Business contracts
A contract doesn't always need to be in writing. An agreement made by email, by phone or even by a handshake can be legally binding if there's an offer, acceptance, something given in exchange, and an intention to be legally bound. Written contracts are still important, because they make it much easier to show what was agreed.
A good business contract usually sets out what is being supplied, the price and payment terms, timescales, what happens if something goes wrong, how either side can end the agreement, and any limits on liability.
Your terms and conditions
Many businesses trade on standard terms and conditions. For them to apply, they usually need to be brought to the other party's attention before the contract is made, not printed on an invoice afterwards. Where both businesses send their own terms, it can be difficult to tell which set applies, and this is a common source of disputes.
Businesses have more freedom to agree terms with each other than with consumers. However, some terms that limit or exclude liability must be reasonable to be enforceable, and some types of liability, such as for death or personal injury caused by negligence, can't be excluded at all.
Selling to consumers
If your business sells to consumers, different and stronger rules apply. Consumers have legal rights under the Consumer Rights Act 2015 that you can't take away in your terms, and there are extra rules on information and cancellation when you sell online, by phone or off-premises.
Late payment and unpaid invoices
If another business pays you late, you may be able to claim statutory interest and a fixed sum of compensation under the Late Payment of Commercial Debts (Interest) Act 1998, unless your contract sets out a different, substantial remedy. You may also be able to claim reasonable costs of recovering the debt.
A common approach to an unpaid invoice is to send a polite reminder, then a firmer letter, then a formal letter before action giving a final deadline and warning that you may start court proceedings. If the debt still isn't paid, you may be able to make a claim through the county court, which can often be done online.
Disputes with suppliers or customers
If a supplier doesn't deliver what was agreed, or a customer refuses to pay because they say your work was defective, the starting point is usually the contract. Check what it says about quality, timescales, liability and how disputes should be handled.
Many disputes can be settled by negotiation or mediation, which is usually quicker and cheaper than going to court. Courts expect parties to try to resolve disputes before starting a claim. Time limits apply to bringing a claim, and in England and Wales the general time limit for a claim for breach of contract is six years.
Choosing a business structure
The main ways to run a business are as a sole trader, a partnership, a limited liability partnership (LLP) or a limited company.
As a sole trader or a partner in an ordinary partnership, you're usually personally responsible for the business's debts. A limited company is a separate legal person, so the company is generally responsible for its own debts, and shareholders usually risk only what they've invested. In practice, banks and landlords often ask directors to give personal guarantees, which can make them personally liable after all.
Company directors
Directors have legal duties under the Companies Act 2006. These include acting within the company's constitution, promoting the success of the company, exercising independent judgement, using reasonable care, skill and diligence, and avoiding conflicts of interest.
If a company is in financial difficulty, directors must take particular care. They can become personally liable in some circumstances, for example if they continue trading when they knew, or should have known, that the company couldn't avoid insolvency.
Business partners and shareholders
Disagreements between business partners or shareholders are common, especially in small businesses. A partnership agreement or shareholders' agreement can set out how decisions are made, what happens if someone wants to leave, and how disputes are resolved.
Without one, the default rules in the law apply, and these may not suit your business. For a partnership, this can mean the partnership ends when one partner leaves. For a company, it can be difficult for a shareholder to leave or to get a fair value for their shares.
Protecting your brand and ideas
Your business name, logo, content and designs may be protected by intellectual property law. Copyright arises automatically for original work such as text, photos and software. A trade mark can be registered to protect your brand name or logo. Registering a company name at Companies House doesn't by itself give you a trade mark.
If you use a freelancer or agency to create work for you, they may own the copyright unless your contract says it is transferred to you.
Commercial agents
If someone sells goods on your behalf as a self-employed commercial agent, special rules may apply under the Commercial Agents (Council Directive) Regulations 1993. These can give the agent rights to notice and to compensation or an indemnity when the agency ends, even if the contract says otherwise.
Important: urgent situations
If you've received a court claim, a statutory demand or a winding-up petition, act quickly. Strict time limits apply, and missing them can lead to a judgment against you or the business being wound up.
If your business can't pay its debts as they fall due, get advice from a licensed insolvency practitioner promptly. Don't rely on LegalBuddha for urgent deadlines.
Frequently asked questions
Is a verbal agreement legally binding?
Often, yes. A contract doesn't usually need to be in writing to be binding, but it can be much harder to prove what was agreed without written evidence.
Can I charge interest on a late invoice?
Usually, yes. If you're paid late by another business, you may be able to claim statutory interest and fixed compensation under the Late Payment of Commercial Debts (Interest) Act 1998, unless your contract provides a different remedy.
What is a letter before action?
It's a formal letter setting out your claim and giving the other party a final chance to pay or respond before you start court proceedings. Courts expect you to send one before issuing most claims.
Am I personally liable for my limited company's debts?
Usually not, as the company is a separate legal person. However, you may be personally liable if you've given a personal guarantee, or in some cases of wrongful or fraudulent trading.
Do I need a shareholders' agreement?
It isn't a legal requirement, but it's often useful where a company has more than one shareholder. It can set out what happens if shareholders disagree or one wants to leave.
Can LegalBuddha help me with a letter before action?
Yes. Once you've unlocked an answer, you can ask about document preparation assistance, which includes practical help preparing letters based on the information you provide.