The current GFC presents both significant challenges and
opportunities for businesses. Good business practice and a strategy
to manage risk and capture opportunities during the current
downturn and beyond may involve a review of business contracts.
Often the first time you really look at a contract is when
something goes wrong in your business relationship with the other
The drafting of the contract and what terms and conditions have
been incorporated is often critical to a party's success when
resolving a dispute.
Accordingly, to effectively manage risk and minimise costly
disputes, it is vital to critically review the contracts that make
up your business to ensure that they adequately reflect the
agreement between the parties. The best time to iron out any
confusion in relation to the contract is at the start. In fact, an
understanding of business risks and how they may be managed by
contract is often a significant factor in the success or failure of
A contract can protect or expose you to risk depending upon how
it is drafted. Poorly drafted and prepared contracts expose you to
risks including legislative risk, litigation risk and commercial
risk. The condition of your contracts determines what level of risk
your business is exposed to, which may ultimately affect its
profitability and longevity. One poorly drafted contract can have a
damaging impact on your business if things don't go to
Many businesses consider the expense of having a contract
reviewed or prepared prior to execution as a costly and unnecessary
one. However the cost of legal advice at the earliest stage of a
contractual relationship is normally significantly less expensive
than seeking advice when an issue arises. Most importantly, you
have the opportunity to amend the contract to protect your business
– an opportunity usually not available once a dispute
Most disputes arise out of miscommunication between the parties
to a contract. These issues are exacerbated by the lack of a
written agreement or a poorly drafted agreement which is incomplete
A good commercial contract performs a number of functions
Providing a clear and concise record of the agreement entered
into by the parties
Allowing the parties to allocate, limit or exclude the various
risks that arise from that particular business activity.
In relation to a supply contract, in addition to a description
of the particular product or service to be supplied, the contract
will often include terms and conditions governing issues such as
the contract price, payment terms and delivery requirements and
important risk management provisions including clauses dealing with
retention of title, insurance, indemnities, exclusion and
limitation of liability.
A retention of title clause will usually ensure that a party
retains legal ownership of the product or material supplied until
payment is received, even if the product is in the possession of
the other party. Proper legal advice is essential to the
preparation of such clauses, particularly in instances when the
product is used to manufacture another product.
An exclusion clause is included in a contract to limit or
exclude the liability that a party would otherwise have. A party
may also seek to limit its liability in the event of a breach of
contract, limiting the amount that the other party may claim to a
pre-defined amount. Clauses of this type may be of great benefit to
your business and can significantly reduce your exposure should
things not go to plan due to factors within or outside your
Another common area of contention is the argument regarding
whether a party's quote conditions form part of the contract in
circumstances where the client has issued a purchase order which is
inconsistent with the standard terms and conditions.
Often the later in time prevails, meaning that any qualification
you may have in your standard terms and conditions are not an
effective part of the contract.
A prudent business will appreciate that the cost of having
commercial contracts properly prepared and reviewed is an
investment that may avoid costly disputes and liability. This could
result in substantial dividends in the long-term.
This article was prepared by Marissa Dimarco, Senior
Associate, from Moray & Agnew's Newcastle office.
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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