Your commercial contracts are a vital part of your business. They ensure that your everyday trading runs smoothly, efficiently, and on terms that you understand.
English courts can rectify a contract if there is a mistake in it which cuts across the intention of the parties, nevertheless it is important to get your contracts right from the outset.
In this article we consider why businesses should have robust and compliant commercial contracts in place, the importance of reviewing them on regular basis and circumstances in which your contracts could be rectified by the court.
Why should you have commercial contracts in place?
A commercial contract regulates the relationship between two parties, usually two businesses.
Organisations benefit from having robust and compliant commercial contracts and policies in place for the following reasons:
- Compliance – the law is ever-changing and so are the requirements for companies to comply with various regulations and legislation, some which can be very costly and impose life changing sanctions.
- Risk – the risk of litigation or fallout from non-compliance will be decreased. Having standard terms and conditions will also reduce your risk of liability when things go wrong or ease frustration occurring from dealing with suppliers and customers.
- Efficiency – robust and up-to-date contracts will make contracting easy and efficient with both suppliers and customers.
- Reputation – in the business world, reputation is everything. Having effective policies and contracts give your company the accreditation it deserves – professional, current and knowledgeable.
What do you need to do to get your contracts right the first time?
Whether your business is in its early stages or well established in its field, commercial contracts are essential to the success of the company.
When looking to make a business contract with another business, we would recommend you to consider the following:
- What is the commercial agreement? – this sounds obvious, but it is essential to have a clear commercial deal between both parties before contracting. It can make the negotiation and drafting processes long and drawn out if elements of the commercial terms are misunderstood or disputed.
- The commercial and legal risks contracting with the selected third party could bring to the company – is the third party a well-established business or is there potential for your reputation to be compromised? This is just one example of commercial risks which can be dealt with in the terms of the commercial contract. If you can completely understand the risks a commercial contract can bring to your business, then these can be broached in the drafting.
How can you ensure your contracts are up-to-date?
Contracts, policies and procedures need to be regularly reviewed and updated to stay up-to-date with common practice and legislation.
Being in touch with changes in your market area will give you the edge and forward awareness of legal updates which may impact your contracts. Once you have identified the affected contracts, seeking legal advice and exploring best practice to see what is needed to stay compliant with new laws.
Rectifying contracts by the court - legal update
The courts' approach to rectification has historically been uncertain following a number of different approaches. But thanks to the Court of Appeal in FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd1, there may finally be a clear way forward.
Where are we now after the FSHC Group Holdings Ltd case? The Court of Appeal in the UK has clarified the relevant test and has broken the test down to two distinct examples:
- If the parties have entered into a prior agreement, and subsequently executed a contract which contains different terms – the courts will apply the objective standard to its rectification, meaning, the courts will not look at the intention of the parties involved but will interpret the contract based on its wording;
- If the parties have no previous contract, they share a common intention and by mistake they execute a contract which does not mirror that intention – the courts will apply a subjective standard to its rectification (which must have been held at the time the contract was executed and must have been the subject of an "outward expression of accord"). This means they will take the intention of the parties into consideration when interpreting the contract.
While it is possible for contracts to be rectified by the courts, the standard is still high in order to get as far as a rectification, let alone once there, to establish the above tests.
Commercial contracts are integral to any business and getting them right the first time protects your business and its standing in the marketplace.
1.  EWCA Civ 1361
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.