Posted on 27 May 2014
3 tips for writing a watertight contract
By Slater and Gordon
Have you ever sat down to write a contract and weren't sure where to start? Whatever the situation, we've put together some simple steps that can help you write a watertight contract and avoid any disputes down the track.
A contract is essentially an agreement between two or more parties to do or not do certain things. It can be as simple as agreeing to buy a product at an agreed price or as complicated as a company agreeing to take over another company.
1. Understand each party’s rights and obligations
It is critical that you have a clear understanding of what your rights and obligations are under any contract that you enter into, as well as what rights and obligations the other party has. This includes understanding a party’s rights to end the contract – can it only be terminated if a party is in breach or can the parties end it at any time?
The contract should set out the procedure for terminating a contract to remove any doubt as to whether a party has correctly terminated the contract or not. Wrongfully terminating a contract (because you did not follow the correct procedure), is considered to be a breach of contract and could mean that the other party can bring a claim against you for breach of contract for any losses they suffer as a result of that wrongful termination.
Unless you understand the parties’ rights and obligations under the contract, you will not know when a party has breached the agreement and what remedies you have in relation to that breach.
2. Put the agreement in writing
Any significant agreement you reach with another party should be documented in writing. This does not mean that verbal agreements are not enforceable. Rather, it reduces the chance of any confusion or uncertainty about the terms of the agreement, which often occurs with verbal contracts.
For example, say you make a call to a mechanic and reach an agreement with them to repair your car for $500. Does that price include GST? Does that price include the cost of any parts that need replacing or that extra? Will you be provided with a rental car while your car is in the workshop?
Sometimes things go wrong because the other party has not done what they have agreed to do; having a written contract protects you against that other party from denying that it was ever part of the deal. As part of any breach of contract claim you have against a party, you must prove what the terms of the agreement are. A written agreement shortcuts this process, saving you time and costs in establishing this requirement.
3. Have all of the terms of the agreement in one place
Not only should the agreement be in writing, but as much as possible, it should also be contained within the one document. Nowadays, parties often negotiate the terms of a contract via email which can result in a large number of emails being exchanged before all of the terms of the agreement are established. This results in the terms of the contract being scattered across a number of emails.
Once all the terms of a contract have been agreed to, they should all be set out in the one document (including an email), confirming all the terms or in a formal deed signed by the parties. This assists parties to identify all of the terms of the contract quickly, saves time, and avoids any confusion.
Slater and Gordon regularly acts for clients who seek to recover losses they have suffered as a result of the other party breaching the contract (whether it is written or verbal). From our experience, following the 3 simple tips above can go a long way in resolving disputes in a timely and cost-effective manner.