Understanding contracts for small businesses: how tight is 'watertight'?

There’s no such thing as a contract that is absolutely watertight because you can’t anticipate every situation and unforeseen circumstances can occur. What we do try to do, however, is make contracts as watertight as possible.

Generally, it’s important for business owners to understand basic contract principles and understand at what point they’re actually entering into a contract, especially as so much can be discussed over email the parties may find it unclear. You should take a great deal of care over contracts right at the beginning of any discussions, before you start carrying out your activities for what the contract is for, to avoid complications and disruption later on.

Often, people think that they can just do an online search for terms and conditions and contracts and then copy and paste the wording, assuming that it will work as well for their business. This is quite risky because contracts should be bespoke to be appropriate for what a business specialises in. Even if it’s a contract used by a similar business, it should reflect how your business operates and what clarity and protection it needs from the contract.

There has to be an understanding between the parties of what the contract is for, what’s going to be taking place, and what its possible scope could be, and you need to know how the businesses operate to make sure it reflects back in the terms and is appropriate for the contract.

Some of the most common loopholes that come up in contracts are in the terms of the termination provisions. People might find they’re tied into contracts for a lot longer than they thought or they’re relying on a customer or a supplier that can terminate at very short notice. It’s vital that these are set out clearly to protect both parties. 

There are also clauses that allow companies to charge customers for additional costs on top of their fixed fee. These are often reasonable charges incurred in delivering a service that a company would want to recover but it’s important to set out the scope and terms of these and understand them to avoid disagreements or unexpected charges.

The trickiest contracts to negotiate are mostly between companies that haven’t done any work together before, and where they don’t have an established relationship or a level of trust between them.  

Consumer contracts are also complex because they are subject to additional consumer regulations and protections which supersede any contradictory provisions which may be in the contract. So, regulation could significantly change the contract which you could have on paper.

The fee for legal advice on contracts is dependent on the type and complexity of a contract, but it’s better to get professional legal advice, rather than relying on what can be found online or reusing other contracts that were written for other businesses. Get in touch with our corporate and commercial team for expert advice.