Contractor checklist: structure and clauses a contract for services should include

It is a general principle of English law is that there is freedom of contract. There are some exceptions to that, particularly where one party is a consumer, but that is the general principle so whatever the parties agree, the court, if called upon to do so, will enforce it by requiring the party in breach to pay compensation to the other party. So it is important to get a solicitor or barrister to draft the contract – if you are in the fortunate position of being able to put forward your own contract wording – or to check the contract if, as often happens, the starting point is a draft contract put forward by the other side.

The form of the contract

The basic deal between the parties - how much one party will pay and what the other party will do in return – is negotiated in principle between the parties. After that, with legal advice, the parties negotiate the detailed terms which make up the contract, before it is signed by both parties and becomes legally binding.

Certain contracts, such as contracts for the sale of land, have to be in writing, signed by the parties, but it is possible (though often not desirable) for most other contracts, including commercial contracts, to be made by word of mouth or by email. If the intention is that there is to be a formal detailed contract signed by the parties, is important when negotiating the basic deal to make clear that it is not intended to be binding unless and until a formal contract is signed. Otherwise you may end up bound by an oral contract which does not contain all the detailed terms you  intended.

Names of Parties

The contract will commence by naming the parties: “This Agreement is made between...”. Particularly where the parties are limited companies, it is important to use the exactly correct legal name of each party.  

Recitals

Most commercial contracts do not have recitals but they can sometimes be useful to set out the circumstances in which the contract comes to be entered into, because, in case of dispute about the correct interpretation of the contract, its stated commercial context can help to clarify any possible ambiguity. If there is a recital it conventionally commences with the words Whereas.... and ends when the operative part of the agreement starts  with the words: It is Agreed as follows:

Definitions

The first numbered clause of a contract usually sets out definitions of key terms. For example the word Work might be defined as “the work to be carried out by the Contractor as set out in  detail in Schedule 1”. The word Work having been defined, it can then be used whenever required later in the contract and its specific meaning will be clear.

Main Commercial Obligations     

In the interests of clarity it is usual to then set out the main commercial obligations – what one party will do and what the other will pay – before setting out all the detailed clauses dealing with, for example,  what happens in exceptional circumstances.

Inability to meet main obligations

One of the main risks when entering into a contract for the provision of services is the possibility of the party providing the services being in breach of contract because of circumstances outside that party’s control such as accident or illness. One approach is specifically to provide that an inability to carry out work due certain specified causes is not a breach of contract. If this approach is taken it is usual to provide that, although there is no breach of contract, the other party can, if delay continues for a specified period, and if that party so wishes, terminate the contract. Unless the price is purely an hourly rate, it will also be necessary to provide for how the price is to be recalculated if the contract terminates early without breach.

An alternative approach is to make clear that the contractor is not obliged to provide the services only using specified individuals and can use any suitable individual. Such substitution clauses allow work to continue even if a particular person is unwell.

Reducing Risk

A substitution clause reduces the risk of being in breach due to illness of the key individual but it creates another risk in that finding a suitable replacement at short notice may not be easy.

The usual approach when negotiating commercial contracts is for each party to seek to reduce its own risk and deflect risk onto the opposite party, the negotiations normally resulting in some compromise sharing risk. In some cases, however, the shadow of the notorious IR35 legislation causes negotiations to take a different path with the contractor almost welcoming risk as a means of demonstrating that the “hypothetical contract” would not be one of employment.  The possible damage to profits from IR35 is a legitimate concern but at the same time there is a balance to be struck: it may be unwise to seek a small reduction in the risk of IR35 applying at the cost of accepting a large contractual risk.

Limiting liability 

Accepting some risk, whilst agreeing an upper limit on liability, is often the goal. Generally the parties can make a binding agreement to limit liability to each other though it is important that the precise terms are correctly stated. Often a party wishes to also limit the liability of its directors/employees to the other party for tortious acts. Since 1999 this has been possible under s.1(6) of the Contracts (Rights of Third Parties) Act 1999.

Ensuring that the contract is not construed as a contract of employment

Where the contractor is an individual person, contracts for services traditionally take some care, not only to state that they are contracts for services (and not contracts of service) but also – because the “label” may not be determinative in law – to set out “for the avoidance of doubt” specific terms consistent with a contract for services and inconsistent with a contract of service.  Where the contract is between two limited companies, the view was sometimes taken in the past that there was less need to do this because a contract between two companies cannot be a contract of service as only a human being can be an employee. However the introduction of the IR35 legislation, with the possibility of a company-to-company contract being used to build a hypothetical company-to-individual contract for tax purposes, means that the same approach should be considered in company-to-company contracts. This is not a matter of shouting from the rooftops that the contract is not one of employment but rather of carefully going through the relevant terms one by one and ensuring that they unequivocally follow the parties intention that this should be a business-to-business relationship. Since the contracting company itself is likely to have a relationship with the individual it uses to carry out the work which comes within worker protection legislation, such as legislation providing for minimum entitlement to paid holiday leave, some care is needed in distinguishing between the position vis-a-vis its own worker and the position vis-a-vis charging the other contracting party.

Entire Agreement Clause

Most formal written contracts have a clause stating that the agreement is the entire agreement between the parties. The effect of this is to make it difficult for either party to subsequently claim that there are additional terms agreed between the parties which are not in the written agreement. Thus is makes for certainty. Of course if such a clause is used it is important that all the agreed terms are contained in the agreement.

Restrictive Covenants

Where the contract is between a contractor and an agency, the agency may seek to include restrictive covenants in the agreement, to prevent the contractor seeking or accepting direct work from the end client for a period of time after the contract ends. The starting position of English law is that it is in favour of the free market and against covenants which limit competition. However the law will uphold some covenants if they are not too widely drawn. From the contractor’s point of view if a covenant is so widely drawn as to be certain to be invalid, and it cannot be removed entirely, it can sometimes be tactically wise to leave it in its invalid wide form, rather than seek to cut it down in which case it may become valid. As with all contractual terms the advice of a solicitor or barrister should be sought. Where the Conduct of Employment Agencies and Employment Businesses Regulations 2003 apply, without a valid opt-out, regulation 6 prevents most restrictive covenants being enforced. 

Law and Jurisdiction

If the contracting parties are both English companies, the work is to be carried out in England, and there is no connection with anywhere other than England, the contract will undoubtedly be interpreted in accordance with English law and any dispute subject to the jurisdiction of the courts of England and Wales. However for the avoidance of any possible doubt, and in case the circumstances are not so straightforward, it is usual to have a clause expressly saying this.

Arbitration

It is possible to have a clause providing that any disputes will be referred to arbitration. Many people think that arbitration is an inexpensive and informal means of resolving disputes, compared to the courts, but often the reverse is the case. Arbitration is in fact often more expensive both because the arbitrator himself has to be paid as well as solicitors and barristers (whereas in the courts only solicitors and barristers and the court fee  have to be paid: the judge is paid for by the taxpayer)  and because the courts have a tiered system which limits costs for smaller value claims. Arbitration however does have the feature that it is confidential whereas court hearings are open to the public.    

John Antell is a barrister who specialises in contractual disputes particularly those involving IT, engineering and construction. Prior to coming to the Bar he was an IT consultant. He also practises in land law and employment law.  

www.johnantell.co.uk

Neither the author nor the publisher can be held responsible for any actions taken (or not taken) as a result of the opinions expressed in this article which are necessarily of a general nature and cannot be a substitute for individual legal advice on your own particular situation.

© John Antell 2011  

Monday 1st August 2011