Drafting Commercial Contracts

Back to basics

In this article we go back to basics, looking at the essential principles behind drafting commercial contracts for the benefit of anyone who wants, or needs, an introduction or a refresher. But first, let's take a moment to reflect on some of the principles that underpin contract law.

Assuming that all parties can claim an appropriate legal capacity, there are four essential requirements for a contract to be formed: offer, acceptance, consideration and the intention to create legal relations. Once these four principles have been satisfied a contract has been made. The first three are always matters of fact; but the fourth is not.

Intention to create legal relations

Assuming that the other three elements of a contract are present the presumption in commercial contracts is that the parties intend their agreement to be legally binding. If that is not the case then during the course of negotiations they will (should) typically use terms such as "subject to contract" to make their position clear. That said, in the case of Somerfield Stores Limited v Skanska Rashleigh Weatherfoil (2006), in which an agreement was made "subject to contract" but was then acted on immediately even though the detailed contract was negotiated over a three-year period, it was decided that the agreement was still contractually binding for that period, notwithstanding the use of those words.

Does a contract have to be in writing?

Providing that the essential ingredients of a contract are present there are only a very limited number of circumstances in which a contract must be in writing. The most common are:

a contract for the sale of land (section 2, Law of Property (Miscellaneous Provisions) Act 1989);

the assignment of intellectual property rights (sections 90(3) and 222(3), Copyright Designs and Patents Act 1988);

guarantees (section 4, Statute of Frauds Act 1677); and,

the assignment of contractual rights (Section 136, Law and Property Act 1925).

It is also worth remembering that certain sorts of agreement not only need to be reduced to writing, but, in certain circumstances, must also be in the form of a deed. Examples of these are:

land transfers (section 52, Law of Property Act 1925);

leases (sections 52(2) and 54(2), Law of Property Act 1925);

agreements which the parties intend to be binding but where there is insufficient consideration.

Leaving aside those situations in which a contract must be in writing there are obvious reasons why it is desirable for any form of commercial agreement to be written down, in particular, to provide certainty to the parties and to clearly apportion the risks and benefits arising from the contract.

But there are drawbacks too. Difficulties may arise in relation to longer-term...