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As a business owner, you will most likely enter into contracts on a fairly regular basis. For example, you enter into contracts when you:
- purchase equipment;
- hire a staff member; or
- engage a supplier for your products.
It is important when you enter into contracts to ensure that you protect yourself and your business as best as possible. This article will outline five tips for entering into any contract.
1. Get the Contract in Writing
It is always best practice to get your contracts in writing. This is advantageous as it provides more certainty and clarity for you and the other party about what the terms of the contract are. More importantly, written terms are more difficult to dispute. Having the contract in writing ensures that there is no ambiguity and also captures all of the transaction’s relevant details.
2. Never Assume Anything
If the other party has provided you with their contract, there may be terms that you are unsure about or the contract may be missing some terms. It is important not to assume anything. You should always ask for clarification from the other party to ensure that you are both on the same page. This is because the court will not enforce what you think is meant by the contract; they will enforce the actual contents of the written document that you have agreed to by signing. As part of your due diligence, to ensure that you are not assuming anything, you should:
- always read the boilerplate clauses. These are just as vital as any other clause in the contract and are often found at the end of the contract. They usually set out where the contract is enforceable and any amendments to the contract. Do not assume that they are the same in every contract;
- think about what is not included in the contract. For example, you may have discussed that the payment terms will be seven days after issuing an invoice. If it is not in the contract, seek clarification from the other side. If it is not stated in the contract, do not assume that the ‘payment clause’ will address what you discussed; and
- make sure you fully understand any clauses that limit legal responsibility or indemnity clauses that remove legal responsibility, including all the potential implications of those clauses on your business.
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3. Negotiate the Contract
When you are entering into a contract, you are giving something and receiving something in return. You would not enter into a contract where you are not receiving anything in return. As such, negotiating is essential to get the best deal possible and to ensure that your interests are adequately addressed. You may be given a “standard form” contract by another business.
However, this does not mean that the contract is not negotiable. When negotiating your contract, remember:
- to be reasonable;
- that it is not always about winning or losing the negotiation;
- what your non-negotiables are and what you are willing to concede on; and
- the value and benefit that both you and the other party seek in the transaction.
4. Include Termination and Dispute Resolution Clauses
Even when you have a written contract, things can still go wrong. It is, therefore, important when entering into a contract to be risk-averse and create a mechanism within the contract to assist the parties when things go wrong. The two common ways to do this are by providing a:
- termination clause that specifies when and how either party to the contract can terminate it. For example, you may agree that one party can terminate the contract if the other party breaches it; and
- dispute resolution clause in the contract that specifies how the parties to the contract should resolve a dispute. This is to allow you and the other contracting party to agree on how you will address and resolve any potential disputes.
5. Conduct Thorough Due Diligence
Finally, it is also critical to conduct thorough due diligence. Conducting due diligence is the process of checking all facts and ensuring that you fully understand what you are agreeing to. When conducting due diligence, ensure that you:
- know the party with whom you are contracting. Ideally, you trust the party you are contracting with;
- are talking with the right person or organisation and are discussing with the appropriate representative of the organisation;
- perform all the appropriate checks; and
- ensure that you are signing the most recent version and that no pages are missing.
Running a successful business will involve entering into many different types of contracts. It is vital when you enter into contracts that you:
- get the contract in writing;
- verify all your assumptions and get clarification when you are unsure about a particular term or clause;
- negotiate the contract when necessary;
- have appropriate dispute resolution and termination clauses in place; and
- conduct thorough due diligence.
If you have questions about drafting or reviewing a contract you are about to enter, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.
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