Q&A: Business Contracts

Q. What makes a commercial contract legally enforceable in England and Wales? 

For a contract to be legally enforceable in England and Wales, it must contain four essential elements: 

• Offer — one party must make a clear offer to contract on specified terms. 

• Acceptance — the other party must accept that offer, without material qualification (a qualified acceptance is a counter-offer, not an acceptance). 

• Consideration — each party must provide something of value in exchange for the other’s promise. In a commercial contract this is typically the payment of money in exchange for goods or services. 

• Intention to create legal relations — the parties must have intended to be legally bound. Commercial agreements are presumed to have this intention; social or domestic arrangements are not. 

In addition to these basic requirements, the parties must have legal capacity to contract (companies must act through authorised individuals), the subject matter must be legal, and the contract must not have been induced by misrepresentation, duress or undue influence. 

Most commercial contracts are valid even if not made in writing — English law does not generally require commercial contracts to be written or signed. However, certain contracts must be in writing (such as contracts for the sale of land, consumer credit agreements and guarantees), and it is almost always advisable to document commercial agreements in writing to avoid disputes about what was agreed. 

Q. What is a limitation of liability clause, and is it enforceable? 

A limitation of liability clause is a contractual provision that caps the amount one party can recover from the other in the event of a breach of contract or other claim. It may limit liability to a fixed monetary sum (for example, the value of the contract), exclude specific types of loss (such as consequential loss, loss of profits or loss of data), or both. 

In English law, limitation of liability clauses are subject to the requirements of the Unfair Contract Terms Act 1977 (UCTA) and, for consumer contracts, the Consumer Rights Act 2015. For business-to-business contracts, UCTA provides that: 

• A clause excluding or limiting liability for death or personal injury caused by negligence is void and unenforceable. 

• A clause excluding or limiting liability for other loss caused by negligence, or for breach of contract, is only enforceable to the extent that it is reasonable. 

The reasonableness test under UCTA considers factors including the relative bargaining strength of the parties, whether the clause was drawn to the attention of the other party, whether the limited party could have obtained insurance, and the nature and value of the contract. 

Well-drafted limitation clauses that reflect the commercial realities of the contract — capping liability at an amount that reflects the contract value, or excluding consequential losses in an industry where such losses are typically uninsured — will generally satisfy the reasonableness test. Limitation clauses that seek to exclude all liability entirely, or that are buried in small print, are more vulnerable to challenge. 

Q. What is a force majeure clause and when does it apply? 

A force majeure clause is a contractual provision that excuses one or both parties from performance of their obligations in the event of exceptional circumstances beyond their control — circumstances that were not foreseeable at the time the contract was made and that make performance impossible or impractical. 

English law does not have a general doctrine of force majeure — unlike many civil law systems. A force majeure clause only operates if it is expressly included in the contract. The scope of the clause, and the events that trigger it, depends entirely on the drafting. 

Common events listed as force majeure include: natural disasters, war and civil disturbance, acts of terrorism, pandemic, government action or regulatory change, and infrastructure failure. Whether a specific event triggers a force majeure clause depends on whether it falls within the scope of the listed events, whether it was foreseeable at the date of the contract, and whether it actually caused (rather than merely contributed to) the failure to perform. 

The COVID-19 pandemic tested force majeure clauses extensively. Courts were generally reluctant to find that the pandemic triggered standard force majeure provisions, particularly where the affected party had found alternative means of performance or where the clause required physical impossibility rather than mere commercial difficulty. 

Separately from force majeure, the doctrine of frustration may apply where supervening events make performance physically impossible or render the contract fundamentally different from what was agreed. The bar for frustration is high — commercial inconvenience or increased cost is not sufficient. 

Q. What are standard terms and conditions and how do they interact with the ‘battle of the forms’? 

Most businesses contract using standard terms and conditions — pre-drafted contractual provisions that they seek to apply to all their transactions. The problem arises when both parties have standard terms and each purports to contract on their own terms rather than the other’s. This is known as the ‘battle of the forms’. 

Under English law, the battle of the forms is generally resolved by the ‘last shot’ doctrine: the last set of terms that was put forward, and not objected to, before the contract was performed, will generally prevail. In practice, this means the party whose terms are on the last document before performance begins (often a delivery note or order confirmation) may have their terms incorporated. 

However, the outcome of a battle of the forms analysis is uncertain — it depends on the precise sequence of correspondence and the specific provisions in each party’s terms. Businesses that are serious about their standard terms should: 

• Ensure their terms are clearly incorporated by reference in all relevant documents — quotations, order confirmations, invoices. 

• Include a provision that their terms prevail over the counterparty’s terms in any conflict. 

• Train their sales and procurement teams to identify when the counterparty is seeking to impose their own terms and to respond appropriately. 

• For high-value contracts, negotiate a bespoke agreement rather than relying on standard terms. 

Q. What should I do if the other party to a contract is in breach? 

If you believe the other party is in breach of a commercial contract, the steps to take will depend on the nature and severity of the breach and what you want to achieve. 

First, consider whether the breach is a condition (a fundamental term going to the root of the contract, which if breached entitles you to treat the contract as terminated) or a warranty (a less fundamental term that gives rise to a damages claim but does not justify termination). Wrongly treating a breach as a condition — and purporting to terminate the contract — can itself amount to a repudiatory breach, exposing you to a claim by the other party. 

Practical steps to take: 

• Document the breach — preserve evidence of what was promised and what has (or has not) been delivered. 

• Check the contract for dispute resolution provisions — many contracts require the parties to attempt to resolve disputes by escalation or mediation before formal proceedings. 

• Check notice requirements — if you intend to terminate the contract, many contracts require formal notice in writing and a cure period before termination is effective. 

• Take legal advice promptly — limitation periods begin to run from the date of breach. For a breach of contract under English law, the limitation period is generally six years. 

• Consider whether to continue or stop performance — continuing to perform while accepting a breach can, in some circumstances, amount to affirmation of the contract, waiving your right to terminate.