Business contracts form the basis for the legal relations between business parties, companies, and clients. A contract is a legally binding document which sets out the terms of an agreement and details the products, services, or other payment to be exchanged under the agreement. They also establish a timeframe for any associated dealings and contain provisions that protect against misunderstandings or disputes over the agreement. Business contracts usually contain provisions with legal remedies to be used in the case that one party does not honor their contractual obligations.
The following tips can be used to make sure that you get your contracts right, protecting you and your business or company from the fallout which results from flawed or void contracts. Sample contract templates are available all over the internet, so you should be able to find one which is relevant to your business or area of operations. This is a good way to start, as it makes sure that the structure and language used in the contract is legally correct.
Step 1: Ensure that all parties to the contract have the legal right to enter a contractual relationship
Contracts are important and powerful documents which bind parties together into a legal relationship, with associated benefits and repercussions for any breaches. As a result, for a contract to be legally binding (able to be enforced through the courts), all parties to the agreement must have the right to enter legally binding relations.
Known as legal capacity, the law stipulates that certain parties are ineligible for forming or entering contracts. Examples include:
- Minors, or those under the age of 18, are generally unable to enter enforceable contracts. There are some exceptions, such as for employment contracts or basic sales contracts. In the case of more complex contracts, a parent or guardian is usually required to enter the agreement on behalf of the minor for whom they are legally responsible.
- Mental capacity – all parties to a binding contract must have adequate mental capacity and cognitive ability to clearly understand the contract, its terms, and its provisions. Besides the obvious case of mental impairment or illness, mental capacity is likely to be insufficient in those suffering from intoxication or substance abuse problems. This provision prevents the exploitation of certain disadvantaged parties by voiding any contracts which they may have agreed to as a result of impairment.
- Willingness to enter a legally binding relationship – In order for a contract to be legally enforceable, its parties must all be aware of the fact that they are entering into a legally binding relationship and will be beholden to certain terms and conditions upon signing the contract.
Step 2: Evaluate the consideration which forms the basis of the agreement
For a contract to be legally binding, something of value must be exchanged in return for something else of value. In legal terms, this payment or service is known as ‘consideration’, and a binding contract cannot exist without clearly identified consideration.
For example, a business which sells goods to consumers often purchases their stock from a manufacturer or supplier. In order to guarantee the consistency, quality, quantity, and delivery conditions of the goods, the business will enter into a contract with the supplier or manufacturer. In this case, the consideration being paid by the business is in the form of money, and the consideration offered by the supplier or manufacturer is certain goods or supplies.
All parties must be clearly aware of the consideration involved in an agreement in order for the relevant contract to be enforceable.
Step 3: Identify the contract’s legal purpose
A contract which contains an agreement which requires any party to do something illegal is automatically void and unenforceable for obvious reasons. You should make sure that your contract does not contain any terms which could contravene the law, including unfair terms legislation which was introduced throughout Australia a few years ago.
If you are unsure, you should consult a legal professional for assistance. A solicitor can review a contract before you enter it, and can write a draft if you are unsure of how to word your document.
Step 4: Setting the terms of the agreement
Remember, for a contract to be enforceable, an offer of consideration must have been clearly made and clearly accepted. All parties to a contract should have the same idea about the function of the agreement. If a contract does not suit the requirements of all the involved parties, it should be modified in consultation with the relevant parties. Doing so will decrease the likelihood of any disputes, and ensure that the contract is binding.
Never attempt to include terms in a contract which unfairly impact another party, as you may face legal action under Commonwealth fair terms legislation as a result.
- Prepare a draft contract, or have a solicitor prepare a draft for you. Ensure that both the party making the offer and the party/s accepting the offer agree to all of the terms set out in the document. The accepting party may offer alternate or additional terms, this is known as a counter offer, and can be negotiated and included in the final document upon agreement by both sides.
- Ensure that you attend any meetings in good faith – that is, try and understand that both sides should be willing and eager to accept all the terms within the contract. This is good business conduct and will ensure that the likelihood of dispute is minimal. Always maintain an honest and fair attitude when engaging in negotiations.
- Verbal agreements can sometimes create a legally binding relationship. In order for a verbal agreement to be enforceable, you must be able to prove that the agreement took place and that it satisfies legal requirements. For example, a business seeking to purchase stock from a supplier may agree to certain terms over the phone, thus creating a legal contract. It is always a good idea to get a contract in writing, as this will prevent confusion and ensure that all parties are well aware of their contractual obligations. If you want to avoid entering a verbal contract by accident, ask for a written statement whenever you are negotiating with other business parties or clients.
Writing a contract
Step 5: Start with basic information
When drafting a contract, you should always start by writing the date at the beginning of the document as well as the names of all the parties involved. Any other identifying information you might want to include, such as business designation or title, should be included here. When writing a contract on behalf of a company or business, write the business name as well as the names of the individuals who are authorized to carry out the contract on behalf of the company. This could be the director, president, or CEO for example.
Step 6: Detail the items/ exchange of consideration
Using plain and easily interpreted language, describe in detail the goods or services which are being exchanged as part of the agreement. For example, ‘Company C agrees to supply 500 widgets per week to Company B. Company C will charge $3 per widget for a total of $1500 to be paid by Company B within 10 days of delivery.’
- Avoid using tricky legalese type language, as a court will always examine the case according to how they believe the contract could be interpreted by the ‘average person’.
- Be concise. Do not include superfluous details which are not important to the agreement itself. Focus on what is being exchanged, by whom, and the terms of this exchange.
- Include acceptable methods of payment or procurement for any consideration involved in the agreement.
- For contracts involving the sale of land or real estate, include a description of the property as well as its location/address. You may need to contact your local records office to obtain a legal description of the property.
- For goods or services, include a detailed description of the items, including model, colour, size, delivery date, cost, and any other relevant details. Describe any services which are to be performed and specify who will perform said services and for whom, when, and where they will be performed.
Step 6: Consider including a confidentiality clause
If you don’t want the other party or parties to share information contained in the agreement with anyone else, you can include a confidentiality clause which stipulates the agreement not to share details with outside parties. Confidential information which you might wish to protect could be things like sales plans, recipes, marketing strategies, or payment information.
It is common practice for employers to include a confidentiality agreement in employment contracts as employees often have access to confidential information. If the other party to your agreement will not be exposed to any sensitive information, then there is generally no need to include a confidentiality clause.
Step 7: Include provisions for dispute resolution
A good contract will include information about what to do if the contract is breached. For example, who is liable to pay legal fees in the event of a breach, and a legal remedy for the breach. It is a very good idea to add a clause which provides alternative dispute resolution provisions. Alternative dispute resolution practices include mediation, conciliation, and arbitration. These are affective and less confrontational methods of resolving legal disputes. Utilising these methods can save all parties involved time and money by avoiding the court process.
Step 8: Include a clause detailing termination conditions
When drafting a contract, you must specify a timeframe and how long the contract is expected to last. For one-time transactions, state that the contract will be terminated once the exchange of consideration is complete. If the contract is based on an ongoing relationship, state a set of terms under which the parties can terminate the contract should the need arise.
A good contract allows for termination if one party violates their contractual obligations. Termination notice should also be included, for example, you may wish to have two week’s notice in the event of a potential termination.
If the contract is successfully performed by both parties, without breaches, termination will occur automatically. This can be interpreted from the basic terms of the contract.
Step 9: Ensure that the contract complies with relevant laws
In Australia, there are a wide range of laws affecting various industries and activities. Make sure that you research the legislation affecting your business dealings.
- For example, contracts for the sale of land or real estate must be written in order to be enforced.
- Employment contracts must include provisions detailed under any industrial awards, enterprise agreements, or workplace instruments affecting that particular employment scenario.
Step 10: Have a lawyer review the contract
A legal professional can verify that your contract is enforceable and that it does not contravene any relevant laws. They can also assist you with the wording of the agreement and important sections such as the termination clause. A lawyer is also able to advise you of available remedies to be referred to in the event of a breach of contract.
Making the deal
When the contract has been drafted, ask the other party to review it. Ensure that they review its terms and conditions thoroughly to prevent misunderstandings.
If the other party makes a counteroffer, consider it carefully and determine how it might fit in with the rest of the contract as well as your business goals.
If the other party is taking a long time to accept an offer, you are able to revoke that offer before it is accepted. Once an offer has been accepted, it is unable to be revoked.
Understand your liability under the contract
Once signed, a contract can be legally enforced through the legal system. This means you are bound to its terms, and must perform them according to the agreement set out in the contract.
If you happen to breach the contract, a court could order you to enforce the contract. Known as ‘specific performance’, this would require you to perform your obligations or face penalties. A court may also award monetary damages to the aggrieved party, or defer the case to an alternative dispute resolution service.
LGM Advisors is a professional Melbourne Commercial Law firm, professionals in contract law. LGM Advisors have the skills, experience and expertise to ensure that you and your contract matter is consulted upon with the utmost professionalism. Contact LGM Advisors and speak to a contract lawyer today on (03) 9832 0608 or by email at firstname.lastname@example.org.