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The phrase ‘freedom of contract’ speaks to the infinite obligations that parties can agree to perform in a contract. As an individual, you can make promises to different people that are legally binding in the form of a contract. However, in many commercial contracts, there are some common legal terms that companies and individuals often use. By keeping an eye out for these terms, you can better understand the scope of the contract you will potentially bind yourself to. 

1. Substance

The substance of individual legal contracts will widely differ. Lawyers often draft the terms of a contract to suit their client’s specific commercial arrangement or varying circumstances. For example, if you are building a home and engage a building contractor, the substance of your building contract will likely cover:

  • what work the builders will complete;
  • how long the builders have to complete the work described; 
  • payment for the work completed; and
  • whether the builders will complete work you verbally agreed to but did not necessarily include in the written contract.

Generally, the substance of commercial legal contracts will cover what goods and services you are exchanging. It will also cover the time periods in which the exchange must occur, and any fees associated with the transaction. As mentioned above, however, the substance of your contract should principally suit the agreement made between you and another party. 

2. Consideration

Consideration is one of the essential requirements for a legally valid contract. Put simply, the term ‘consideration’ refers to the price paid by a party in exchange for a promise made by the other party. 

For example, to use the building example above, you pay the builders a fee in return for the builder’s promise to build your home. In this example, an exchange has clearly taken place. 

If a business owner has outlined what goods or services they will provide you with in the legal contract, the agreement should also include what you must give in return. To put it simply, your contract should specify:

  • what you pay the other party;
  • how will you be invoiced; and 
  • the terms of the payment. 

In the instance where a contractual dispute arises, the court will likely not inquire into the adequacy of the consideration between the parties; that is, the comparative value of the consideration provided. For example, it would be possible (albeit ridiculous) to exchange an acorn for $1,000,000. Whilst the two objects are relatively unequal in value; it only matters that there was sufficient consideration, meaning some form of exchange took place. The court would therefore accept this as consideration. 

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3.Indemnity

Another common term in commercial contracts are indemnity clauses. Indemnity refers to the form of security or protection you might provide to the other contracting party in the instance where they face or sustain any losses or damages incurred in the performance of their obligations. For example, you might agree to indemnify the other party in the instance where you breach the contract. As you can probably tell from this example, an indemnity clause is crucial since it can have widespread implications on the party offering the indemnity.

In most cases, it is difficult to contract out of an indemnity clause. However, you can draft indemnity clauses in various ways so that it is reasonably fair for both you and the other party involved. 

For example, you might agree only to indemnify the other contracting party for a particular task. Since indemnity clauses are often drafted broadly and can be confusing to understand, you should seek the advice of a lawyer who can help you understand or better negotiate the term. 

4. Confidentiality

Confidentiality clauses are becoming increasingly necessary in light of the increased flow of information in today’s age. As a result, many business contracts will have a clause relating to confidentiality. This means that you and the other party agree to keep the details of your business relationship completely confidential. 

If you are a business owner engaging an employee, contractor or partnership, a confidentiality clause is essential. It ensures you protect the nature of the business transaction from public disclosure. 

5. Governing Law and Dispute Resolution

The governing law and dispute resolution clauses are necessary for any legal agreement. This is because such clauses will determine which legal rules apply to your business transaction and specify which courts or alternative dispute resolution avenues you have available to you.

The dispute resolution provisions will, in particular, establish a clear-cut way to resolve matters, especially when there is tension between the parties. If you are reviewing or getting a legal contract drafted, you should have a dispute resolution clause referring to mediation or a similar alternative dispute resolution approach. By undertaking mediation, you can bypass the extensive costs and time involved in court proceedings and potentially reach a mutually beneficial agreement with the party in breach whilst incurring lower costs. 

Key Takeaways  

When reviewing legal contracts, you should make sure you closely analyse the:

  • substance of the agreement;
  • consideration that is required, meaning the fee or price by one party for the exchange of goods and/or services from the other contracting party;
  • indemnity clause;
  • scope of your confidentiality obligations; and
  • governing law and dispute resolution clause. 

If you need help with your business contract, our experienced commercial 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 

When is a contract ‘frustrated’?

Frustration occurs when, without the fault of either party, they are incapable of performing their obligations under the contract. When a contract is frustrated, it is no longer enforceable because the obligations that the parties agreed to perform were rendered ‘radically different’ by some circumstances out of their control. For example, many contracts would have been frustrated by the COVID-19 pandemic. 

What is a collateral contract?

A collateral contract is a written or oral contract separate from the main agreement made between two people. For example, if you made a promise that induces another party into entering into a written contract, but you do not include such promise in the written contract, this could give rise to a collateral contract. 

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