Key Principles of a Contract

We start with the assumption that there has been an offer and acceptance and that the two contracting parties are entering into a bespoke form of contract as opposed to a standard form or an amended standard form of contract.

The key criteria is that the contract is entered into freely and offers sufficient protection to both parties. A contract that is too skewered in favour of one party to the other could be subject to a challenge under The Unfair Contract Terms Act [1977].

This Act was enacted to limit the extent to which under English, Welsh & Northern Ireland law, civil liability for breach of contract, or for negligence or other breach of duty, could be avoided by means of contract terms and otherwise. Under Scots Law civil liability can only be avoided by means of contract terms.

So where do we start.

The first principle is that the contract states the parties to it, what is being contracted for, and for what payment or offer of services apply. For example a Management Contract would state the management roles expected to be undertaken, usually have a minimum duration and mechanisms to extend the contract without need for a new contract being signed and an amount of remuneration, be that per hour, day or week.

The next critical element is the definitions of the contract where a term appears in the clauses that follow which are in effect the terms and conditions of the contract, for example if there may be interfaces with third parties as part of the contract these are defined and the extent of these interfaces are defined. This is primarily to ensure good practice but also to also avoid further dispute later.

It may sound simplistic, but if prior to contract award sufficient time is taken for the contract to be properly formulated, the chances of petty disputes are greatly reduced. In the event there is then a dispute, this will be on a fundamental principle of the contract and what is being contracted for. In this instance a fair and equitable contract will be critical for either party to assert their position.

Following these key term definitions there are a number of key heads that will be required for the contract to operate effectively and not become frustrated. These will include, but not necessarily be limited to the following and are in no particular order:

• Specific duties under the contract of both parties

• If one of the parties is going to deliver part of his obligations under the contract via a 3rd party, the specific requirements for this sub contract to operate

• To follow the previous bullet point, where the contract being entered into is a sub-contract, then for the party joining the works as a sub sub-contractor it is vital they are aware of the specific terms and conditions and by consequence any obligations that may be incumbent on them from that Main Contract

• How change (Variation) to what is being contracted for is dealt with

• Payment terms, what the parties are required to do to effect payment, the frequency of payment and grounds for withholding of payment

• The mechanism of the final payment due and the requirements for this to be computed

• In the event the contract has time limits with penalties, the grounds for the movement of the completion date and requirements to demonstrate this

• Confidentiality clauses, in effect that the commercial terms of the contract are kept secret, save for where required by a court of law. In sensitive industries such as nuclear power or defence these confidentiality clauses will be more onerous for obvious reasons of national security

• Insurance requirements and the period of any liability for your works under the contract (Professional Indemnity, Employers Liability, Product Liability etc)

• Dispute resolution provisions, such as informal discussions between the parties with named persons from each side, Arbitration or Adjudication (where applicable). This clause will be to avoid the prohibitive cost of litigation, however that will always remain as the final remedy between the parties

• The governing law of the contract, which is critical if a dispute ends up in litigation that the governing law is stated, e.g. English Law, Scots Law etc. In countries like the United States of America this can be critical as laws differ from state to state and while the difference may not be fundamental it could be material in a dispute

• Where the work of one of the parties will generate Intellectual Property, who retains the specific Intellectual Property to that work and the licensing of it for use by the employer and other third parties

• A similar arrangement will be required to the bullet point above in relation to any patents that may fall under the auspices of the contracted works

• While not always necessary, a clause relating to Force Majeure (Acts of God) is always a sensible clause to include

• Grounds for termination, before the contract has naturally expired and how this are invoked, this also needs to be even handed on both parties

• The most important clause of all I have left for last, Limit of Liability. At a simplistic level this is the upper limit of claim against your company or indvidually for your contracted works if they are defective etc. If the contract is silent on this, an argument could be made that your liability is unlimited, as the claim will effectively be made as a result of the consequences of your defective etc works. A contract worth say £100,000 could end up with a liability running into millions of Pound Sterling

These are the main clauses that would be required to allow a contract to operate and for, say a simple management or supply contract are all that would be needed, as the specific information would be inserted into the relevant clauses.

However where the contract is more onerous then additional information will need to be included within Schedules or Appendix. These would be the specific elements unique to that contract. For example the contract may involve a number of people with different skills and a requirement is that they are named in the contract and a mechanism to replace them in the event they are no longer involved in the works This would not be possible in a generic version of a contract, but would be included in a Schedule or Appendix, with the actual names and specific skills.

Another key element to cover in an Appendix or Schedule is any post tender amendments that have been agreed. If we return to offer and acceptance, where an acceptance is different to what the original tender stated it’s critical to capture what has been agreed, this is particularly important where say at tender stage there were a number of exclusions that have subsequently been set aside.

These are the very basic elements of a binding and enforceable contract, we will return to the subject later with a look at various forms of standard contract and their strengths and weaknesses.

Next time we will look at Alternative Dispute Resolution.


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