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  • Writer's pictureJackson Cain

Commercial Contracts

As most commercial transactions all have different elements or circumstances, the contracts for these often require a level of bespoke drafting. This drafting often changes numerous times during negotiations between the parties. However, there are provisions that should appear in most (if not all) commercial and construction contracts. These essential provisions are summarised in the following article. Where a contract lacks the following provisions, there is a chance that the contract will be unenforceable. Alternatively, where certain provisions are either not present or one sided in favour of one party over the other, a party may be exposed to significant risk in the transaction if they proceed with signing the contract.


To be a valid contract, it must contain clear representations of the following:

  1. an offer and an acceptance;

  2. an intention by the parties to create a legal relation through a binding agreement; and

  3. consideration (value).

Offer and acceptance

An offer must contain a demonstrated willingness to enter into an agreement on certain terms that are intended to be binding once both parties have accepted them. It is important to understand the difference between an offer and an intention to negotiate in a transaction, as these concepts are often a cause of confusion or dispute in a transaction. To be a real offer, the offeror needs to communicate clear and precise terms to the offeree, along with confirmation that it is intended to be a legitimate offer.


For the offer to be accepted in an effective way, the offeree needs to confirm their acceptance (which is most effectively achieved when confirmed in writing) by expressly (or through their conduct throughout the transaction) agreeing to the terms of the offer (or such terms as are negotiated and agreed upon prior to the contract being signed).


An offer may also be accepted through an offeree’s conduct. An offer can be revoked by the offeror at any time prior to acceptance by the offeree. Where a contract has formed and/or an offeree has made some kind of payment in connection with an offer, an offer can no longer be revoked. Offers may be terminated in the following ways:

  1. a change in circumstances for the transaction, or one or both of the parties;

  2. a particular lapse in time, usually where the offer (or its essential terms) is no longer relevant or achievable; or

  3. failure of an essential condition of the offer (i.e. where one of the parties dies).

Intention to create legal relations

To establish that a contract exists, the parties must demonstrate their intention to be bound by the terms of the contract and to create a legal relationship. For a Court to enforce the contract there must be evidence that the terms of the contract are sufficiently certain and that all terms necessary to carry out the intention of the contract have been agreed on by the parties.


Consideration

For a contract to be valid there must be consideration (or value) provided in return for the offeror’s offer. Consideration involves the passing of value between the parties, usually in the form of money being paid for goods or services. Reference to the consideration to be paid (essentially the price to be paid to the promisor (i.e. seller/ service provider) in exchange for their promise (i.e. goods / services)) must be clearly set out in the contract for it to be valid.


Certainty

In addition to the above elements, a contract must contain enough certainty and terms agreed between the parties to allow them to fulfil their obligations under the contract. Certainty of a contract is most commonly disputed where the rights and responsibilities of the parties are the reasons for such a dispute. There are two competing considerations regarding certainty of a contract that the Court will often have in a dispute:

  1. is there a way that the parties can consensually agree to enter a legal relationship under the contract?; and

  2. the Courts will be reluctant to enforce terms of a contract where they are too vague.

Other significant provisions include:

  1. clearly defined descriptions of all goods or services to be provided under the contract;

  2. the price to be paid, as well as how and when each payment is to be made under the contract;

  3. any interest applicable in relation to payments not made on time under the contract, including the amount of interest and time periods from when it starts and stops accruing;

  4. any milestone dates for delivery of goods or services;

  5. confirmation that the person signing off on behalf of the other party (where it is a company) has the relevant authority to do so; and

  6. provisions relating to indemnities, termination, dispute resolution processes and insurance.


A contract can be partly written and partly oral. In the circumstance that a dispute arises as to the existence of this contract, the Court will have regard to the conduct and words of the parties after the contract is said to have been made. There are however some types of contracts that must be in writing, including most building contracts, contracts of guarantee and contracts for the sale or disposition of an interest in land.


A contract may become invalid or voidable where the intent of the parties to the contract is illegal, a party has breached a provision of the legislation relevant to the transaction or where the conduct of a party or the contract itself involves misleading or deceptive conduct, duress, undue influence, unconscionable conduct, or a mistake of the parties. These usually occur prior to the formation of a contract and are often relied on as a remedy for an innocent party.


A dispute arising out of a transaction or the contract can be resolved through either arbitration or mediation between the parties. The contract will usually contain a provision noting that a party must engage in either of these processes prior to commencing court action as a final way to resolve a dispute.


Breach of contract

A party breaches a contract when they fail or refuse to fulfil an obligation or promise contained in the provisions of the contract. The main ways that a party may breach a contract include:

  1. Actual breach: an actual breach may arise, for example, in circumstances where the parties have agreed to have part of the contract performed (i.e. services provided) by a particular date, and a party does not perform this obligation. In the event of an actual breach of the contract, the non-breaching party will often have the right to terminate the contract.

  2. Anticipatory breach: this type of breach is also known as a repudiation of the contract. When a party indicates an unwillingness or inability to perform their obligations under the contract, this will be an anticipatory breach by that party. If the breaching party provides notice to the other party of their unwillingness or inability to fulfil their obligations, the non-breaching party will then have the right to terminate the contract.

  3. Minor breach: a minor breach of the contract occurs where a party fails to perform an obligation, but the entire contract has not been breached as a result. In these circumstances, a non-breaching party will need to establish that it has suffered actual financial loss because of the minor breach to be able to pursue a legal remedy.

Contracts are usually discharged on completion and performance of all contractual obligations of the parties. A contract may also be discharged where:

  1. the parties agree (usually in writing) to terminate the contract;

  2. there is a breach of any term of the contract, where the non-breaching party may terminate if:

    1. the contract contains a provision allowing discharge or termination for a breach of contract;

    2. the other party repudiates the contract (anticipatory breach); or

    3. the breach of the contract is sufficiently serious and prevents the intention of the contract from continuing; or

  3. where the contract has been frustrated. This means that the contract is no longer able to continue for a reason beyond the control of the parties. Where a contract has been frustrated, it is usually neither parties’ fault.

Whilst it is possible to rely on conduct or verbal agreements (or where the contract or agreement is partially written and partially verbal), it is best to avoid relying on verbal representations for the creation of a contract. A written document (contract or agreement) setting out exactly what was agreed at the time the contract was formed is far better evidence the intention and agreement of the parties in connection with the transaction when their legal relationship commenced.


If you have any questions regarding the above changes or require assistance in relation to commercial contracts, please contact our office as we would be more than happy to help.


This article is not legal advice, and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.



 

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