Businesses regularly enter into contracts for various goods and services. Written agreements set out the parties’ expectations as well as their rights and obligations. In reality, many SMEs have limited resources and turn to drafting their own legal documents. As many business disputes emanate from poorly drafted contracts, we recommend a lawyer review your business’ agreements. Below, we set out some quick tips on what to look for when reviewing a commercial contract.
1. Is the Contract in Writing?
Verbal agreements can legally bind parties, but they are often difficult to enforce. You can avoid the headache and costs that come with litigating a contractual dispute by writing down all key terms. A lawyer can assist you in determining whether the contract contains all the terms parties agreed to during the negotiation phase.
2. Is the Contract Expressed in Simple English?
Avoid using archaic terminology and convoluted sentences. Outdated legalese such as ‘inter alia’, ‘aforementioned’, ‘hereinabove’ should be left where it belongs – in the past. A well-drafted contract should use short, clear, simple sentences.
3. Are You Contracting With the Correct Party?
Although this seems straightforward, a surprising number of parties get this wrong. We have reviewed agreements where a party had incorrectly identified their own company. Ask yourself:
- Does the person I am negotiating with have the power to make a decision?
- Is this person the right entity (i.e. a company vs. private individual)?
Trying to hold a company accountable for a failed business venture is of little use if you entered into a personal agreement with the CEO.
4. Are the Details Correct?
It is important that a contract spells out all the details of the parties’ arrangement, such as:
- performance obligations,
- payment terms,
- right of termination,
- dispute resolution (including any alternative dispute resolution), and
- remedies in the event of a breach.
Jurisdiction is particularly important when contracting with an individual or company based interstate or overseas.
5. Is There a Confidentiality Clause?
When a party enters into a contract with another business or individual, they will inevitably disclose and/or exchange confidential information. Unless there are special circumstances, it’s sensible to impose ‘mutual obligations of confidence’. In doing so, parties can ensure that any information they disclose throughout the course of the relationship is not shared with third parties or used for ulterior purposes.
6. Have the Parties Correctly Executed the Contract?
A contract is executed (i.e. effective) when a person with the authority to sign the agreement does so. If an individual is the contracting party, the person with the authority is the individual. If the contracting party is a company, the person is either a director or agent with express authority to sign on behalf of the company.
7. Have You Read Through the Document for Errors?
Importantly, parties should ensure all cross-referencing is correct. Incorrectly cross-referenced paragraphs can give rise to ambiguity, and potentially, make the clause unenforceable. Also, proofread the final agreement to ensure it is free of errors. A small typo in a crucial clause (e.g. a missing comma) can be detrimental.
Make sure that your agreement withstands the scrutiny of the other party and, if necessary, the courts. It’s prudent to have a lawyer review and if required, redraft your contract. This manages your business’ risk and prevents issues escalating into expensive legal disputes. If you have any questions or need assistance drafting an agreement, get in touch with our contract lawyers on 1300 544 755.
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