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Before entering into a commercial contract, you should consider many factors, especially if the contract has broad implications for your business. Unfortunately, however, many business owners do not know about the deceptive tactics businesses may use in their written contracts. This article outlines some questions you should ask yourself before entering into a commercial contract to avoid unfair business practices.

What Are My Rights and Duties Under the Contract? 

This may seem like an obvious question to consider. However, before you enter into a commercial agreement, you need to clarify your rights and duties under the contract. This is because the substance of your legally binding agreement will materially affect what you can and cannot do in your everyday business activity.

In almost every case, a contractual right will have a corresponding duty. For example, a retailer who purchases specialty products from small businesses has a contractual right to receive the goods upon payment. Therefore, those small businesses have a duty to fulfil their obligation by delivering the products.

When negotiating your written commercial contracts, you should clearly set out the rights and obligations of each party. This often involves including essential terms or phrases in the definitions section of your commercial contract. Poor commercial contract drafting can lead to ambiguity and conflict between businesses concerning what those clauses mean. Even so, contractual terms that are too uncertain may be unenforceable. 

Similarly, some written contracts fall silent on certain features of your business arrangement. 

For example, your contract for the sale of goods might set the agreed price for the goods, the quantity of the goods and the period for delivery but not specify how you will deliver these goods. In this instance, you will probably have the freedom to decide how you might deliver the goods. 

Suppose you believe a particular part of your business arrangement is especially important to the nature of the transaction. In that case, it would be best to put this into writing rather than leave it out of the contract.

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How Can I Terminate the Contract? 

As you probably know, business arrangements can quickly turn sour. Helpfully, a termination clause in a commercial contract enables you to release some of your obligations under the contract. This means that you generally no longer have to perform what you promised to do under the contract once it has been terminated. However, there are exceptions for certain obligations relating to confidentiality or privacy.

Termination Clauses

A termination clause typically specifies:

  • under what circumstances you can terminate the contract, e.g. upon breach of contract by the other party; 
  • the effect of terminating the contract, e.g. who is entitled to any remaining payments; and
  • the steps the parties must take to carry out the termination of the contract, e.g. you may have to return the other party’s property to them.

For example, if the other party is breaches an essential clause in your agreement, you may be able to terminate the contract. Likewise, if you breach an essential clause in the agreement, the other party can terminate the contract.

Termination Procedures

A well-drafted contract will set out termination procedures that you must follow to ensure that the contract ends properly. Termination procedures typically require you to:

  • notify the other party in writing; 
  • notify the other party within the notice period specified before termination; and
  • do anything else necessary to ‘uncouple’ such as returning property to one another or leaving a physical property in a reasonable state and condition.  

If you do not follow the specified procedures, the opposing party might initiate a claim against you for wrongful termination. Therefore, to avoid the time and costs involved as a consequence of wrongfully terminating a contract, you should ensure that the termination procedures are sufficiently clear and understand what is involved and when those steps need to be carried out. 

Without an express clause to terminate the contract, you may be entitled to terminate the agreement if the other party has breached an essential term of your contract. However, not every breach will enable you to terminate the contract. In this instance, it is a good idea to seek the advice of a lawyer before you decide to stop performing your obligations under the contract.

What Are the Consequences of Breaching the Contract?

Hopefully, you would not be entering into a contract with the sole intention to breach it. After all, breaching a contract can have negative implications on the financial success of your business. However, breaches can arise in unforeseen circumstances, and for this reason, it is important that you consider the consequences if you breach a contract.

Typically, if you breach a contract, you must pay the other party damages. Damages are intended to compensate the other party for the loss they suffered or might suffer as a result of the breach. The general idea behind damages is that it should place someone in the same position as though the wrong had not occurred. For example, if your business pays a deposit of $20,000 for renovations that never happen, the business in breach of the building contract would likely have to pay you $20,000 in damages.

Additionally, your commercial contract might specify other remedies in the instance where a breach arises. For example, the party in breach might have to pay you a liquidated sum for failing to perform their obligations. Therefore, when you review a commercial contract, you should identify whether any clauses specify the outcomes of a breach.

Key Takeaways 

Before signing a commercial contract, you should be clear about:

  • your rights and obligations under the contract;
  • the termination procedures to bring the contract to an end; and 
  • the consequences for a breach of the contract by either party.  

If you have any further questions about a commercial contract, LegalVision’s experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

Can Australian Consumer Law protect my small business?

Generally, Australian Consumer Law protects consumers and not businesses. However, Australian Consumer Law can affect how your small business operates. For example, Australia Consumer Law prevents you from misleading or deceiving customers. Nevertheless, Australian Consumer Law can protect your small business from unfair contract terms where you entered into or renewed the standard form consumer contract after 12 November 2016. 

What does it mean when someone ‘repudiates’ a contract? 

Repudiation refers to when someone ‘walks away’ from their obligations under a contract. It is where a party indicates their intention to no longer be bound by the terms of the contract.

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