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Contracts 101

Does a contract need to be written?

Not always. Under Australian law, a contract can be written, oral or partly written and partly oral. However, it is best practice for a business to make sure that all its commercial agreements are in writing as this significant limits the risks of arguments arising in future over whether the contract exists or the commercial terms of the agreement.

Note however that some contracts are required by law to be in writing, such as property sale and purchase agreements, guarantees and transfers of shares or other securities in a company.

When does a contract come into existence?

Under Australian law, a contract comes into existence when the following key elements are met:

Offer and acceptance. One party makes an offer of the terms on which the parties will contract on, and that offer is subsequently accepted by the other party.

Consideration. There must be consideration, which is that the parties must have exchanged something of value between them. For example, the payment of money in return for goods or services.

Intention to be legally binding. The parties must intend for the contract to be legally binding. In a business, there is a common law presumption that the parties intend for their contract to be legally binding. This element gets trickier in transactions or circumstances involving family members.

Certainty of terms. The terms of the contract must be sufficiently certain and detailed. Otherwise, they may not be enforceable. This can be your undoing in a verbal agreement.

Key terms of the contract

The primary purpose of a contract is to record the parties’ commercial arrangement. When negotiating the contract, consider the following:

• What form will the contract take? i.e. a one off contract, a framework agreement for multiple work orders, a party’s standard Terms & Conditions, etc

• What are the details of the transaction? (See below)

• Does the contract accurately reflect the risk profile of the transaction? It is good business practice to carry out an assessment of the risks arising from the transaction.

Details of the transaction

Below are the main starting points to help steer discussions when it comes to preparing your contract:

Scope, requirements and specifications: In a supply arrangement, are the procurement requirements clear? Is the scope clearly defined?

Parties’ obligations: Are the parties clear on what they are doing?

Term and renewal: How long will the contract last for? What are the renewal or extension arrangements?

Price and payment arrangements: How much will the goods or services cost? What are the payment arrangements? Should there be a price review mechanism?

Intellectual property: Are there any intellectual property rights issues? If yes, how will these be dealt with?

Data protection: Will the transaction involve the transfer or processing of personal information or other sensitive data?

Representations and warranties: These are statements of facts in the contract relating to a specific area. For example, those relating to the standard or quality of goods or services being delivered. The broader the statement, the more risk is assumed by the party making it. If a statement turns out to be untrue, this could amount to a breach of contract. Consider what representations and warranties the business is asked to give in the contract.

Limitation of liability: Will liability be limited, and if so, what is the cap, and will there be any exclusions to liability? Are the limits acceptable to the business and appropriate for the risks involved? Does the business have sufficient insurance coverage to ensure that it has the financial capacity to satisfy its liabilities under the contract?

Insurance: Does the business require the counterparty to maintain specific levels of insurance coverage?

Contractual indemnities: This is an express promise to pay money on the happening of a specified event. What indemnities does the business seek from the counterparty? Conversely, what indemnities is the counterparty seeking and will the business agree to this? If giving indemnities, would these be capped or not?

Termination rights: What are the parties’ termination rights? Can either party terminate for convenience, and is there a termination for convenience fee?

Dispute resolution, governing law and jurisdiction: How will disputes be dealt with (mediation, arbitration, expert determination)? Is the business comfortable with the governing law and jurisdiction clause?

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