these are subject to judicial and statutory control. In the event of a breach (which the defendant claims was covered by an exclusion clause), the court will consider whether:

  • the exclusion clause was properly incorporated into the contract, i.e. whether the buyer signed a contractual document, or if there was a reasonable attempt to draw such terms to the buyers attention before the contract was formed; and
  • whether the exclusion clause was constructed to cover the particular breach or liability it sought to exclude. In these circumstances, the court will apply the contra proferentum rule, so that any ambiguity in the wording of the clause will be construed against the party seeking to rely on it.

If the clause has been incorporated into the contract, and covers the breach in question, its validity will then need to be determined under the Unfair Contract Terms Act 1977 (UCTA), which offers a statutory control over exclusion clauses.

UCTA 1977

Under the UCTA, a business selling goods or service is not allowed to exclude liability for:

  • death or injury under any circumstances
  • losses caused by negligence unless to do so is reasonable
  • defective or poor quality goods unless to do so is reasonable

The UCTA does not define precisely what is meant by reasonable, but courts will usually take into account:

  • the relative bargaining power of the parties and whether there was an option for the buyer to negotiate;
  • the information available to both parties when the contract was drawn up;
  • whether the buyer was offered any inducement to accept the clause;
  • whether the buyer could have gone elsewhere.

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