Most organisations regularly use commercial contracts. They play a fundamental role in most industries, including the railway industry. However, not so many people understand how complex contracts can be, or the fact that, if properly drafted, they can form an invaluable asset to a business. They could act as protection for you in case things go wrong.

The first thing to note is that contracts can be created relatively easily, as they can be either written or verbal. Commercial contracts tend to be written but there is no prescribed form for most commercial contracts. It is quite easy, therefore, to create a contract unintentionally, such as where one party starts work, before the contract is concluded, or where the parties have not said that negotiations are ‘subject to contract’. A number of recent cases also make it clear that a valid contract can even arise where the parties have simply exchanged emails.

In the rail industry, contracts are usually made for provision of rail services. However, organisations might also have contracts with suppliers of uniforms, train parts or other equipment. Regardless of the type of contract though, any commercial contract needs to include precise terms so the parties understand what rights and obligations they have. The more detailed the contract, the less room for misunderstandings and disputes.

The contract should contain a number of key terms and conditions. Provisions relating to time of payment and remedies for non-payment are crucial to anyone providing a service to a client. You need to ensure prompt payment and make sure you can take action quickly and effectively if payment is withheld. So, for example, does the contract allow for payment within a reasonable time period, say 14 or 28 days? And how soon after that can you take action? Can you claim interest on late payments or do you have to rely on the statutory provisions relating to interest?

Equally important, from your viewpoint, are service levels and the circumstances when the contract can be terminated for non-performance. Are you given the opportunity to remedy a breach or is termination automatic? Can the client demand termination of one or more elements or does a breach mean the entire agreement will terminate? Of course, commercially, the longer the notice period, the better for a contractor, so this should be checked from the outset.

Clients and suppliers will often have their own terms and conditions and it may be difficult to negotiate more favourable terms. It is preferable to use your own standard terms of trading wherever possible, so you can negotiate from a position of strength. But many organisations choose not to, believing that the client will always insist on using their own contracts. However, regardless of who has prepared the contract, it is important to know where the possible risks lie, since any contract should minimise the risks that you face. Standard contracts from clients and suppliers will probably contain service levels and detailed warranties and penalties for non-performance. These could have an impact on you financially and might even affect your decision when tendering or pricing up the job.

The importance of a good contract usually only becomes evident when something has gone wrong or when the contract is being terminated. If you have agreed to onerous terms and conditions, a client or supplier might hold you to those terms once the relationship has soured. At that point though, it’s usually far too late to negotiate new terms and far too late to protect yourself contractually.

Claudia Gerrard is a legal consultant at Excello Law. You can call her on: 07447 985647 or email her at:cgerrard@excellolaw.co.uk

Contract law: Top Ten Tips

Recent cases have highlighted the need for caution when dealing with contract negotiations.

Contract formation
A valid contract must include offer, acceptance, consideration, intention to create legal relations and certainty of terms. These are essential. If any item is missing, you might not have a valid contract.

Subject to contract
Until the contract is concluded, negotiations should be subject to contract. Otherwise the parties may inadvertently create a legally binding contract. This could mean that you are bound to carry out services, or accept work from a contractor, even though you haven’t finalised all the terms.

Part performance
Avoid starting work before the contract has been finalised, as part-performance can mean a contract is created. If there is part performance, it is unlikely that all the contract terms would have been finalised. This in turn can create uncertainty and disputes between the parties.

Form of contract
Most contracts can be written, oral or by an exchange of emails. Emails are particularly dangerous, as many key terms might not be included. If anything has been omitted and there is a dispute, a court might imply terms which aren’t particularly favourable to you.

Key terms of the contract
Use plain English and define ambiguous terms. Include all relevant terms, including payment, duties, obligations, warranties,
termination and remedies. Contracts do not have to be in ‘legal’ language and should be clearly understood by non-lawyers.

Importance of boilerplate
Include standard boilerplate clauses and what happens if one party cannot meet its obligations. Boilerplate clauses are standard clauses which appear in most contracts. They cover matters such as termination, whether English law applies, data protection issues and what happens if a clause is invalid or unenforceable.

Standard terms of business
Although standard terms are recommended, they may be unenforceable under the unfair contract terms legislation.

Battle of the forms
If there are a number of different contracts, ensure that your document is sent last. It is the last document which counts, so your terms and conditions might not apply.

Breach of contract
If one party does not comply with the contract, this may be a breach of contract. This could have repercussions in terms of liability and sums which you have to pay the other party.

Remedies
The innocent party may be entitled to compensation or can force the other party to carry out the contract. Damages can be expensive and may include substantial legal costs. A well-drafted contract should anticipate and deal with problems which arise at the end of a contract. Specialist help may be needed, particularly if a contract is complex or of high value.