A guide to creating successful and watertight commercial contracts

For any formal business agreement, a well-drafted commercial contract benefits all parties by helping to ensure the terms of the agreement are adhered to as well as saving time and expense on legal action if its terms are breached.

Paul Matthews, associate director and head of WHN Solicitors’ corporate and commercial team, discusses the key elements of making sure commercial contracts are successful and watertight.

Skilful and diligent drafting helps to ensure a contract has its desired effect. Poorly drafted contracts can fall foul of the contra proferentem rule which effectively means that where there is doubt as to the meaning of a contractual provision, that provision will be interpreted against the party who put the provision forward.

Well drafted contracts are also easier to comply with as well as being more straightforward, and therefore cheaper, for the recipient to obtain legal advice and negotiate any points of concern.

In addition, when a dispute arises, the likelihood of court proceedings being required is reduced as the contract will already provide for what happens in the event of a variety of foreseeable issues arising.

Even if a dispute ends up with court proceedings, a well-drafted contract is likely to significantly narrow the issues to be dealt with by avoiding the need for legal argument about what various contractual provisions were intended to mean.

A successful and watertight contract should be:

Coherent and consistent

The quality of business contracts varies widely and this tends to be heavily dependent on how well the initial version was drafted. It can be very tempting to cut corners by borrowing parts from other contracts you have seen or seeking to repurpose a contract designed for a different set of circumstances.

Doing this involves all sorts of risks. For example:

• Inconsistent use of defined terms
• Inconsistency between different provisions
• Including provisions which were relevant to the previous contract but are not appropriate to the current contract
• Including provisions which were not relevant to the previous contract but are desirable for the current contract

Clear

Avoiding lengthy and unwieldy sentences or clauses makes contractual provisions significantly easier to understand and interpret.

A well drafted contract will, wherever possible, avoid longer clauses by dividing them into shorter clauses or using sub-clauses. This is particularly important in relation to clauses where the enforceability of the clause is dependent upon reasonableness e.g. restrictive covenants and clauses seeking to limit or exclude liability.

Where it is found that part of such provision goes beyond what is reasonable (which is always a risk with such clauses as different judges may take different views as to what is reasonable), a court can strike out the offending wording (rather than ruling the entire clause unenforceable) providing the remainder of the clause continues to make sense without the offending wording.

Where the offending words are contained in a separate subclause rather than embedded within a single longer clause, it is far more likely that the remainder of the clause will be left unaffected.

Certain

A contractual provision will only be enforceable if it is sufficiently certain. By way of example, agreements to agree (e.g. the price will be revised on the first anniversary to such increased price as the parties shall agree) are likely to be worthless in the absence of any provision as to what happens if the parties can’t agree.

Concise

The length of a contract should be determined by what it sensibly needs to cover. Contracts should not be artificially shortened but can often be repetitive, dealing with the same issue on more than one occasion.

Not only does this make the contract longer than it needs to be, it also risks inconsistency. This creates avoidable scope for dispute as often the issue won’t be dealt with in an identical way.

Judging which words to include in a contract is extremely important – making sure the correct words are included assists with clarity and certainty. Including unnecessary words is likely to prejudice coherence, clarity and certainty.

Drafting commercial contracts is a skilled matter and, whether you need a contract preparing or are the recipient of someone else’s contract, getting appropriate professional advice at the outset will help ensure it is successful and reduce the scope for costly and time-consuming disputes.

Paul specialises in corporate and commercial transactions, including company and business sales and acquisitions, management buyouts, shareholder agreements, joint ventures, partnership agreements and issues, as well as general commercial contracts including terms of business.

For further information on commercial contracts or any other corporate or commercial law matter, call Paul on 0161 761 4611 or email him at [email protected]