When your business negotiates a commercial deal with another party, you might engage a lawyer to draft the final contract. Understanding the terms of a written agreement can be difficult, making it challenging to fulfil legal obligations. This article unpacks critical elements of your commercial contract.
Elements in a Long Contract
A contract aims to document the rights and responsibilities of all contracting parties to the agreement. While your written agreement may be long, it will often contain several essential elements. Recording these elements in writing is critical as it enables parties to refer back to the written agreement in case of any future confusion. This can help your business to avoid landing in a legal dispute.
Below we set out some of the core elements often found in long written agreements.
The Parties
Simply setting out the parties to a written agreement may take up some space. If a party to the agreement is a corporate party, a contact person will usually be nominated. The parties’ contact details are also included for issuing notices and other relevant particulars. There may be multiple contracting parties, and the agreement may be subject to guarantees (in which case, the guarantors are likely to be listed as a party. A guarantor is the person or persons who will pay the value of the contract in case one of the parties is unable to pay.)
Definitions
Contract disputes often arise from unclear definitions of words or phrases. To alleviate any ambiguity, most commercial contracts contain several definitions. For instance, standard commercial contracts include a definition of a promissory note. The purpose of these definitions is to assist in the interpretation of the relevant agreement terms.
Recitals
Recitals are like the ‘background’ of the written agreement and are not operative terms per se. They may set out the purpose or intent of the agreement and can be considered in the event of any subsequent dispute.
Operative Provisions
Operative provisions are the ‘meat’ of the agreement and are, arguably, the most crucial section. These provisions set out the respective parties’ legal rights and obligations pursuant to the written agreement.
Warranties and Indemnities
Parties use warranty and indemnity provisions to protect themselves from any harm caused by each other during the performance of the operative provisions. Typically, contract authors often draft indemnities and warranties in their favour. To ensure adequate protection, it is important to review such clauses.
Boilerplate Provisions
Many contractual disputes have resulted in there being a series of standard, or boilerplate, provisions contained in almost every commercial agreement. These are the T-crossers and the I-dotters of the contract world and include such things as how notices are to be served, whether the contract can be signed in counterparts, and which Court or State will exercise jurisdiction over the contract’s operation.
Execution Clauses
Even executing a commercial agreement is not as simple as ‘signing on the dotted line’. Corporations must sign in accordance with the Corporations Act, and parties acting jointly sign differently from those acting in their sole personal capacity.
Can I Make the Contract Shorter?
As much as reading a long written agreement can be boring and painful, avoid looking to make a contract shorter. If relations turn sour between you and the other party, those tedious and unassuming clauses may end up protecting you and your business.
In some instances, it may be possible to remove or simplify certain clauses that would make a written agreement shorter. However, this will depend on the specific circumstances of the agreement.
You may look to remove clauses that are not relevant or that do not apply to the contractual arrangement. This often arises when a business uses a templated contract for a more specific or niche agreement. For example, if you are entering into a written agreement for the delivery of cleaning services and the contract contains a clause concerning when the title in goods passes, you may look to remove that clause from the written agreement.
Often contracts are drafted favourably to one party. As such, you will often find clauses that are unfair or create burdensome obligations for you to fulfil. You may seek to remove these clauses entirely or reword them to minimise your obligations or liability.
Continue reading this article below the formWhy is It Not Advisable to Shorten a Contract?
You may benefit from having certain contractual clauses removed or reduced. However, this often requires negotiation between the parties. This may impact your business relationship and possibly delay the commencement of the arrangement. Therefore, it is important to have a clear understanding of the contract and the implications of each clause. Consult a lawyer if you are unsure about a clause’s meaning or inclusion in a contract. They can provide advice and suggest changes to make the contract shorter without affecting its operation.
Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
Key Takeaways
When you commit your commercial deal to paper, your business might end up with a long contract filled with numerous clauses. It may be tempting to keep the contract as short as possible and delete sections you think are irrelevant. However, your contract contains the entire rights and responsibilities of each party. Every element of your written agreement will assist in clarifying each party’s obligations to avoid future confusion and possible legal action.
If you see anything of concern in a contract you are about to sign or are struggling to decipher the legal jargon in the contract, contact our experienced contract lawyers 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
Almost every commercial contract contains a set of standard provisions known as boilerplate provisions. These can cover issues such as how notices are served, dispute resolution, and whether the contract can be signed in counterparts.
This will depend on the specific circumstances surrounding the agreement. You should exercise caution when looking to remove or reword clauses and consider the process of negotiating contract terms with the other party.
The Recitals are not operative terms; instead, they state the purpose or intention of the contract and parties can refer to them in case of any dispute that may arise.
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