1. The contract will impose obligations on you (or your
A contract usually contains a mixture of rights and obligations
for each party.
Before you finalise the contract, check out what the contract is
requiring you to do.
There will be some key and obvious obligations that form the
crux of the agreement. For example, if it is a service agreement,
these might be services that you have undertaken to provide to the
But there could be tens or hundreds of other obligations
scattered throughout the agreement. They might appear minor but
may, in practice, be onerous. Depending on the wording of the
agreement, your failure to meet them may give the other party
rights such as the right to terminate the agreement or the right to
withhold payment from you.
For example, is there an obligation to comply with a particular
statute? Is there an obligation to destroy all confidential
information at the close of the contract?
Is it manageable for you to meet these obligations? If not, you
should negotiate (with the help of your lawyers) their removal
from, or modification in, the agreement.
2. Look out for the economic effects of the contract
In particular, a contract may have a number of economic effects
and the potential to impact your cash flows.
If it is a lease, what does it have to say about outgoings?
If it is an employment contract, what does it have to say about
salary, superannuation, travel expenses and telephone bills?
Are there economic considerations which you would expect to see
in the contract but which are missing? If so, and the contract is
still being negotiated, it may be possible to insert these. If the
contract is already finalised, evidence of agreement on these
matters may be found elsewhere such as a letter accompanying the
contract or a policies manual to which reference is made in the
3. Know the mechanisms by which the contract can be
Your lawyer will probably have you turn your mind to this during
the drafting and negotiation stage.
There are a myriad of possible termination provisions. One party
may have the ability to terminate the contract unilaterally with no
notice – although the ability to include provisions for
unilateral powers is limited by statute, particularly where
consumers are concerned.
There may be a fixed term of notice that may be given by one
party to the other in order to terminate the contract.
Other termination events may include the failure of one party to
comply with particular requirements, giving the other a right of
termination. For example, if an Australian financial services
licensee is appointing an authorised representative, it may reserve
the right to terminate the representative's appointment if the
representative breaches provisions in the licensee's compliance
manual and fails to rectify this to the satisfaction of the
licensee within, say, two weeks.
While termination generally means the agreement is finished, a
contract may be drafted in a way that specifies that particular
clauses survive termination. This is common. Topics generally
addressed by such clauses are confidentiality, and restraint of
4. Beware of provisions in the contract allowing variation by
Look carefully where variation to the contract is possible
unilaterally. Sometimes such powers can be well hidden in the
Again, the ability unilaterally to vary a contract is generally
not permitted in consumer contracts but may occur in commercial
contracts between business entities.
For example, if the contract enables the other party to vary
unilaterally fees payable by you, this may result in a fee increase
so great you may be unable to meet your obligations under the
The notice period required for the other party to vary the
contract should be longer than the notice period required for you
to terminate the contract – so that if the other party varies
the contract in a manner not your liking, you have the ability to
exit the agreement.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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