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As a business owner, you are no stranger to contracts. They are a necessary part of any business transaction, and it’s not something you can just ignore.
The problem?
In the excitement of sealing a deal or getting to work, most people don’t read the fine print. They skim over terms and conditions, hope for the best and sign on the dotted line. But when things go wrong, it’s they who end up on the wrong side of the law.
The good news?
It doesn’t have to be this way. Understanding the basics of contractual obligations is key to protecting your business and building stronger commercial relationships.
You will learn:
- What Are Contractual Obligations?
- The Essential Elements of Binding Contracts
- Common Contractual Pitfalls
- How to Protect Your Business
What Are Contractual Obligations?
Contractual obligations are the legal duties that arise when two or more parties enter into a binding agreement. These agreements can take many forms and can be formal or informal, written or oral. They all have one thing in common: all parties involved have specific obligations or commitments that they must fulfil in order for them to be legally binding.
In commercial law, there is no such thing as an implied contract – every deal has its terms and conditions, which you can ensure you follow by working with experienced commercial lawyers Brisbane. Whether you are drafting an employment agreement or negotiating a partnership deal, make sure you understand your rights and responsibilities under the contract. The law sets out the rules for when a contract is formed, what it must contain to be valid and what happens when either party fails to perform their obligations.
But here’s the thing…
As a business owner, you know not all agreements are contracts. For a contract to be legally binding, it must contain certain essential elements. These requirements are what commercial law refers to as the building blocks of a binding contract.
The Essential Elements of Binding Contracts
For a contract to be valid and enforceable by law, it must contain these five core elements. One missing, and your entire contract is unenforceable.
Offer and Acceptance
An offer is a clear indication of willingness to enter into an agreement on certain terms. Acceptance must be unequivocal and communicated to the person making the offer.
Consideration
There must be an exchange of value between the parties. This could be goods or services for money or a promise to perform an act or refrain from doing something in the future.
Intention to Create Legal Relations
All parties must intend that the agreement creates legally binding obligations. Business agreements generally have this intention presumed unless expressly stated otherwise.
Capacity
Contracting parties must be legal adults of sound mind and not under any duress or undue influence. Otherwise, the contract is invalid or voidable.
Certainty of Terms
The terms and conditions of the agreement must be sufficiently clear and certain for the court to enforce them. Vague or ambiguous terms may render the contract unenforceable.
According to recent data, contract disputes account for 60% of all commercial litigation. This means that for every ten lawsuits in the commercial space, six have their genesis in contract. What’s more, most contracts disputes can be avoided by paying attention to these building blocks.
Types of Contractual Obligations
Contractual obligations can be divided into categories depending on their importance.
Express terms are the obligations stated clearly in writing or verbally within a contract. These are obligations the parties have agreed to.
Implied terms are obligations that are not expressly stated but are implied by law or custom. For example, in a sales agreement, there is an implied term that the seller has the right to sell the goods.
Conditions are the most important terms. These are the terms that go to the very heart of the contract. If breached, the innocent party can terminate the contract and claim damages.
Warranties are minor terms. Breaching a warranty only entitles the innocent party to damages, not termination.
Common Contractual Pitfalls
It would be nice if contract disputes were easy to avoid, but they’re not. Even the most experienced business owners make mistakes when it comes to commercial agreements. Here are some common contractual pitfalls to watch out for.
Verbal Contracts
Verbal contracts can be legally binding but very difficult to prove. Unless you have a witness or written evidence, it is very unlikely the court will help you.
Ambiguous Language
Ambiguous terms are a major source of commercial disputes. A contract must be clear and easy to understand by both parties.
Omission of Key Terms
Missing important details in a contract can cause problems down the line when they become important. This is why it is always advisable to ensure key terms like payment schedules and delivery dates are explicitly defined in any agreement.
Failure to Review Contract Changes
Contracts often go through several drafts before they are finalised. Failing to review the final draft carefully means you could find yourself agreeing to terms you never intended.
Absence of Termination Clauses
Termination clauses are your get-out-of-jail-free card. If a contract becomes too onerous or doesn’t work out, you have an escape clause, so you don’t have to continue.
Breach of Contract and Consequences
A breach of contract is an act that goes against the obligations or promises set out in a binding agreement. Contracts can be breached in many ways:
Failure to perform contractual obligations within the specified time.
Performing them incorrectly.
Intentionally breaking an express term of the contract.
The law imposes various sanctions on a party who breaches a contract. These include:
Damages
The defaulting party may be required to compensate the other for losses suffered as a result of the breach.
Specific Performance
In some cases, the court may order the party who breached the contract to perform their obligations as promised.
Injunction
An injunction may be granted to prevent a party from acting in breach of contract.
Rescission
The contract may be rescinded, releasing all parties from their obligations under it.
Research shows that businesses lose significant revenue each year due to poorly managed contracts. This underscores the importance of proper contract management.
Protecting Your Business
The best way to deal with contractual disputes is to prevent them. The following strategies can help you protect your business when entering commercial contracts.
Get it in writing
This is by far the best way to ensure terms and conditions are understood by all parties. A written contract is clear and unambiguous and can serve as evidence in case of a dispute.
Use clear language
Avoid legal jargon and make sure all terms are clearly defined. If in doubt, seek legal advice before signing on the dotted line.
Include dispute resolution clauses
Specify how disputes will be handled through negotiation, mediation, arbitration, or litigation in the contract. This can save you significant time and money if things go wrong.
Review before signing
Don’t sign a contract until you have read it carefully and understand all its terms and conditions. If there is anything you don’t understand, get legal advice.
Keep good records
Maintain copies of all contracts and related correspondence. Document any changes or issues that arise during the term of the contract. This will be valuable if a dispute arises later.
Conduct regular contract audits
Review existing contracts regularly to ensure they are all parties are meeting their obligations and that the terms are still appropriate.
Bringing it all together
Contracts are the lifeblood of any commercial relationship. Understanding the nature of contractual obligations, the essential elements of a binding contract, the common pitfalls, and what you can do to protect your business can save you a lot of trouble.
The most important thing to remember is to take every contract seriously. Don’t be in a hurry to sign on the dotted line until you understand what you’re getting into. Ensure all the terms and conditions are clear, and seek professional advice where necessary.
With the right knowledge and approach, you can master the art of commercial contracts, build stronger business relationships, and focus on what really matters – growing your business in today’s competitive marketplace.
