The importance of contracts

By Brabners LLP

30 Apr 2021

img_8534-2429.jpg

Put simply, a contract is an enforceable agreement between two parties. Contracts do not have to be written down in order to be legally enforceable; an oral promise can also be binding. However, relying only on a long-standing relationship and a handshake is an unnecessarily high-risk strategy. Greater legal – and commercial - protections are afforded by well-drafted, written contracts, tailored to the specific arrangement being formalised.

Commercial considerations

A well-drafted, written contract provides certainty, clarity, and protects parties’ interests if problems arise down the line. The specifics of what the contract covers can be identified (for example through a scope of services clause or schedule of goods), and each party’s obligations and rights expressly stated. A written contract can also ensure that agreed procedures are in place should one party fail to comply with the terms of the contract, or if the parties are unable to perform their obligations due to unforeseen circumstances.

The COVID-19 pandemic and its impact on trade exemplified how instrumental a well-drafted contract can be to a company’s commercial resilience. Contracts that provided “get-out” clauses for situations such as a pandemic meant parties could terminate an agreement without being in breach of their obligations. If a party is in breach of contract, it can be liable to pay costs and/or damages to the other party. It might also incur legal fees if the parties cannot reach a settlement and the dispute goes to court.

More generally, if a dispute arises out of a contract and the contract is not written down, the parties could face the often difficult and protracted task of proving: (a) that a legally binding contract existed between the parties, and (b) what their obligations/rights were under the contract. Where there is no written agreement, the law can be less certain, and it will ultimately be one party’s word against the other’s.

The value of a contract

Contracts can be valuable assets to a company and should be managed as such. In particular, a company should know which of its contracts are ‘material’ (i.e. worth 10% or more of its turnover) and what its obligations are under such contracts. This is particularly important where a share sale is envisaged but should be borne in mind even before the contract is entered into.

By way of example, a contract might contain a “change of control” clause. This provision gives a party enhanced protection if the controlling shareholding of the other party is transferred. Often, the party who is not subject to a change in ownership will have the right to terminate the contract in the event of a change of control of the other party. If a material contract contains this right to terminate, it can be a red flag to prospective buyers because there is a risk that a major customer will terminate its contract with the company upon the transfer of that company.

In the best-case scenario, the sale process would be slowed down while the customer’s consent (i.e. the party with the right to terminate upon change of control) is obtained. If consent is not given, a prospective buyer could use this as leverage to negotiate a lower purchase price - since it is taking on the risk of losing a material contract – or seek to include an indemnity in the sale agreement.

A company should be alive to these issues and should ensure it understands its position in light of a prospective sale. Then, it can take appropriate steps to communicate with suppliers and/or customers and minimise risk.

Before entering into a contract, a company should consult a specialist legal team. Firstly, there is no such thing as a “one size fits all” contract, and each context – be it employment, consultancy, supply chain, consumer law, or data protection – will warrant different considerations and legal requirements. Secondly, interpreting a legal contract is not always as straightforward as it might appear. Some clauses might be drafted in such a way that implies certain obligations, or that omits protections that a company might wish to benefit from. When executed well, a binding, legal agreement can be a company’s greatest asset. However, when executed poorly, it can leave a company open to undue risk and liabilities.

If you have any queries about any of the above or would like to discuss anything further, please get in contact with me or a member of the Family Business Team.

Latest news

1

Bellway to build 183 high quality new homes Royal Bowland Park street scene NEW.jpg.jpg

Bellway to build 183 high quality new homes

29 Oct 2025

2

University of Lancashire recognised for entrepreneurship and supporting business growth - Representatives from the University's Business School, local SMEs and the IOEE

University of Lancashire recognised for entrepreneurship and supporting business growth

29 Oct 2025

3

£8bn Typhoon order is great news for Lancashire BAE Typhoon ECRS Mk2 Radar

£8bn Typhoon order is great news for Lancashire

28 Oct 2025

4

Award-winning Lancashire wedding venue and hotel is sold The Mill at Conder Green

Award-winning Lancashire wedding venue and hotel is sold

28 Oct 2025

5

PM+M announces another 19 promotions across the firm PM+M promotions

PM+M announces another 19 promotions across the firm

27 Oct 2025

Background image for hub sign up block

LBV Hub

Leverage Lancashire Business View platforms

Post your news
Post your events
Post your offers
Build your network
Improve your SEO
Gain coverage in the magazine
Sign-up
Events
November / December 2025 Magazine Launch Event
Holiday Inn Hotel
Networking
19 Nov 2025

November / December 2025 Magazine Launch Event

Holiday Inn, Blackpool

08:30 - 10:30

CMI Level 5 Management and Leadership Course
UCLanAerialCampus.jpg.jpg
LBV Hub Seminars
21 Feb 2025 - 21 Feb 2026

CMI Level 5 Management and Leadership Course

Preston Campus, Preston , PR1 2HE

09:00 - 17:00

CMI Level 5 Project Management Course
UCLanAerialCampus.jpg.jpg
LBV Hub Seminars
21 Feb 2025 - 21 Feb 2026

CMI Level 5 Project Management Course

Preston Campus, Preston, PR1 2HE

08:00 - 17:00

Help to grow management course
Help to grow - barriers to growth.png.png
LBV Hub Seminars
26 Sep 2025 - 16 Dec 2025

Help to grow management course

Preston Campus , Preston , PR1 2HE

09:00 - 15:00

Women scaling up Blackpool Fylde and Wyre
LBV Hub Seminars
22 Oct 2025 - 09 Jan 2026

Women scaling up Blackpool Fylde and Wyre

The Small Business Academy, Blackpool, FY4 5JX

09:30 - 15:30

RISE - Lancashire's unique leadership programme for women
thumbnail_Emma Weston Illustration WENDY BOWERS RISE Illustrstion.jpg.jpg
LBV Hub Seminars
22 Oct 2025 - 18 Mar 2026

RISE - Lancashire's unique leadership programme for women

East Lancashire Chamber of Commerce, Clayton le Moors, BB5 5JR

09:30 - 15:30

Chamber Breakfast Networking – November
Lancs-cham-logo.jpg.jpg
LBV Hub Networking
06 Nov 2025 - 06 Nov 2025

Chamber Breakfast Networking – November

Porsche Centre South Lakes, Carnforth, LA6 1FW

08:30 - 10:30

Lancashire Police business update with The Police and Crime Commissioner
Lancs-cham-logo.jpg.jpg
LBV Hub Roundtables
10 Nov 2025 - 10 Nov 2025

Lancashire Police business update with The Police and Crime Commissioner

Lancaster Castle, Lancaster, LA1 1YN

14:00 - 16:00

AI, Creativity, and what it means to be human
2.jpg.jpg
LBV Hub Networking
11 Nov 2025 - 11 Nov 2025

AI, Creativity, and what it means to be human

Society1, Coworking Space, Preston, PR1 3LT

18:00 - 20:00

Beyond the Brand: Building trust through values and integrity
1.png.png
LBV Hub Networking
11 Nov 2025 - 11 Nov 2025

Beyond the Brand: Building trust through values and integrity

Society1, Coworking Space, Preston, PR1 3LT

18:00 - 20:00

The Business Network Central and East Lancashire
LBV Hub Networking
13 Nov 2025 - 13 Nov 2025

The Business Network Central and East Lancashire

Stanley House, Blackburn, BB2 7NP

11:30 - 14:15

The AI Lab: E-commerce
Ai Lab ecommerce (1).png.png
LBV Hub Seminars
14 Nov 2025 - 14 Nov 2025

The AI Lab: E-commerce

Door4 Office, Burnley Wharf, Burnley, BB11 1JG

09:00 - 11:30

Advertise with us

Reaching 50,000 members, our print, digital and event platforms offer a fantastic way to raise your business profile and help you grow.

Find out more LBV124 Online Graphic
Subscribe now

Weekly news bulletin