Orr Litchfield
Solicitors and Business Lawyers
Solicitors and Business Lawyers
Here are a few summary extracts of contract law that all entrepreneurs should have knowledge of – preferably before you sign a commercial contract and whatever the size of the other contracting party.
Courts have shown a willingness to uphold exclusion clauses in contracts negotiated between commercial parties with equal bargaining power and will interpret clear words in exclusion clauses with respect to their natural meaning.
Examples of types of loss that are often excluded in commercial contracts are: loss of profits, loss of anticipated profits, and indirect losses. You can also exclude liability for negligence but you must make this clear in the contract.
A time-bar for a party to notify the other of a liability claim can also be an effective exclusion of liability. Specify types of claim and state a CAP for aggregate claims. Obtain insurance where possible to cover potential claims against you.
Structuring your exclusion clauses is important. Avoid long paragraphs and use separate clauses for different types of exclusion of liability. If your contract ends up in the courts and the courts decide to strike out, for example, an exclusion of liability for loss of profits, but the phrase is embedded in one long clause, the whole clause could get struck out, resulting in you becoming potentially liable for all losses.
If a contract is in standard form or drafted by one party, the contra proferentem rule dictates that ambiguities in a contract should be interpreted against the party that drafted the clause.
The contra proferentem rule is particularly relevant in ambiguous exclusion of liability clauses. If the language and meaning of an exclusion clause is clear, it bars a party from relying on the contra proferentem rule, particularly so in relation to a commercial contract negotiated between parties of equal bargaining power.
The contra proferentem rule only applies if there is ambiguity in contract interpretation. For example, if a party excludes liability for anything and everything, the other party may be able to rely on the contra proferentem rule.
There is no legal concept of ‘good faith’ and you cannot use the term to defeat the express words of a contract. However, the courts follow certain principles when determining whether or not a party has not acted in good faith. In essence, conduct which is dishonest, commercially unacceptable, or which undermines the contract's purpose may be held to breach a good faith clause.
If you include good faith terms in your contract, explain what it means, e.g. to act honestly and not in bad faith” then define what “bad faith” means, e.g. negotiating with third parties without the knowledge of the other party.
A repudiatory breach is not legally defined but is normally a breach which either deprives the other party of substantially all the benefit of the contract, or which breaches one of the key terms of a contract. Such a breach can give rise to a right to terminate a contract immediately. For example, if you contract with a cleaning company to clean your offices and they never show up, this is likely to be a repudiatory breach allowing you to terminate your contract. However, if a breach can be rectified or remedied by the defaulting party then it is unlikely to be deemed a repudiatory breach.
A material breach is also not legally defined but has been interpreted by the court as a “substantial” or “serious” breach – but not necessarily repudiatory – that allows the non-breaching party to claim damages for losses. If the breaching party acted unfairly or in bad faith, the court is more likely to characterise the breach as material.
Given there is no legal definition of repudiatory or material breach, it is advisable that you define types of breach within the contract including whether they trigger the innocent party’s right to terminate the contract. If the terms of the contract specify the meaning of different types of breach, the court will look to those provisions to make its determination.
Always consider very carefully the terms of the contract before you decide to terminate because if you wrongly terminate the contract, the other party could argue that the termination is in itself a repudiatory breach of contract and bring a claim for damages.
Whether you are planning to enter into a new contract or would like us to review your existing contracts or any part of them, we can help you to plan, prepare, review and implement your contracts in a way that helps you to protect and develop your business.
If you would like more information about any aspect of commercial contract law or would like to discuss a potential or existing contract or commercial contract law matter, please email us at enquiries@orrlitchfield.com, complete an Enquiry Form or call us.
