If you are in business, the chances are that you will at some point be required to enter into contracts, perhaps with suppliers, your customers, partnerships, landlords and/or licensors.

Before you sign a contract, it is important to ensure that it reflects the position your business wants, otherwise your business may suffer significant loss. 

We have put together our top 4 tips for avoiding the simple mistakes often made when entering into contracts, and how you can avoid making them:  

1)            Getting the scope of the contract right

When entering into a contract, it is important to have a discussion with the other party to understand both parties’ position, expectations and what each seek to gain from the contract. The contract should then reflect the parties’ expectations. This helps avoid disputes down the track on the basis that the contract did not reflect a party’s intentions.

2)            Include specific detail in the contract

Parties who draft the contract amongst themselves can often use language that is too broad. This then creates the opportunity for the other party to interpret a wider meaning for a word or term than what was intended at the time. 

For example, a provision may use the words “such as” which suggests the examples provided in the contract, but also opens up the possibility to include anything else that is not mentioned.

3)            Define what will constitute a “breach” of the contract

When drafting a contract, you should also determine what could go wrong and whether it would constitute a breach of the contract. Then you need to consider if a breach has been made, how the contract will provide for that breach in order to protect the business. 

4)            Provide for alternate dispute resolution

If disagreement arises between the parties, there should be a clause(s) in the contract which provides how the parties will resolve the dispute. We recommend requiring the parties to enter into either mediation and/or arbitration, where a third party can made a decision that is (if agreed by the parties) binding on both parties.

This can help to preserve the relationship of the parties and avoid the costs of going to Court.

If at all in doubt, seek legal advice before you enter into a contract to ensure that your position is protected and that you know your rights and obligations in the contract.

 

Kirsten Ferguson

Commercial Lawyer
Wellington