As a tech startup you are probably forming agreements with other companies, such as supply, service, and production agreements, among others. Commercial transactions are fundamental to your technology business and translating this into a contract will formalise any agreements you have with other parties. Commercial contracts will be relevant to all aspects of your business!
Contracts can be very broad, and it is difficult to determine what exactly needs to go into your agreement. Below we will go through a brief overview of the elements and some common clauses found in commercial contracts. Whether you will be forming these contracts yourself, or are outsourcing legal services, you should consider incorporating these into your agreements.
To begin with, a commercial contract will start with preliminary clauses.
What do preliminary clauses consist of?
- Document title;
- Parties bound by the Agreement:
- Ensure that you have the full name of the person/company that will be bound by the agreement; and
- Include the ACN or ABN of corporate parties, and the full name and office address of the company.
- This provides the intentions of each party at the time of entering into the agreement. It will put context around the agreement, which will be considered if there is any dispute surrounding a specific clause or provision.
Definitions and interpretation
In this section you will list terms used throughout the agreement and provide definitions for them in these specific circumstances.
For example, as a tech business you have valuable assets in your Intellectual property. Therefore, you could incorporate a concise definition of intellectual property in relation to this agreement and each time the term is mentioned, the same meaning will be given to the term.
In the case of a dispute, having clear and concise definitions will protect your company from any ambiguity and make the agreement clearer.
What are operative provisions?
The operative provisions form the main part of the contract and contain the key rights and obligations of each party. These provisions may differ with each agreement, depending on the type of contract being drafted and the obligations of the parties. Below are common operative provisions that form commercial agreements:
- Effective date: The date the agreement comes into effect or commences;
- Term of the agreement: How long the agreement will be in force for;
- Obligations of each party: This provision will set out exactly what each party is required to do under this agreement;
- Intellectual property: This is a particularly important clause for a tech start up as you likely have valuable assets in your IP, especially if the other party will be using your IP under this agreement. This section will allow the parties to the contract to protect their IP rights including trademarks, patents and business names;
- Compliance: This will require the parties to comply with any applicable legislation or relevant corporate policies;
- Confidentiality: This clause is particularly important as a technology business. It could be detrimental to your business if the other party uses confidential information outside of this agreement. This clause will impose obligations on both parties regarding confidential information which may be exchanged during the agreement;
- Payment: this is necessary for all commercial transactions, you need to provide clauses on pricing, invoicing, GST, rebates, price reviews, and anything else relevant to the price and payment under the agreement. You can use the schedules to provide more detailed information on this provision;
- Liability: This clause will limit the liability of your party in the case of a breach:
- if you are selling goods/services, try and limit your liability to a fixed sum; and
- if you are purchasing goods/services, try to guarantee that the seller’s liability is not limited and that they are responsible for losses that could occur to you.
- Indemnification: An indemnification clause is a promise to compensate the other party in the case that a party’s actions cause harm to the other or cause a breach of a third party;
- Privacy: It needs to be ensured that the Australian Privacy Principals (APP) are being complied relevant to the circumstances of the contract;
- Dispute resolution: This will specify how parties will deal with a dispute if it occurs, it’s important to include this provision as a precaution. Arbitration and mediation provisions are commonly used in these clauses in an attempt to resolve disputes before taking the matter to court;
- Termination: This provision is important as it will clarify exactly when a contract can be terminated. This clause will likely include actions of the other party that could lead to an immediate termination, or where an agreement can be terminated if breaches are not resolved. It is also important to provide obligations upon termination. Particularly for a tech company, you may require the other party to cease use of confidential information and intellectual property, among other things; and
- Delivery and acceptance: This clause will provide acceptable standards for the delivery and acceptance of goods/services under the contract and should take into account the Sale of Goods Act.
What are boilerplate provisions?
Boilerplate provisions will come next in the contract. These are a range of general provisions that are found at the end of most commercial agreements, that regulate the way in which the contract should operate. They cover common issues or requirements of a contract, and often exclude or limit liability. You need to ensure that these provisions meet your requirements, as they are often overlooked.
- Notices: This provides how the parties will communicate i.e. how they should give and receive notices, and when they will be considered as received;
- Variation: This provides what procedures the parties will follow if they wish to make a change to the agreement. Typically, this will be in writing and signed by each party;
- No waiver: This aims to protect party’s rights under an agreement and ensure that neither party waives their rights if the other breaches the contract, even if there is a delay in enforcing their rights;
- Assignment: Whether the rights, benefits, and obligations of a party under a contract can be transferred to another, or the circumstances in which they can do so;
- Counterparts: It is not always practical for each party to sign a copy of an agreement; this will provide whether different counterparts will be allowed to form the agreement;
- Severability: This will provide the effects of a clause being found as unenforceable, generally it will provide that the remainder of the agreement will be intact;
- No merger: This clause provides that the intention is for the party’s obligations under the agreement survive completion or termination;
- Further action: If further action is necessary to carry out the obligations of this agreement, such action can be authorised to be taken;
- Relationship of the parties: Provides the parties’ intentions about the type of relationship they wish to have with one another and limits unintended relationships. It is common for two separate companies to be considered independent contractors;
- Entire agreement: This provides that this is the ‘entire agreement’ and typically states that the contract supersedes all prior representations and understandings;
- No reliance: This provides that the parties are only relying on the contract itself and not any other representations;
- Default interest: This provides the amount of interest payable on sums that are due under the agreement but are unpaid;
- Force majeure: This can be an important provision as it prevents parties from being found liable for not being able to perform their duties under the contract if it is due to an event outside of their control; and
- Governing law & jurisdiction: Provides which courts will have jurisdiction to resolve a dispute, and the choice of governing law for the agreement.
When are schedules used?
Commercial agreements often contain schedules, that will be referred to in the main agreement. Schedules contain more detailed information on the matters referred to in the contract. For example, you may include a detailed list of the scope of the work for the other party.
How is the contract executed?
Executing a contract refers to the signing and ultimately the completion of a legal agreement. It is important to ensure agreements are executed correctly, as it could be considered unenforceable if not. Remember that agreements do not have to be signed to be considered enforceable, however correctly executing your contracts is essential in case of any disputes in the future.
Make sure you clearly state whether the document is that of an agreement or a deed, as deeds have a different process for execution.
Most commonly, if the two parties to the agreement are companies the agreement is executed by having the directors and company secretaries sign, however this can vary dependent on the parties to the agreement.
This serves as a guide to just some of the common clauses of a commercial contract and the general form they take. It is important your contracts are tailored to the specific commercial transaction, and clauses altered respectively to suit the agreement. As a technology business, outsourcing legal services is an effective way in ensuring your commercial contracts are comprehensive and relevant to the required transaction.
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