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Understand contracts and key trading laws

Whatever your commercial activity, you need to understand contracts and the regulations which cover the sales and purchases of your business. Every time you make a sale or a purchase, you enter into a contract.

Ensuring you understand how contracts work can help you avoid the most common pitfalls that catch out smaller businesses. By preparing standard terms and conditions and obeying a few simple rules, you can also use contracts to your advantage.

While the full range of business law is vast, the key issues affecting most businesses are relatively straightforward. Sound legal advice will also help you identify the regulations covering the way you trade, and other legal issues you need to understand. Initial advice is often free, and can help you avoid significant legal difficulties later on.

1 Find out which laws affect your business

1.1 Find out what you can from your trade association.

Many trade associations offer information or training on specific legal issues faced by their industry.

To find your trade association visit www.taforum.org

1.2 Consider taking legal advice from a solicitor.

If you know you need specialist advice in a particular area, consider finding a local expert.

Before committing yourself, you should be able to get an idea of what legal help you need and how much it will cost.

You can search for an accredited law firm in your area that can advise you on a particular issue on the Law Society website.

1.3 Check what business support organisations can offer.

For example, your local Enterprise Agency might offer free or subsidised information and training.

1.4 Check the main legal issues affecting how you trade.

You need to understand contracts with customers and suppliers (see section 2 to section 5).

You must comply with other trading regulations, for example, ensuring that you do not sell unsafe products (see section 6).

1.5 Consider the other key legal issues affecting your business.

When you start a new business, you need to choose the right form for the business (eg sole trader or limited company).

You have responsibilities for the health and safety of anyone affected by your business.

There are several legal issues if you rent or buy premises.

If you employ staff, you need to understand basic employment law.

You have to deal with taxes and National Insurance.

You might need to register for VAT.

If you keep information about individuals, including customers, you might need to register with the Information Commissioner’s Office to comply with the Data Protection Act.

You might need to protect intellectual property owned by your business.

Once you are trading, you might find you need help chasing debts or with other legal disputes.

To find out about data protection, visit www.ico.org.uk

2 Understand basic contract law

2.1 Three requirements must be met before a contract is created.

Both buyer and seller intend to make a contract and are capable of doing so.

An offer is made and accepted. Note that just displaying your goods (in a brochure, for example) is not usually an offer, but an invitation for the customer to make an offer to purchase them — which you can then accept.

Something of value is exchanged, for example, the seller’s goods for the purchaser’s money or promise to pay.

2.2 Remember that contracts do not have to be in writing.

Every time a customer buys something in a shop, a contract exists.

Spoken agreements are just as binding as written ones — though it can be difficult to prove what has been agreed if there is a dispute.

However, some particular types of contract (eg property leases over three years) must be in writing.

2.3 Be aware which terms will be part of the contract.

Terms that have been agreed before or at the time of making the contract apply (see section 4).

There are also important terms that are implied into every contract and apply automatically (see section 3).

2.4 Both buyer and seller are obliged to fulfil the terms of the contract.

Your customer or supplier could take legal action against you if you fail to perform your part of the contract. Similarly, you might take legal action against them.

3 Understand implied terms

3.1 You must usually comply with five key implied terms for the supply of goods.

The seller must be entitled to sell. If you buy something from someone who does not own it, you have the right to your money back from the seller. You will probably not be allowed to keep the goods.

The goods must match their description. Descriptions on labels and claims made by the seller must be accurate.

Goods sold in the course of business must be of satisfactory quality. This includes appearance, freedom from minor defects, durability and safety.

Goods must be fit for the purpose. If a customer asks for a component to use in a particular piece of equipment, your component must be suitable.

If a batch of goods is sold after providing a sample, the goods must match the sample.

3.2 You must also comply with a number of implied terms if you supply services.

The service must be carried out with reasonable care and skill.

The service must be completed within a reasonable time (if a time limit has not been agreed in advance).

The service must be provided for a reasonable price (if a price has not been agreed in advance).

3.3 Do not try to override implied terms when selling to a private consumer.

You cannot override these implied terms (often called ‘statutory rights’) when selling to a consumer. For example, a contract clause stating that no goods can be returned will not usually prevent a customer from returning faulty goods.

If you breach a consumer’s statutory rights, they might be entitled to return goods and get a refund, claim damages, or both. You might also face prosecution.

Protect yourself by adding ‘This does not affect your statutory rights’ to any notice about your terms of trade.

The statutory rights apply to any sale of goods, including second-hand or sale goods. Hiring, hire purchase and part-exchange are covered too. However, goods can have defects if the seller has pointed them out to the buyer and ‘satisfactory’ quality may be lower for second-hand goods.

When selling to another business, you can agree to exclude an implied term, but not unreasonably.

4 Draw up terms and conditions of sale

4.1 Your terms and conditions of sale give you protection by setting out your standard conditions for contracts.

Your lawyer can prepare standard terms and conditions for you to use with every sale.

Large, complicated sales may need a separately negotiated contract.

4.2 Clarify key terms of the agreement in your terms and conditions.

Give details of price, payment terms and so on.

Set out how long any guarantee will last (in addition to the buyer’s statutory rights).

Specify when delivery will be made. Explain what will happen if only part of a delivery is made or a delivery includes faulty goods.

4.3 Ask your lawyer to include terms that protect you.

Include a clause giving you the right to delay delivery when this is due to circumstances beyond your control.

Assert your right to retain ownership of your goods until they have been paid for.

Limit your liability as far as is reasonable if you are unable to supply the goods.

Your lawyer can advise you on other terms that suit your circumstances. For example, you might need to protect your ownership of intellectual property.

In some industries, it is standard practice to agree how any disputes will be dealt with.

4.4 Use plain English.

When selling to consumers, terms must always be ‘fair’ and in plain English.

4.5 Make sure the buyer sees and agrees to your terms and conditions before a contract is made.

If you are using a written contract, it should expressly refer to your terms of trade.

Simply referring to your terms on an invoice is unlikely to be effective — because the invoice is usually only seen after the contract has been made.

5 Reduce contract risks when selling

5.1 Clarify what the customer can expect in terms of the quality of your product or service.

State tolerances in technical specifications to give yourself practical margins for error.

Explain to the customer what to expect of goods of that age or that price.

Set out clearly what is and is not included in any service you provide.

Let the buyer know of any limitations and defects. Don’t let enthusiasm lead you into making exaggerated claims.

Allow the buyer to examine the product.

Make sure any safety instructions are clear and accurate.

5.2 Make sure that any samples you provide are representative.

Give the buyer time to examine your samples. Point out any likely differences in the final product.

5.3 Avoid stating that a product will be suitable for a particular purpose unless you are sure that this is the case.

Legally, it is inadvisable to ask customers what they will use your product for, because you might then be liable if it is not suitable.

If asked whether your product is suitable, say that you do not know unless you are sure of your facts.

If a customer insists on buying an unsuitable product against your advice, ask them to sign a written confirmation.

If a buyer orders customised goods, you might be liable if they do not fit their purpose.

5.4 Keep written evidence of what has been agreed.

Make sure you can prove that a customer agreed to your terms and conditions.

Do not rely on unusual terms buried in your terms and conditions, particularly if you are selling to consumers rather than other businesses.

6 Comply with key trading regulations

6.1 You must not supply defective or unsafe products or services.

Defects can include design, manufacture or marketing defects. For example, a product could be defective if it includes an inadequate instruction manual.

You are likely to be liable for any death, injury or loss caused by defective products and services.

You might be prosecuted if you supply unsafe products even if they have not caused any harm. Your local Trading Standards officer can advise on general safety regulations and any specific regulations for your products.

Everyone involved in the supply chain (eg the retailer as well as the manufacturer) might be liable.

Purchasing third-party liability insurance is essential.

You can search for your nearest Trading Standards office at www.tradingstandards.gov.uk

6.2 You must not trade unfairly.

Unacceptable, misleading or aggressive practices that influence consumers are prohibited.

Various unfair activites such as pyramid schemes or unreasonably pestering consumers are specifically prohibited.

Although the main regulations only cover dealing with individual consumers, business customers are also protected against misleading advertising. Advertisements must be legal, decent, honest and truthful and you must be able to back up your claims.

6.3 You must comply with regulations protecting consumers who purchase goods in their own home or workplace.

If you make a sale to a consumer during the course of a solicited or unsolicited visit to their home, workplace or other non-work location, they are entitled to a fourteen day 'cooling-off' period in which time they can cancel any order worth more than £42. You must also provide the consumer with a model cancellation form.

6.4 You must comply with regulations protecting consumers purchasing via mail order or over the internet.

You have to comply with existing laws on goods and services. You are also required to present specified information in a clear way and provide written confirmation of the order.

The customer is normally entitled to a ‘cooling-off’ period during which they can cancel the order and return any goods they have received.

6.5 You must comply with the Consumer Credit Act if you offer consumers credit to buy your goods or services.

You will probably require a licence if you sell goods or services on credit or hire out goods.

You must provide consumers with a signed, written agreement.

You must provide clear information on the amount and period of credit and the total amount payable.

You must provide consumers with at least one statement of their account per year. You must also send out notices of any overdue amounts if consumers miss or fall behind with payments.

Consumers are also entitled to a 'cooling-off' period of fourteen days.

6.6 You must comply with any specific regulations which apply to your industry.

You might be required to get a licence before you are allowed to trade. For example, your business would require a licence to sell alcoholic drinks or to run a nursing home.

Certain businesses (eg if you sell food) are subject to extra regulations. Ask your legal adviser or trade association for advice.

You can search for regulations affecting your business sector at

7 Protect yourself when purchasing

7.1 Consider drawing up and using standard terms and conditions of purchase.

If the supplier agrees to your terms they become part of the contract.

Larger suppliers are likely to insist that their own terms and conditions of sale apply.

If you purchase services from small subcontractors, you might be in a position to insist that your terms are agreed.

7.2 Always ensure that your agreement includes any terms that are important to you.

For example, if prompt delivery is important, inform the seller and confirm it in writing.

7.3 Ask as much as possible about the product or service you are being sold.

Ask lots of questions, as if you do not know much about the product or service.

Ask for detailed product specifications. When you place an order, insist that the product must match the specification.

State what quality levels and standards you expect.

Tell the seller what you will use the product for or why you require the service.

Ask the seller to tell you about any hidden dangers, limitations or quality changes.

Keep a record of any claims made by the seller.

7.4 Examine products thoroughly.

Once you have examined goods, you might lose the right to reject them if you find a defect later.

Do not sign delivery notes saying that goods are satisfactory unless you have checked. If you must sign, make a note of your reservations (eg ‘goods not checked’) and let the seller know.

Keep samples you have examined for reference.

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