The moment you start a business you are immediately subject to a plethora of rules and regulations. Most businessmen argue too many, and political parties of all persuasions argue in favor of cutting red tape, but never quite seem to get round to doing so. At present, however, you are immediately subject to registering as self-employed and setting up a direct debit so that a monthly National Insurance charge can be extracted from your bank account.
Registration, of course, notifies the Inland Revenue that you have set up a successful business that will be subject to tax. The first installment is due by 31 January, following the end of your first year of trading. You gain a short break, but should set aside funds to meet the future liability.
As soon as you employ anybody, you are subject to further rules and regulations and must set up a payroll to deduct taxes and National Insurance from employees’ remuneration. There are rules about health and safety at work and, of course, health and safety regulations surrounding the work you carry out for customers. These are insurable risks. You need to take out cover for damage to third parties and or damage caused by your product or service.
Most people are familiar with how insurance works, certainly everyone who owns a car and most householders, but in carrying out your everyday work you may cause damage to other people or their property. It is easy to envisage dropping something from a ladder or scaffold that lands on somebody’s head, or maims them.
You might work on the foundations of a semi-detached house or party wall and, in doing so, damage the property next door. Insurance cover is obligatory for this type of risk, so do consult an insurance broker early and talk through the cover you need. I will deal separately with life cover and pensions later.
Professionals can also cause damage negligently. An architect could design a building that has a flawed construction and is ultimately unsafe. A lawyer could misinterpret the law applying to a particular subject and put a client to considerable expense or assign the wrong plot of land in a property sale.
Auditors could neglect to examine ownership documents and subsequently be held liable for not reporting to shareholders that the assets no longer existed.
These failings too can be covered by professional indemnity insurance.
Commerce operates within a framework of law. Most of the time this is implicitly understood by the parties but occasionally spills over into an argument. It is as well, therefore, to understand the basic principles of the law. This is not so that you avoid using lawyers, merely a guide to comprehend the legal implications of what you are doing in broad terms.
Contract law
This impinges on every transaction. Contracts do not have to be in writing unless relating to the transfer of real estate or shares. To be valid a contract needs only three constituents:
Offer – acceptance – and consideration
In simple terms if you say to your friend: ‘I will take you to the cinema tonight if you do the washing up’, and if the friend says yes, or does the washing up, you have a binding contract that stands up in law.
Similarly if somebody says: ‘How much to fix my boiler?’
You reply: ‘Hundred quid.’
The customer says: ‘Okay.’
There is a binding contract. It may not have covered all aspects of what is involved, i.e. there is no commitment to repair the boiler today but, nevertheless, there is an obligation on both parties. In such cases it would be implicit that the work be carried out within a reasonable time, but there is a potential argument about how much is reasonable.
There can be counter offers and extended negotiations, but the contract will only exist if the above three constituents are present. It is also self evident that if you have spent considerable time negotiating the conditions surrounding the offer, consideration and acceptance you would be wise to put them in writing.
However valid, there is an obvious problem with a verbal contract in that, unless witnessed, it is open to dispute as to who said what, i.e. ‘You told me you would fix it on Tuesday.’ ‘No I didn’t. I said Tuesday week.’
It follows there is less doubt about the terms agreed if the contract is in writing or can be evidenced by written documents. A letter confirming the agreement following a meeting would have more credibility than somebody arguing that he or she had not agreed with the letter.
You can quickly see that it pays to be disciplined and to confirm the arrangement in writing. This can be done briefly or you can use order acknowledgements in printed form that thank the customer for the order, confirms when and how much.
This can be further improved by having your terms and conditions printed on the reverse of the order acknowledgement. If you cannot set these out simply yourself invite a solicitor to draft them for you but try to present them in user friendly terms not ‘small print’ with all its implications.
Before leaving this subject there is a further point that can be critical relating to variations. This frequently happens when a customer has a tradesman on site and says: ‘I wonder if you could just fix that for me while you’re here.’
The tradesman agrees and finds it takes them an extra day and submits a bill, but they have a problem. The additional work was carried out without ‘consideration’. There was merely offer and acceptance unless in their order acknowledgement the tradesman had stated that any additional work carried out on site would be charged at so much extra.
It is easy to slip up on small variations and this even happens with large institutions that put everything in writing. For instance, somebody is paying off a large debt to a credit card company at £50 a month and makes an offer to pay £3,000 in full and final settlement of a £10,000 debt.
The credit card company writes back and says: ‘We reject your offer of £3,000 and suggest £7,000 or continue paying £50 per month until the debt is extinguished.’ The creditor continues paying £50 per month, seemingly ignoring the correspondence but, in fact, a new contract has been created.
The credit card company has discarded its former contractual right to demand income and expenditure statements and to vary the level of repayment. Inadvertently it made a new contract and must continue accepting £50 per month for the next 17 years. Your printed terms and conditions should cover this type of risk.
Sale of goods
It is implicit that goods must be fit for purpose, regardless of whether they are guaranteed or not or subject to warranties. If something is purchased for the advertised or described purpose and does not fulfill that requirement it can be returned and must be replaced or refunded.
Similarly if you provide samples, prior to sale, and the bulk of the consignment does not match the samples, the whole consignment can be rejected. In practice this tends to lead to negotiations rather than litigation. You can agree to sort the consignment and take back the inferior products or agree a discount.
Agency also needs understanding in that, in general terms, somebody acting as your agent can commit you and acts with your full authority as regards third parties. In practice terms of reference should be clarified in writing with your agent, making clear the situations in which they should refer back to you for guidance when acting on your behalf.
If you do not like the agreement reached in your name you should quickly write to the customer or supplier pointing out that your agent has exceeded their authority and offer to renegotiate, but if they hold you to the contract your only action is against your agent. Again, in practical terms, you will start by replaced or refunded.
Similarly if you provide samples, prior to sale, and the bulk of the consignment does not match the samples, the whole consignment can be rejected. In practice this tends to lead to negotiations rather than litigation. You can agree to sort the consignment and take back the inferior products or agree a discount.
Agency also needs understanding in that, in general terms, somebody acting as your agent can commit you and acts with your full authority as regards third parties. In practice terms of reference should be clarified in writing with your agent, making clear the situations in which they should refer back to you for guidance when acting on your behalf.
If you do not like the agreement reached in your name you should quickly write to the customer or supplier pointing out that your agent has exceeded their authority and offer to renegotiate, but if they hold you to the contract your only action is against your agent. Again, in practical terms, you will start by withholding their commission and any money owing to them, repudiate their contract and have sufficient sanctions to ensure that they don’t stray outside of their brief.
In circumstances such as this the contract should be in writing, but more of this when I deal with employment although it should be noted that an agent is not an employee.
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