After working with small and medium-sized businesses (SMEs) for many years, we often see business owners unsure about commercial contracts and their importance. A well-drafted contract can protect your business, clarify expectations, and prevent costly disputes.

In this guide, we cover the key aspects of commercial contracts to help SMEs understand how important they are and how to navigate them with confidence.

What is a commercial contract?

A commercial contract is a legally binding agreement between two or more parties outlining their rights and responsibilities. These contracts cover a range of business transactions, from terms of business, supplier agreements and service contracts to employment terms and partnerships. There are many different types of commercial contracts used in a business.

Why are contracts important?

Without a written contract, business relationships rely on trust and verbal agreements, which can lead to misunderstandings and disputes. A well-drafted contract helps to:

Clearly define each party’s obligations

Reduce the risk of disputes

Set out payment terms and timelines

Provide legal protection if things go wrong

Key elements of a commercial contract

Every commercial contract should include:

• Parties involved: The full names and addresses of all involved parties
• Terms and conditions: The core terms of the agreement, including what is being provided, timelines, and responsibilities
• Payment terms: When and how payment will be made, including any penalties for late payments
• Termination clauses: Conditions under which the contract can be ended by either party
• Liability and dispute resolution: How disputes will be handled, and any limitations on liability

Common pitfalls to avoid

Many SMEs fall into common contract traps, including:

• Not having a written contract: A handshake agreement is not enough—always get it in writing
• Using generic templates: While online templates may seem convenient, they are not likely to reflect your specific business needs or UK law
• Failing to review terms: Always read and understand every clause before signing
• Ignoring termination clauses: Know how you can exit an agreement if needed

Case study: A costly oversight

The problem: Sarah runs a small marketing agency and entered into a verbal agreement with a web development firm, TechSolutions, to build a website for a major client. No formal written contract was signed. As the project progressed, delays occurred, and disagreements arose about additional costs and responsibilities. TechSolutions claimed extra fees for services Sarah assumed were included, while Sarah insisted the original agreement covered them. Without a contract specifying these terms, resolving the dispute became difficult.

The outcome: After weeks of back-and-forth, Sarah had to pay additional charges to keep the project on track, leading to unexpected financial strain. Had she put a clear written contract in place outlining the scope of work, payment terms, and dispute resolution methods, she could have avoided this situation altogether.

Lesson learned: This case highlights the importance of having a written contract that clearly defines each party’s obligations and expectations. Even if you trust a business partner, a contract ensures there is no ambiguity.

When to seek legal advice

It’s always wise to seek legal advice when:

• Drafting a new contract for a significant business relationship
• Negotiating complex terms or high-value agreements
• Facing a dispute over an existing contract
• Reviewing a contract presented by another party

Final thoughts

Commercial contracts are the backbone of any SME’s operations. Taking the time to ensure your contracts are clear, fair, and legally sound will help safeguard your business in the long run. If you need assistance with drafting or reviewing contracts, seeking professional legal advice can save you from costly mistakes.

If you need advice on commercial contracts, feel free to get in touch with Sarah Naylor on 01302 320621 or email sarah.naylor@switalskis.com