A commercial contract is a legally binding agreement between two or more parties to fulfil an obligation. A contract can be entered into for a number of different reasons – like sale and purchase agreements; partnership agreements; lease agreement of business premises; lease agreement of plant and equipment and employment agreements. A legally binding contractual obligation requires the fulfilment of 3 different aspects – offer, acceptance of offer and consideration.
A commercial contract between businesses for supply or sale of goods is in the nature of Business to Business Contracts (B2B contracts) and the Sale of Goods Act 1923 is applicable to such transactions.
CONSIDERATIONS BEFORE ENTERING INTO A CONTRACT
Commercial contracts regarding supply or sale of goods are time bound contracts and require precision of performance. Thus, a few factors need to be considered before the execution of a contract for supply or sale of goods. These factors include:
Is the nature of sale or supply
The first question to be determined is whether the contract being entered into constitutes an actual ‘sale’ of goods and when did the incidence of sale take place or whether it is a supply of goods like a hire purchase agreement.
Mode of performance of Contract
The contract should specify how the contract will be performed and at what time should the parties involved should expect progress regarding the contract. If any of the parties is required to undergo a particular step to advance the contract, it should be specified in the contract.
Delivery of Goods
In a contract regarding supply or sale of goods, delivery is of utmost importance. The contract must specify when and where the goods need to be delivered and in what form. The anticipated date of delivery of goods should ideally be mentioned in the contract.
The Personal Property Securities Act 2009 (“PPSA”) encompasses the business of selling or supplying goods on credit or by consignment within its purview. The inclusion of a “retention of title” (“ROT”) clause seeking to retain ownership of the goods until the full payment for goods will bring the contract within the purview of definition of “security interest” under the PPSA. Thus, the PPSA will determine the enforcement mechanism for these clauses.
A contract for supply or sale of goods often involves clauses of guarantee, lien or pledge and these should be included in the contract. The liabilities of each party in case of a breach of contractual obligations should also be included. Nowadays contracts for supply and sale of goods involves question related to transfer of Intellectual Property Rights (“IPR”). The involvement of IPR issues gives a whole new dimension to the parameters of drafting the contract and issues like with whom the IPR regarding a specified product or good sold would vest should be always clarified before entering into the contract.
THE PROCESS OF CREATING A CONTRACT
A commercial contract should always be a written instrument specifying all the legal clauses to avoid future complications. A contract of sale and supply of goods covers many legal implications including Taxation and IPR issues to name a few, and care should be taken to minimise these implications. Our tax lawyers in Sydney can help with these. In case a contract for supply or sale of goods is multijurisdictional, a uniform law should be decided upon to avoid legal complexities.
CLAUSES TO BE CONSIDERED FOR INCLUSION IN A CONTRACT
The following clauses should ideally be included in a commercial contract involving supply or sale of good primarily because of the requirement of time bound completion of the contract. They are:
A commercial contract should contain specified termination clauses in order to avoid legal complication in the event of non-performance or breach of the contract by either party.
A contract for supply or sale of goods should contain a penalty clause to specify the nature of damages to be paid in if case of breach of contractual terms.
Limitation of Liability Clause
Subject the fulfilment of Competition and Consumer Act 2010 (Cth) and the equivalent legislations of the States, a limitation of liability clause for exclusion of any liability may be inserted in a commercial contract.
Conditions and Warranties
The inclusion of conditions and warranties in a contract for sale or supply of goods is important to classify which are the major terms (conditions) or minor terms (warranties) in the contract. Breach of a condition gives the affected party a right to repudiate the contract and claim damages, whereas breach of a warranty gives an option for claiming compensation.
IMPORTANCE OF INCLUSION OF A DISPUTE RESOLUTION CLAUSE IN A CONTRACT
The inclusion of a dispute resolution clause in a commercial contract is increasingly gaining popularity and importance. This clause provides a standard mechanism for dispute resolution in case of a breach or a disagreement regarding contractual obligations by and between the parties. One of the most preferred modes of dispute resolution in case of commercial contracts is Arbitration, Mediation and other Alternative Dispute Resolution (ADR) methods, since it provides a way out from the long drawn litigation process.
Arbitration is also a cost effective solution in case of contracts entered into between parties of different national jurisdictions. In case of a litigation award, there is always a possibility of non-enforcement in the domestic Court system of one of the parties concerned. However, an Arbitration award is enforceable in the jurisdiction of any of the 144 signatory states of the New York Convention.
Commercial Contracts also provide the hierarchy in which the dispute resolution medium should be approached. The ‘Ericsson Case’ is a famous example where the English Court found the construction of the alternatives provided in the dispute resolution clause in the contract in the light of feasibility and practicability.
Australia is also a signatory to the Vienna Convention on Contracts for the International Sale of Goods which provides for uniform rules for governing the formation and performance of contracts for international sale of goods.