Commercial Law: what to consider before signing a contract
We often find that when businesses and individuals are signing contracts that it is a busy time in the business or individuals’ lives.
There is often a lot going on and a lot of excitement about the endeavour about to be entered into. It is often, therefore, a temptation for businesses to rush into a transaction before proper reflection and consideration occurs. Here are 10 tips to consider implementing before you enter into a contract:
Read and Reflect on the Contract
As obvious as this sounds, I have been practising law for 23 years and I have regularly met with clients who have sought advice on a contract and they have not read the contract themselves first. Whilst some parts of the contract may be worded in legal jargon, which is difficult to understand, several aspects of the contract will require your important input. Particularly, where the contract involves implementation of technical services, complex goods or operations occurring. We often find that contracts, if not effectively prepared, have been prepared by merging and cutting and pasting from multiple sources and this can inadvertently result in errors. Always remember, the greater you understand the contract, even if you are receiving legal advice about the transaction, the more effective that legal advice will be.
Check parties contact details
While again this seems obvious, we have regularly seen contracts that incorrectly refer to the parties details because either a previous party that the contract was used for has been left in there or some important aspect of your contact details are wrong or whether you are entering into it as individuals or through a corporate entity needs to be correctly detailed. We have recently experienced a matter where the execution of the contract by the other party was signed by employees of the business that were not directors and there was a question as to whether or not the people that executed the contract had the authority to bind the company. Employees of a company may have ostensible authority to bind a company but it is best practice to have company directors sign a contract.
Check the obligations (rights and responsibilities)
This is particularly important for you to be involved with as you will know what was agreed with the other party as to what goods or services are being provided. You will need to ensure that the scope of works or detail of goods being provided are accurate and any return policies, time delivery of service and other specifications will need to be checked closely.
You need to check the provisions in relation to matters relating to the contract being confidential to ensure you only release non-confidential information to those outside your business. You should also review what rights there are in relation to intellectual property that may be created during the course of the services being provided under the contract. You will need to check whether the intellectual property created is owned by the service provider or by the receiver of the services.
Allocating risk and indemnification provisions
Determine how risk is being allocated under the contract and ensure that you discuss this with your insurance provider to make sure that you are insured for any risk that you are being exposed to. A good insurance broker will be able to understand the relevant provision and advise you on appropriate insurances to have in place. You also need to understand what you may be indemnifying under the contract as you may be indemnifying sub-contractors of your works and you need to ensure that you have got appropriate coverage for that. If a party is indemnifying you, the indemnity is only good as that party’s financial capacity providing that indemnification to absolve you from risk. You may need to still take insurance to cover that.
Most contracts have requirements for insurance to be taken by the parties. You will need to ensure that you speak with your insurance broker or insurance company to build the cost of that insurance into your budget. As detailed in the previous paragraph, you should also, if dealing with complex transactions, have an insurance broker and/or your lawyer review the requirements, to advise where you are exposed to risk under the contract to determine if there is insurance that can protect you against that risk.
Check the price
You should double check the condition for and the details of how prices and costs are calculated under the contract. Also, ensuring you check the payment terms (being how soon after an invoice is rendered is it required to be paid). Look for clauses that allow for the price to be increased or ways in which variations to the contract can occur and the pricing of those variations.
Termination (know how to end the contract)
A crucial aspect of all contracts is knowing how they can be terminated by either party or how they can be brought to an end. Termination usually involves rights relating to breaches of the contract. However, some contracts can be brought to an end by one party giving the other party ‘x’ days’ notice. This could be highly detrimental to you if it is a particularly involved contract. You may want to ensure that there are provisions in the contract to compensate you if the contract is brought to an end early based upon your expectation costs and the cost to demobilise from contract implementation.
Resolution of disputes
Most contracts have what is known as ‘alternative dispute resolution clauses’. There are clauses that allow for the parties to have a mechanism of dealing with disputes without having to bring the matter to court immediately. These provisions can be effective in resolving disputes quickly and for less costs than going through a court resolution process. You should, however, understand the process and ensure that it is suitable for your circumstances.
Talk to a lawyer
Whilst you should read the contract yourself, speaking to a lawyer with expertise that has experience in knowing what to look for in that type of contract, what is usual, what is unusual for that type of contract and what is particularly onerous upon you, to ensure you are aware of these matters before you enter into the contract. You should be particularly wary of dealing with large organisations that have their own in-house lawyers. If the other side has an in-house lawyer and you are not represented then as you are often then not negotiating from a position of strength, it is important that you are aware of what you are entering into before you start performing the contract rather than experience it during the performance of the contract.
It is important not to rush into a transaction even though it may be extremely important to your business and there may be pressure being exerted on you to sign. You should take the time to both read the contract, reflect on it and consider the matters raised in this article. We also strongly advise you to obtain expert legal and insurance advice about contracts before entering into them.
Should you have any queries or wish to receive advice on a contract, we have decades of experience in doing this at Lynn and Brown Lawyers. Please contact us in that regard.
About the author:
This article has been authored by Steven Brown who is a Perth lawyer and director at Lynn & Brown Lawyers. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.