Here are four more essential things you should know about contracts – even if you have a lawyer to draft or review contracts for you.
We told you about the first four essential things, in our blog post in June.
1. The contract will impose obligations on you (or your organisation)
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 other party.
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 contract.
3. Know the mechanisms by which the contract can be terminated
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 trade.
4. Beware of provisions in the contract allowing variation by one party
Look carefully where variation to the contract is possible unilaterally. Sometimes such powers can be well hidden in the contract.
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 contract.
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.
