How to read a commercial contract

Reading time – 5 mins

A commercial contract (Commercial Contract) is a legally binding agreement between two (2) or more parties that contains the terms and conditions for a mutual exchange of value, such as goods or services for financial compensation.  This article aims to assist the reader on how to understand the contents of such a document.

A Commercial Contract can take many different forms depending on the following factors:

• the industry-specific legislation that applies;
• the general legislation that has to be complied with; and
• whether the contract is for the sale of goods or services or both.

Note that the above taxonomy is for discussion only, as such a neat break-up is unlikely to apply to all situations.

Industry-specific legislation

Depending on the commercial field, a Commercial Contract may be required to comply with specific industry legislation.  In the case of a Franchise Agreement, the content and form of this Agreement must comply at least in part with the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Franchising Code of Conduct).  This includes the addition of various clauses that must be included for the contract to comply with the Franchising Code of Conduct.

Other examples include building contracts in Queensland that must comply with the Queensland Building and Construction Commission Act 1991 (Qld), and Standard Form of Agreements for telecommunications contracts that must comply with the Telecommunications (Consumer Protection and Service Standards) Act 1999.

General legislation

Irrespective of the industry-specific legislation that must be complied with, all Australian contracts have to comply with the rights and obligations contained in Schedule 1 Competition and Consumer Act 2010 (Cth) and certain parts of the Corporations Act 2001 (Cth).  In short, a well-drafted Commercial Contract will comply with both industry-specific legislation and the obligations imposed generally by Australian law.

Contracts for the sale of goods or services or both

The rights and obligations that apply to a Commercial Contract for the sale of goods will differ from those that apply to a provision of a service.  This is due, in part, to the ownership of the goods sold passing to the buyer and the contract being discharged by performance.  On the other hand, a contract for the provision of services typically entails ongoing obligations and commonly includes clauses addressing termination and the implications of termination.

General form of a Commercial Contract

The form of each Commercial Contract differs depending on the preferences and style of the law firm that was responsible for its preparation.  For illustration, the below shows the standard layout for contracts prepared by Dundas Lawyers:

• Cover page: The cover page is the introduction to the name of the agreement and the parties involved.
• Table of contents: The table of contents lists all the clauses in the contract and provides a reference to their corresponding page and clause number.
• Parties: This section contains detailed information about the parties that are bound to the terms of the contract, including their complete legal names and contact information.
• Recitals: The recitals section is found under the Parties section and provides context and background regarding the subject matter of the contract – see our article Are the recitals in contracts binding? for more information.
• Definitions: The definitions section contains an alphabetised list of terms that are found within the body of the contract that have a special meaning.
• Interpretation: The interpretation clause, typically included after the definitions for convenience, reflects a firm’s view on which clauses require interpretation based on the rules found in the Acts Interpretation Act 1901 and a variety of other sources such as the Property Law Act.
• Major items Schedule: The major items section is a table found typically towards the beginning of a contract that highlights the important commercial terms of the contract to the attention of the parties. This is not something that is in all contracts as it is a table of information that certain firms may include, while others may decide against it.
• Operative part: The operative part contains the terms and conditions, rights, obligations and responsibilities of the parties to the contract.
• Commencement: The commencement section contains the rules that define when the contract starts.
• Conditions Precedent: A conditions precedent clause states that the terms of the contract will not commence unless and until the specified “condition” occurs.
• Contract-specific rights and obligations: This section contains any clauses required to be implemented in the contract because of industry-specific legislation.
• Termination and effects of termination (if services): The termination section contains the circumstances, procedures and consequences related to the cessation, failure to perform or cancellation of the contract.
• Warranties: The warranties section contains any assurances or guarantees made by one party to another regarding the quality, condition, or performance of certain aspects of the goods or services being provided. These assurances serve to instil confidence in the other party and provide recourse in case the promised standards are not met.
• Indemnities: The indemnities section contains clauses wherein one party agrees to compensate or protect the other party from specified losses, damages, liabilities, or expenses that may arise under certain circumstances.  These provisions are commonly used to allocate risk between the parties and ensure that one party is not unfairly burdened with the consequences of certain events.
• Consequential loss: The consequential loss section typically contains clauses that seek to limit the liability of consequential losses (indirect loss) and place restrictions on the extent to which one party can be held liable for such losses.
• Limitation of Liability: The limitation of liability section works similarly to consequential losses but sets a cap or restriction on the amount of damages one party can be held liable for in case of a breach of contract, negligence, or other legal claims arising from the contractual relationship (direct loss).
• Dispute resolution: The dispute resolution section outlines procedures and mechanisms that parties can agree to follow in the event of a disagreement or dispute arising from the contract.
• General provisions: Also referred to as “boilerplate provisions”, this is a section that contains standard clauses typically included at the end of the contract that address various administrative, procedural, and miscellaneous matters, but do not directly relate to any substantive rights or obligations.
• Signature page: The signature page, usually found at the end of a contract but not always, is where parties physically sign to confirm their acceptance of the terms.

The above is a general taxonomy of how a commercial contract can be structured.  Of course, each law firm will choose to adopt is own structure and there are also significant differences between the way that contracts are structured and drafted by law firms in different countries.

Tips for reading a Commercial Contract

Useful tip 1 – Read and understand the definitions

When reading a Commercial Contract, the first thing to do is to read the definitions or defined terms.  If drafted properly the defined terms should be capitalised throughout the document.

Useful tip 2 – Understanding the legislative framework

If you understand what legislative framework applies, it can help clarify why certain clauses are included.  For instance, the Franchising Code of Conduct mandates specific disclosures and obligations, which explains the presence of such related provisions in franchise agreements.

Useful tip 3 – Check the cross-references

Cross references in Commercial Contracts point you to other sections that are relevant to the clause you’re reading.  It’s important to follow these references to understand the context and implications of each clause fully.

Useful tip 4 – Seek legal advice

If you’re unsure about any part of a Commercial Contract, it’s best practice to seek legal advice.  Legal professionals such as the Dundas Lawyers team can help you understand complex terms, identify potential pitfalls and ensure your interests are protected.

Links and further references

Legislation

Competition and Consumer Act 2010 (Cth)

Corporations Act 2001 (Cth)

Further information about commercial contracts

If you need a Commercial Contract drafted or need advice on its meaning and enforceability, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

---

Related insights about contract law