Negotiating Commercial Agreements – What to look for?

Businesses are operating in more litigious times, which means each party need to ensure they have appropriate protections in place. Unfortunately, you can no longer rely on a simple handshake. It is paramount to understand commercial agreements and the complexities of the law.

Commercial agreements act as a regulator of business relationships between parties when they agree to perform actions and/or refrain from doing others. Commercial agreements outline the various legal obligations that each party owes to each other. When negotiating commercial agreements, it is very important to ensure that parties protect their own interests, including to ensure they are protected in the event the other party does not fulfil the contractual obligations conferred upon them.

When entering negotiations, it is important to understand the position you are in, establish what your risks are and how you can manage them, as well as understanding your legal position. There is no legal requirement for commercial agreements to be in writing, however, it is strongly recommended to reduce the risk of disputes and misunderstanding.

In early negotiations, it is important to consider the possibility that the other party may not perform what was originally promised even if you are on glowing terms with them entering the agreement.  It is essential to ensure that you have appropriate safeguards if that happens. 

Despite all commercial contracts being different in nature, in the formal process of drafting commercial agreements, there are four main elements of such agreements that are almost always vital to include, consider and understand.

1. Termination Provisions

Termination provisions operate as a way out of agreements. It is very important to understand how to end contractual agreements. Under contract law, contracts may come to an end in a variety of ways, such as through termination, discharge by full performance, breach or frustration.

  • Termination: through specific contractual provision, that allows for mutual or unilateral termination in specific circumstances;
  • Discharge by full performance: fulfilling all contractual obligations under the agreement;
  • Breach: a breach of contract, will not automatically discharge the contract. However, the aggrieved party may be permitted to discharge the contract under certain circumstances;
  • Frustration: contractual agreements will be deemed automatically discharged in the event it becomes illegal or otherwise impossible to perform obligations. It is important to note, that this is extremely rare.

It is important to have specified avenues to discharge the contractual agreement between parties, with clear definitions as to what constitutes as a termination provision and breach. However, it is important to note that these avenues are not one sided, the other party may use them to discharge their obligations.

2. Liability Clauses

Liability clauses are specifically protections that are unanimously conferred to determine the apportionment of liability between parties, including excluding and/or limiting liability in the event of breach or termination of the agreement. These clauses, also can cap the amount awarded to an aggrieved party in the event of breach, restrict the types of loss recoverable, and impose short time constraints on parties.  

It is strongly recommended that all clauses are worded in a concise and unequivocal way. This extends to liability clauses. When determining what is specifically relevant to your commercial agreement, be sure to include express reference to the obligation or liability that you seek to limit or restrict. Avoid using excessive or ambiguous wording, as you want to limit the scope.

3. Remedies and Avenues for Relief

Remedies exist to provide solutions where problems arise from non-performance. The general rule of thumb is that if a party is aggrieved and sustained a loss, it should be entitled to damages. The aggrieved party should be left in the same position as if the contract had been performed as opposed to profiting from a breach. Some contracts, identify a formula for the calculation of the amount payable in the event of breach. It is important to understand the financial impact this will have in the event a party does not perform its obligations, and that the formula represents a genuine pre-estimate of the likely loss, as opposed to amounting to a “penalty” (which courts tend to disallow).

Generally, commercial agreements will provide solutions to handling disputes if they arise. It is advised that there is a clear process for dispute resolution agreed upon before entering into agreements. The purpose of doing this is to limit the avenues that parties can take in the event they are aggrieved.

3. Force Majeure Clauses

A force majeure clause relieves a party from performing its contractual obligations due to an event outside of the reasonable control of the affected party. In commercial agreements, it is important to identify an exhaustive definition of force majeure events; and the operative nature, that establishes the obligations on parties if a force majeure event occurs. Force majeure clauses are specifically important with current COVID-19 restrictions in place.

What should you do?

When entering into any form of a commercial agreement, it is paramount to understand the obligations that are conferred on you, including the specific requirements of performance determined in the agreement. It is equally important to understand the rights you have, if you are aggrieved throughout the course of your commercial agreement.

Unfortunately, some commercial agreements do not go as planned, even when entered with the best of intentions. In the event a party does not perform as promised, it can lead to significant and unforeseen disputes. In order to limit the potential damage this can have and to save costs in the long run, it is important to consider the specific clauses prior to the agreement and ensure you can fulfil the contractual obligations conferred upon you.

If you have any questions or are in the process of negotiating a commercial agreement and wish to discuss your circumstances with a lawyer, please contact the BAL Lawyers Business & Commercial team or the Litigation and Dispute Resolution team on 02 6274 0999.

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