What are the key elements of a contract?
A fresh-faced law student is likely to answer this differently from an experienced corporate lawyer because in the business world, there are certain things that every prudent contract should have which the textbooks don’t tell you about. Let’s look at a few of them.
How to define the relationship (DTR)
We all know that a contract needs at least two parties but did you also know that it is important to DTR (define the relationship) in business contracts? When a company is granting a license to another or hiring a consultant, the relationship they want is that of independent contractors. This prevents either party from representing, acting for, or binding the other.
The risk of not defining the relationship
When a business contract does not DTR, it runs the risk of creating an agency, partnership, employment, or even a joint venture relationship. This means that a party can be unwittingly subjected to the special obligations imposed upon agents or employers such as a duty of loyalty or a statutory requirement to set up a workplace pension scheme.
Contract elements which should not be silent
Furthermore, since the law does not readily presume anything to do with confidential information: if your contract is silent, there is no guarantee that it will be secure. There is no common law duty to protect someone else’s confidential information which means that every prudent contract should expressly impose such an obligation where such information will be disclosed. A good contract will also indicate how long the obligation will last for, and even consider if it will survive termination.
Even so, confidentiality clauses are weak without liabilities for breach being considered. Business contracts typically authorise sharing confidential information with a party’s agents e.g. lawyers, employees, and directors. You want to ensure a party is liable not only for their breaches but also for those of their agents. Since it is possible to limit liability for certain things, a sensible contract will insist on liability for matters such as an agent’s breach.
A business contract may be silent on its duration where there is an ongoing relationship between the parties. In response, the law may imply a term that the contract can be terminated on reasonable notice. However, since a court considers a wide range of case-specific factors to determine whether a notice is reasonable, it is impossible to predict the outcome. It is also difficult to imply this provision into a contract which grants one party a right to terminate. A prudent contract should therefore set out its duration and provide for its renewal and termination.
How to overcome the legalese
These are only a few examples of terms which may seem very simple but without express provisions for them in your business contract, then a basic level of protection is not guaranteed. It is crucial to be vigilant when signing contracts yet it remains difficult to do so with all the legalese.
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The opinions on this page are for general information purposes only, and are not legal advice on which you should rely. Please consult with a lawyer if you want legal advice.