Contracts and the law

At the heart of business law are the laws that cover contracts and trade. This article looks at contracts for both buyers and sellers including the thorny issues of statutory rights and implied terms, plus other contract terms, trading standards and the myriad of trading laws that affect small businesses.

There are strict rules to adhere to. Customers usually have more rights than businesses do when it comes to contracts. You must understand the trade laws and their restrictions which affect how you are allowed to sell. At the same time be aware that your business may not get the same level of consumer protection from other businesses. Duport aims to give you a basic understanding of these key issues and clarify any misunderstandings. However you must consult a solicitor for professional advice to help draw up your contracts and terms and conditions, and for any contractual problems or issues. Take advantage of the free legal consultations from Lawyers For Your Business

What is a contract?

A contract exists when three conditions are met:

• both buyer and seller are capable of making and intending to make a contract
• an offer is made and accepted
• something of value is exchanged.

Contracts do not have to be written, although some particular contracts (for example property leases over three years) must be in writing. It is important to realise that only terms which have been agreed before or at the time of making the contract apply. However there are also ‘implied terms’.

The terms of the contract govern what the seller and buyer are obliged to do and legal action can be taken if one party fails to perform their part of the contract.

Statutory rights

Every contract has implied terms, even though they are not spelled out. Some of these terms can be explicitly excluded from the contract, but not unreasonably:

• the seller must be entitled to sell. If you buy something from someone who does not own it you have the right to get your money back from the seller
• the goods must match their description. Descriptions on labels or claims made by the seller must be accurate
• goods sold in the course of business must be of satisfactory quality
• goods must be fit for the purpose
• goods sold after providing a sample must match the sample.

Other contract terms

Businesses can produce a ‘terms of trading document’ setting out standard conditions for its contract. Common clauses may include description/specification of the products or services being sold, details of price, payment date, payment method and delivery. Maybe a guarantee for a certain time period (in addition to the buyer’s statutory rights), a clause giving the seller the right to retain legal ownership of the goods until they have been fully paid for, the right to delay delivery due to circumstances beyond his or her control, clauses limiting the seller’s liability (but you can’t alter a consumer’s), or a clause stating that nobody apart form the buyer and seller is to have any rights under the contract.

Contracts for sellers: what you should do if you sell goods and services

If you are selling you should use a solicitor to draw up standard terms of trade. Remember that when selling to consumers, terms must always be ‘fair’ and in plain English. You must ensure that the buyer is aware of, and agrees to, the terms before the deal is made. If the contract is in writing it should expressly refer to your terms of trade. Generally speaking any reference to your terms in an invoice will not be effective, so don’t think you can get away with lumping terms onto the invoice.

• describe the product or service accurately – – this will reduce the risk of breaching the implied terms
• it is a good idea to give you sensible and practical margins for error by stating tolerances in technical specifications (for example if you make sofas you might want to state that the measurements in your brochure can vary by several centimetres etc.)
• remember that it is illegal to give false descriptions and you might be sued if you do
• the contract should explain to the buyer what to expect of the goods – for example for the price/age etc.
• explain to the buyer any limitations and defects. Do not make exaggerated claims
• allow the buyer to examine the product
• make sure instructions – including safety instructions are clear and accurate
• if you provide samples they should be representative of the real thing
• get a written confirmation from a buyer if they are buying against your advice.

You have to be very certain of your facts before you advise a buyer the product is suitable for a specific need. If in doubt say you do not know. Legally, if you ask a buyer what they are going to use the product for and it is not suitable, you could be liable, so it is best not to ask! You could even be liable for customised goods if they do not fit their purpose. Generally, you need to be accurate and honest.

Contracts for buyers: what you should know when you are buying

Businesses do not have the same protection as individual consumers. In general, when your business purchases goods or services from another business you should have the same implied rights as a consumer would when buying from you. However, while these basic rights can’t be excluded from contracts with consumers, they can be excluded from contracts between businesses. A consumer contract excluding liability for defective goods would be automatically invalid. But as a business purchaser it is up to you to check in advance what terms and conditions you are agreeing to:

• check whether there are any terms or conditions in the contract that appear to be too heavily weighted in favour of the business supplying the goods or services
• look out for exclusion clauses which the seller might use to exclude certain liabilities from the contract
• if you are unhappy with any of the terms or conditions do not agree to them, but get them checked by a solicitor or contact your local Trading Standards office
• you can take the initiative when negotiating contracts with your suppliers and have terms and conditions amended or added to improve your position. Of course this will depend on your bargaining power and how much business you offer
• you can use a solicitor to draw up standard terms of trade for key purchases of goods and services that you can enclose with the order to make sure it is agreed that your terms will apply (of course the other party must agree to it)
• the contract should reflect what has been agreed in terms of qualities, price, payment terms, delivery schedule etc.
• insist on removal of exclusion clauses limiting the seller’s liability for defective goods or for losses due to negligence
• make sure the goods correspond with the seller’s description
• are of satisfactory quality – safe, in working order and free of defects
• are fit for purpose – capable of doing what they are meant to do.

These rights are outlined in the Sale of Goods Act 1970. Similar implied contractual rights also apply when purchasing services. If you purchase services from another business the service should be carried out with reasonable care and skill, with a reasonable time and a reasonable charge. It is not just purchases but also hiring, hire purchase, part exchange etc.

Sole traders, and those within a partnership or as an unincorporated association, are also protected by the Consumer Credit Act 1974, under which you count as an “individual”. The Act does not extend to limited companies or LLPs

• when you are buying protect your rights under the implied terms. You can do this buy asking for detailed product specifications. Even if you know a lot about the product make sure you ask lots of questions
• when you order insist that the product must match the specification and state explicitly the quality levels and standards you expect. Make sure you tell the seller what you will use the product for and make sure you keep a record of claims by the seller. This can be done with brochures from the seller, confirmation emails to your specific questions, etc.
• when you get the product under no circumstance should you give it a mere cursory examination and accept it. If you do this you may lose your right to reject it if you later find a defect
• you have the choice to either examine it thoroughly or not at all to protect your legal rights. Never sign a delivery note saying the goods were satisfactory until you have thoroughly inspected them
• put the onus on the seller – ask them to inform you of any hidden dangers, limitations or quality charges
• if you need a particularly delivery date or time make sure this is confirmed in writing.

Other trading laws

You should be aware of the other trading laws and aspects of law that may affect you, whether buying or selling:

for example the seller is likely to be liable for death, injury or loss to property caused by defective products or services. This includes design, manufacture and marketing defects. It is important to understand that everyone in the supply chain (e.g. retailer, manufacturer) can be liable

• it is absolutely essential to have third party liability insurance
• all products must meet safety regulations
• false descriptions are illegal
• it is also illegal to give misleading prices so you cannot display goods at a low price and then charge more, or claim to offer a sale price or a discount if the price has not genuinely been reduced
• you may need a licence for certain types of business, including businesses which offer credit (other than trade credit)
• some businesses are subject to extra regulation (e.g. those selling financial services, food or goods online). If you are involved in these you should know, for example that the Consumer Protection (Distance Selling) Regulations 2000 place restrictions on telephone sales and give online buyers some extra rights
• it is important to remember that if you keep information about individuals (including staff) on computer means you will probably need to notify the Information Commissioner. (See data protection section.) The Data Protection Act applies to all personal records – not just those on computer – and there are special rules for any personal records on the internet. Even if you only record basic information (such as names and addresses) you may need to notify the commissioner – but there are exceptions.

The unfair contract terms act

Transactions between businesses are covered by the Unfair Contract Terms Act 1977 (UCTA). In general businesses are free to enter into whatever contracts they agree between themselves – obviously you should make sure you’re happy with the contracts you agree with other businesses.

However UCTA places a number of restrictions on the contract terms businesses can agree to. Specifically, it lays down rules for the ways in which vendor businesses can use exclusion clauses to limit liability in certain areas:

• excluding liability for death or injury is not permitted in any circumstances
• excluding liability for losses caused by negligence is permitted only if it is reasonable
• excluding liability for defective or poor-quality goods is also permitted only it if is reasonable.

Although ‘reasonable’ is not defined precisely , courts would take into account the information available to both parties when the contract was drawn up, whether the contract was in standard form or negotiated and whether the purchaser had the bargaining power to negotiated better terms.

What you can do about breach of contract

Although certain rights can be excluded from business contracts that cannot be excluded from consumers it does not mean to say you cannot challenge. For instance being supplied with defective goods may not in fact be a breach of contract if an exclusion term limiting your supplier’s liability in this area has been included, but you might still be able to challenge the exclusion clause on the grounds that it was unreasonable under the Unfair Contract Act 1977.

If your supplier’s liability is not limited by reasonable exclusion clauses and the goods are not fit for purpose are of unsatisfactory quality or don’t match the seller’s description you are entitled under the Sale of Goods Act to reject them within a reasonable time after delivery and to recover any money you have paid.

If you have paid for services which have not been carried out with reasonable skill you are entitled to ask for the work to be redone at no extra cost. If the supplier won’t do this you are entitled to ask another supplier to put the work right and then claim the cost from the original supplier.

If you have agreed a price as part of a contract you are not obliged to pay any more. If deadlines have been agreed and not met you are entitled to compensation for any foreseeable losses you may suffer.

If you have any legal problems you should contact a solicitor. You can get a half hour free consultation from a solicitor under the Lawyers For Your Business Scheme at the Law Society.