Although there are numerous types of contracts and each contract contains its unique terms, there are some standard “boilerplate” terms that are likely to be included in every business contract. It is important to understand the clauses before you sign any contract, as they will be legally binding and may impose serious obligations on you and/or your company.
This is a non-exhaustive list and there are many other contractual terms which are typical to business contracts. To protect yourself and your newly established business, make sure you read through the contract and understand all the clauses before you sign any contract. If any doubt, ensure independent legal advice is obtained.
- Establishing an Agreement
- General Contract Clauses
- Force Majeure Clauses
- Alternative Dispute Resolution
- Jurisdiction (Choice of Law) Clauses
- Forum Selection Clause
- Entire Agreement Clause
- Intellectual property
Establishing an Agreement
All contracts begin with identifying the parties (whether as an individual or as a company), this includes specifying the names and addresses of the parties. The first paragraph often states the type of agreement and the date of contract. For example, “This Joint Venture Agreement is entered into as of [date], between Company A, [office address], and Company B, [office address].”
The contract should record the agreements between the parties. To form a legally binding agreement, there must be offer, acceptance and consideration. An offer is a party’s intention to create a legal relationship and an acceptance is an unconditional agreement to the offer. Consideration is something of value to or detrimental to the contracting party which is provided by one party to another. The most common considerations are money and/or benefit accruing to the other party. A typical contract would set out the respective rights and duties of each party. For example, “Party A shall perform [description of the work] in compliance with this contract; and Party B shall pay [an amount of money] to Party A.”
Regarding the payment of the agreement, there are many other things that you may wish to specify in the contract, such as the credit period and payment method. Parties may also specify whether the payment should be made through bank transfer or cash settlement; monthly settlement or quarterly settlement; direct settlement or settlement through representative…etc. For example, “Party B shall pay [the price] through bank transfer to Party A within thirty (30) days after the day of receipt of an invoice.”
General Contract Clauses
Apart from basic clauses forming the agreement, the following are clauses are often included in commercial contracts.
When one of the parties (partly or completely) fails to perform its duties and breaches the contract, the other party may seek remedies from the defaulting party.
When a contract is breached, there are often lengthy disputes over how much should be paid to the innocent party. To reduce this, a contract can state a fixed sum of damages in advance of an actual breach. This type of damage is called ‘liquidated damage’.
Only fair and proportional liquidated damages would be awarded by the court, and a clause which intends to penalize the breaching party would be unenforceable.
Unforeseeable events may affect the performance of a contract, hence these terms allow parties to plan and risk allocation by dictating what happens when defined events occur. Examples of events include: epidemics, natural disasters, strikes and riots. Possible consequences include: suspension of contract, cancellation, extension of time and excusal from obligation.
Whether or not there is a fixed duration, a contract should include a termination clause to allow parties to end the contract when certain situations arise. Typically, this addresses circumstances when a contracting company ceases to carry on business, becomes insolvent, is unable to pay its debt, or is in material breach of the agreement. If those circumstances are provided in the contract, the other party would be able to terminate the contractual relationship prior to the original ending date.
Alternative Dispute Resolution
As a start-up company, expensive law suits can be very damaging to your business. This clause ensures that parties would arbitrate or mediate on any disputes instead of litigating in court.
Both arbitration and mediation are arguably faster and cheaper alternative methods to solve civil disputes between parties outside a courtroom.
Arbitration is binding on the parties. Some contracts may also specify the law, the language, and the forms of disclosure to be used in arbitration.
Mediators, however, do not determine the case but assist the parties in forming consent and solving disputes. Mediations are generally better suited for claims that involve non-legal issues such as relationships and personal disagreements.
Jurisdiction (Choice of Law) Clause
The ‘Jurisdiction’ of the contract refers to the particular laws that governs the contract, which would be applied when litigation arise from or is in connection with the contract. It is a very important clause as different jurisdictions may have very different rules. Also, it is not specific enough to merely mention a country, as a country may consist of more than one jurisdiction. For example, Hong Kong, Macau and the PRC are separate jurisdictions. A defence which is available under Hong Kong law may not be available under the PRC law.
Forum Selection Clause
‘Forum’ refers to the particular court that hears disputes arising from or in connection with the contract. It is important to have a clear choice of court, especially when working with Mainland, overseas or multinational companies, as they may prefer to have the case heard outside Hong Kong. Moreover, a case being heard in Hong Kong does not necessary have to be governed by the Hong Kong Law. Hong Kong judges are able to apply rules of other jurisdictions, for example, PRC law.
This clause is to clarify that the contract represents the entire agreement between the parties, and that the parties had agreed to nothing else apart from what have been stated in the contract. Any previous negotiations and promises, in the absence of fraudulent misrepresentations, would not be part of the agreement. This ensures certainty, as only the terms contained in the written document are enforceable.
Contract terms can be ruled unenforceable by the court in litigation – it would be very inconvenient if the entire contract was affected since that would necessitate re-negotiations and could disturb ongoing business operations. This clause allows contract clauses to be dealt with separately so that although certain terms are unenforceable, the rest remains enforceable.
This clause protects the intellectual property rights of the contracting parties. This may specifies whether they are authorized to use each other’s intellectual property and what are the conditions or limitations imposed. Intellectual property includes many things such as patents, trademarks, copyrights and designs.
A business may wish to protect their intellectual property from their competitors or the general public, but at the same time it’s necessary to share some sensitive information with the other party for basic business operations, for example: production methods and business strategy. Hence they are often included employment contracts signed at the commencement. This clause prohibits parties from disclosing data within a certain scope to other third parties and the public.
Subcontractors are third parties that are hired to fulfil obligations in the main contract. For example, project developers frequently hire construction workers, plumbers and electricians to do most of the work for their client.
Parties can prohibit or restrict the use of subcontractors. It is also common to require prior approval from the other party, or to impose standards for the qualifications of the subcontractor.
Parties can also assign liability for the subcontractor in case they are negligent and breach the main contract. For example, this main contract can contain a term saying Party A will be liable for the subcontractor’s work.
This is helpful since, as there is no contract between Party B and the subcontractor, Party B would otherwise be unable to recover a remedy from subcontractor if necessary.