In our previous articles Common breach of contract issues and how to avoid them and Five legal ways to recover business debts we discussed the impacts of breaches of contract and parties failing to adhere to payment terms in a contract. In this article, we explore the importance of drafting a virtually bullet-proof contract from the outset to prevent contract breaches.
Contracts are an integral part of a commercial relationship. If drafted properly, a contract can help minimise risks, mitigate impending losses and provide the foundation for ensuring your business operates smoothly and within the confines of the law.
Therefore, it is important to ensure that your contract is drafted properly before entering into it. Key considerations when drafting and entering into a business contract include:
1. Clear and concise terms – Golden Rule
The Courts have stated that the ‘golden rule’ of a well-drafted contract is to include terms that are capable of being clearly interpreted, that is, to use the ordinary and natural meaning of the words. Avoid ambiguious terms that may be misinterpreted. It is important to be as clear and concise as possible with the wording of your contract, so that it is easily understood. This is vital to avoid any future disputes and/or possible breaches of contract.
2. Knowing the other contracting party/ies
Perhaps one of the most important things to consider before entering into a contract is to know who you are getting into business with. This may involve conducting preliminary due diligence on the other contracting party, their financial standing and solvency, the business and its trajectory, their directors’ and shareholders’ (if any), any creditors and similar.
3. Ensure there are no ‘unfair contract terms’ that leave you open to litigation
The Australian Consumer Law (ACL) protects small businesses from unfair contract terms. The Australian Competition and Consumer Commission (ACCC) is responsible for ensuring that there are no contraventions of the ACL, whilst setting out guidelines as to what is deemed to be an unfair contract term. These include:
- Terms that enable one party (but not another) to avoid or limit their obligations under the contract.
- Terms that enable one party (but not another) to terminate the contract.
- Terms that penalise one party (but not another) for breaching or terminating the contract.
- Terms that enable one party (but not another) to vary the terms of the contract.
The best way to ensure that a contract does not include unfair terms and that it complies with the relevant laws is to have an experienced commercial lawyer draft the contract.
4. Include appropriate provisions for dealing with disputes
Disputes between contractual parties are often inevitable. As such, in addition to ensuring that the contract is drafted properly, the contract must also incorporate proper terms for dealing with any potential and future disputes between the parties. This can be done by setting out a clear process for managing disputes resulting from the contract. Doing so, not only saves time and costs when such disputes arise and avoids lengthy court processes, but also, more often than not, prevents disputes from escalating. This could include good faith negotiations between the parties, or failing that, attending arbitration or mediation with third-party facilitators.
5. Compliance with relevant laws and regulations
Unspringingly, but often easily gone astray, is the importance of ensuring that the contract complies with the relevant laws and regulations of the State and the Commonwealth. This also includes industry codes and rules relevant to the contract. To ensure that your contract complies with the relevant laws, rules and regulations, it is important to consult with a commercial lawyer for tailored legal advice.
6. Have an experienced commercial lawyer draft the contract
Given the legally binding nature of business contracts, it is always recommended to seek appropriate legal advice before drafting and entering into such a contract.
If you need assistance with drafting fair contract terms or require advice negotiating the terms of a business contract to which you are a party, our commercial lawyers are here to help. Contact us on 02 9262 4003 for an obligation-free consultation, or submit an online enquiry.