Key Considerations in Commercial Contracts

Key Considerations in Commercial Contracts

Every kind of commercial contract will have its own individually negotiated and agreed terms (for example what is to be supplied; where; how; when; the price for supply; quality etc) all of which may be determined by the parties involved and unique to the particular agreement at hand. However, other terms and considerations will have a more general and universal application and will need to be thought through in the drafting of any agreement, regardless of subject matter. Some such terms and considerations are as follows:

ESTABLISHING AN ENFORCEABLE AGREEMENT

It is famously said that “if it looks like a duck and quacks like a duck, then it probably is a duck”, however in the case of contractual agreements this phrase isn’t exactly correct. A legally binding and enforceable agreement is not simply established by virtue of the fact the agreement is embodied in a way which makes it resemble a contract. In fact, the law requires something more. One must demonstrate:

– Intention to be bound;

– Acceptance of Terms; and

– Consideration (an exchange – e.g. goods in exchange for payment).

It is only once the above factors have been established that a legally binding agreement is created.

WHO MAKES THE AGREEMENT

It is obviously important that the agreement clearly identifies the parties to whom it will apply. This is not only a matter of importance in terms of practical identification of parties involved. It warrants further consideration because contract
law dictates that a contract can only be enforced by and against a person who is a party to it and this rule will apply even if the agreement is made expressly in order to confer a benefit upon a third party. The harsh effect that this rule may create is
somewhat mitigated by certain developed exceptions (for instance agreements made by agents) but nonetheless demonstrates the critical importance that establishing the correct parties holds. A well drafted agreement will expressly state whether the agreement does or does not intend to confer a benefit upon a third party.

Furthermore, potential variation of the parties must be considered at the drafting stage, with appropriate provision being made
for novation (variation by introduction of a new party), assignment (the benefit but not the burden of a contract may be assigned) etc.

VARIATION OF TERMS

However well initially drafted, as time passes, certain elements of any agreement may need to be varied. It is worth considering this possibility in early drafting because a variation which is permitted by the terms of the original agreement will be binding without the necessity for fresh consideration to be applied. It must be noted that terms permitting variation must be considered against the Unfair Contract Terms Law 93 of 1996 which places particular emphasis on protection of consumers and would probably not (for instance) permit the unfair unilateral variation of an agreement by a commercial enterprise doing business with
individual consumers.

ENTIRE AGREEMENT

Statements made during the course of negotiations may be binding upon the parties, if it can be said that the parties intended that they be so. For this reason where appropriate a so-called ‘entire agreement’ clause is often included which will strengthen the supposition that no statements made outside the written agreement are intended to have legally binding effect.

TERMINATION

When entering into a contract it is easy to forget the exit. However, when and how an agreement will end is a critical onsideration when entering a legal relationship. There are a number of ways in which an agreement may end and it is a key consideration to ensure that at various stages of a legal relationship options are available for exit should they be required. There are a number of
ways in which a contractual relationship can end:

– Termination – by virtue of contractual provision allowing for mutual or unilateral termination in certain specified circumstances;

– Discharge by full performance – ie all obligations under the agreement have been performed;

– Breach – a breach of contract will not in itself discharge the contract, but an innocent party may be permitted to treat himself as being discharged under certain circumstances;

– Frustration – in rare cases – a contract will be deemed automatically discharged where it becomes illegal or otherwise impossible (by an event unforeseen at the time of contract) to perform.

REMEDIES

It is always prudent to consider the possibility that the other party will not perform his part of the bargain and whilst it may seem a remote possibility during the negotiations stage, when focus tends to rest on what it is hoped will be done, it certainly pays to be cautious and include provision for what will happen in the case that things do not go according to plan. Inclusion in an agreement of self-help remedies can be highly reassuring as well as practically effective in the event that problems occur. A commercial agreement may include provision to allow one party to withhold performance in the event that the other party breaches or in other specified circumstances. The right to set off may also be explored and application of interest on late payments may be included. Forfeit of deposit, or similar prepayments, may also be provided for under appropriate circumstances.

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Whilst every commercial agreement differs substantially in individual content, there are certain contractual considerations which will always need to be given due thought. A well prepared agreement will protect the client not only in relation to the anticipated outcome, but also in relation to unexpected happenings, ensuring that whatever the outcome of the bargain, there are always options available.

Michael Chambers and Co. LLC are experts in contract law and can assist clients with every stage of contractual negotiation, conclusion and enforcement. If you wish to speak to one of our lawyers, then please contact us.