A clear contract is good business
What do I need to know about contracts?
Contracts are a key element in doing business, which is why it is important to know and understand the terms and legal consequences of entering into an arrangement with a supplier, customer or key stakeholder.
Contractual disputes can be stressful, costly and time-consuming. This is time and money that you could otherwise be spending on your business.
Knowing the basics of contract law can help to set up your business with robust rights (where all parties know what is expected of them), provide the basis for long-lasting business relationships and prevent disputes down the track.
What is a Contract?
A contract is a binding agreement between parties. It must have the following essential elements to be effective:
- an offer;
- an acceptance;
- an intention to create a legal relationship; and
- a consideration (usually money, but not necessarily)
Further, for it to be enforceable, the agreement between the parties must be sufficiently certain and complete.
What makes a contract
Generally, a contract requires no specific form. It can be verbal, in writing, implied or a combination thereof.
For obvious reasons, a written agreement is the most preferred for enforceability and protection. This is because it will be clear what each party has agreed to, because (as the name suggests) it will be written down.
While verbal agreements (such as handshake deals) are just as binding, they are more difficult to enforce if someone doesn’t follow through on the deal (or interprets the arrangement differently from the other party) because it is not always clear what people have agreed to do/pay – the terms will generally be what has actually occurred based on the actions of the parties and it can be very painful (without evidence such as emails, notes, etc) to prove the agreed terms if they are different to what happened.
If the matter goes to Court, Judges may imply a term into an agreement if it is necessary to give life to the rights and obligations as envisaged between the parties. They may also include a term or interpret a term into an arrangement if it has become an industry standard, through time and/or constant use.
Construction of terms
The first rule of contracts is to use words and sentences that make it clear what the intention of the parties are.
A contract doesn’t have to be in English, but both parties need to understand the terms of the agreement. If both parties speak the same language, a contract in that language is fine. If parties speak different languages, an accurate translation on one half of the page (say, in English), with a foreign language on the other half of the page, will also work.
Words and phrases will be understood according to their plain and ordinary meaning, if there is nothing in the agreement to give them a different meaning. If words or phrases have more than one meaning, a Court look at the context in which the words have been used and the surrounding circumstances to determine what each party meant (or at least what the Court believes each party intended) at the time of making the contract. For example, the court may look into the personal background of the parties at the time of signing to determine how they commonly use a specific term in question.
Breach of Contract
No one likes talking about when agreements don’t go as planned but, unfortunately, it is common. A breach of contract by one party may give the innocent party a right to claim damages, such as money, against the party that breached the agreement. The consequences vary depending on the seriousness and effect of the breach. It could range from reduction of the contract price, remedy of the defect, compensation for damages and/or interest for delay up to rescission if the breach is fundamental.
There are generally four kinds of breach of contract:
1.Material Breach – if it goes against the very reason why the other party entered into the contract. If the breach can’t be fixed, or fixed within a short period of time, it could lead to cancellation of the contract. An example might be selling a defective and unusable car.
2.Minor Breach – As the name suggests, these are breaches of the contract which are small in nature. As in the previous example, a minor breach may be delivering working vehicle, but without the tires. This breach can be fixed by the selling party. If, however, it is not fixed, it could lead to the cancellation of the contract, or a reduction in the purchase price so the purchaser can buy new tires.
3.Anticipatory Breach, or repudiation, happens when a party refuses to perform an obligation before the obligation becomes due. Upon demonstrating that the naughty party was seriously unable or unwilling to perform the obligation, the other party may be able to commence legal proceedings for damages, or to force the party to perform the obligation.
4.Actual Breach consists of the non-performance of the obligation when it is due. As to whether this will be a minor or major breach is a question to be considered in the circumstances.
Drafting clear, concise and enforcement contracts is good business. It adds value to your business, and reduces the risk of breach and litigation. Our contract lawyers can assist you prepare precedent or bespoke terms and conditions or agreements for your business.