Decrypting Legalese in Contract Clauses

Most people understand the bits of a contract that talk about payments or what goods or services are being promised.  But have you ever wondered why contracts are so long, and you have absolutely no idea what half the clauses are even getting at? We’ve written this series as a quick guide to help decrypt the legalese – obscure clause by obscure clause – why it’s there, what it does, and whether it’s important for you.

Entire Agreement Clause

An entire agreement clause, also known as an integration or merger clause, declares that the contract is the final and complete agreement between the parties.

It may look something like this:

This agreement is the entire agreement between the parties in relation to the subject matter and replaces all previous representations or proposals not contained in this agreement.

What Is It For?

When you’re negotiating a contract with client or a supplier, you’re probably going to swap a few phone conversations, meetings, perhaps a proposal, some marketing material and emails back and forth, before finalising the deal. Then you (or the lawyers) might argue about the fine print before everyone finally signs off on the written contract.

The final contract could be quite different from, say, the initial proposal, or marketing pitch.

The entire agreement clause draws a line in the sand on the signing date – everything in the contract was agreed to; anything outside was not.

Having one definitive set of terms rather than having to refer back to other material helps to eliminate misunderstandings later.

When Do You Need This Clause?

Nearly all the time: if there have been negotiations, proposals, or discussions of terms different to those in the written contract before signing, make sure you include this clause.

What Can Go Wrong?

Without an entire agreement clause, a party can argue that things said in the earlier discussions, or proposals or emails, are part of the contract too. For example, the proposal or negotiation emails might have outlined some extra services or standards that apply to the work, which didn’t make it into the final contract. Was the ‘quality guaranteed’ marketing blurb intended to be a binding part of the final agreement? Did the supplier actually say in a meeting that they would meet 100% uptime?

Note: Even with this clause, a written agreement can be changed by later discussions. This clause draws a line in the sand on the signing date – later discussions can still vary the contract (use a variation clause to control this).

If you aren’t using written agreements at all, then please call us and we can explain why this isn’t a good idea.

No Partnership Clause

Often contracts have a clause stating that the agreement is not a partnership. It may also go on state that it’s not a joint venture or contract of employment.

It may look something like this:

Nothing in this agreement constitutes a partnership. It is the express intention of the parties to deny any such relationship.

What Is It For?

The word ‘partner’ tends to be overused in business – for example, ‘sales partner’, ‘solutions partner’ and so on. That’s confusing, because in law, a ‘partnership’ is a specific type of legal relationship. Being a partner – in the legal sense – is risky, because means you could be liable for what your partner does. Even if you don’t use the word ‘partner’ anywhere in the contract, courts can still look at the relationship and decide that it’s a partnership. This is because ‘partnership’ has a broad legal definition: the relationship between persons carrying on a business in common with a view of profit. So this clause is aimed at ensuring that the contract you’re signing isn’t a partnership.

When Do You Need This Clause?

Whenever you don’t want to create a partnership. Especially when the agreement:

  • Isn’t a one-off agreement (the work or payment is ongoing);
  • Deals with jointly owned property (including intellectual property);
  • Allows for shared or split profits or gross returns;
  • Allows for shared or split debts, losses or expenses.

What Can Go Wrong?

Courts can decide that a partnership exists without you intending to create one (or even knowing you have). If a partnership exists, then your rights and obligations under the agreement will change:

  • You are liable for debts incurred by the partner.
  • Profits are split 50-50.
  • The partner can sign you up to debts or agreements without your knowledge or approval.
  • You can be sued for something that the partner did, even if it isn’t your responsibility (joint and several liability).
  • The partner has equal rights in running your business.

These can be changed in an agreement, but if you aren’t expecting a partnership, your agreement probably doesn’t deal with these issues.

Note: Even with this clause, courts sometimes decide you are operating as a partnership. Just changing the name isn’t enough. Saying you don’t want a partnership (this clause) is persuasive, but isn’t the only factor. If you are concerned your circumstances look like a partnership, talk to us about other structuring options for your whole business relationship.

Jurisdiction Clause

A jurisdiction clause defines two important variables:

  1. What law applies if there is a dispute? (choice of law)
  2. What court can hear the case if there is a dispute? (choice of forum)

It may look something like this:

This agreement is governed by the laws of Queensland and the parties submit exclusively to the courts of that jurisdiction.

When Do You Need This Clause?

You’ll find this clause useful for pretty much every contract, just for the sake of clarity. But it’s particularly recommended:

  • in all website terms (because your site is accessible worldwide);
  • for any services available or advertised on the internet, especially SaaS or cloud services;
  • if the parties are in different states or countries;
  • if goods are shipped across state or international borders; or
  • if services are provided across state or international borders.

What Is It For?

Different jurisdictions have different laws – and these laws can affect how a contract operates, or even whether the contract is legal. Even within Australia, there are significant differences between laws in each state and territory. This clause clarifies which set of laws applies.

Generally if both parties are based in the same state or territory, there’s no controversy about jurisdiction. But if the other party is interstate or overseas, then for most contracts, it’s probably in your best interests for the laws of your own home state or territory to apply, because they’re the laws you’re most familiar with (and know how to comply with). And if the worst should happen and the agreement ever ends up as a dispute, it’s also far easier and cheaper to sue (or be sued) in your own jurisdiction.

What Can Go Wrong?

Sometimes the other party to the contract might insist that the jurisdiction is in their favour. If you do agree to this, make sure that you’ve thought it through carefully:

  • Do you know what the laws of that jurisdiction are, and how they affect you and the terms of the contract?
  • What are the chances that this contract might end in litigation?
  • How accessible are the courts and lawyers in that jurisdiction?
  • If your own jurisdiction doesn’t apply, does it mean you have no practical way to ever enforce this contract?

Dealing with overseas businesses raises some extra risks. You should be aware that even if you successfully sue an overseas company here in Australia, you will probably still have to take some additional steps in that company’s home jurisdiction, to enforce your Australian court order. However, even if you never intend to sue the other side, it’s still better to have your own jurisdiction apply to the contract, as that makes it harder for the other party to sue you.

Note: Even with this clause, courts sometimes decide they have jurisdiction to hear a matter anyway (in the interests of justice). A jurisdiction clause will never completely prevent you from being sued in another country.

Also, don’t state that ‘English’ law applies. ‘English’ law is ambiguous. History leads many Commonwealth countries (including Australia) to consider their law to be ‘English’ law.

Assignment / Novation Clause

Assignment transfers the benefit of that contract to someone else. Novation transfers the benefits, rights and obligations of a contract to someone else (effectively replacing the original party). An assignment or novation clause grants, denies, or puts conditions on the ability to transfer.

Note: this article does not deal with Assignment of Intellectual Property (which is a specific type of contract). Instead it discusses assignment of a contract itself.

It may look something like this:

The parties may only assign or novate this Agreement in whole or in part with the prior written consent of the other party. OR

Neither party may assign or novate its rights under this Agreement.

And the archaic legalese version, in case someone still uses it [note: the heirs and successors component has a different effect]:

This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns.

What Is It For?

Ordinarily a contract only grants rights and imposes obligations on the parties to that contract. A third party may benefit from the contract, but cannot enforce it. Everyone else is excluded.

Assignment grants the benefit of a contract to a new party. More importantly, it grants that new party the right to sue to enforce the benefit.

Novation of a contract lets the new party step into the shoes of the existing party, effectively swapping out the old for the new as if that new party had signed the contract to begin with.

An assignment or novation clause (like the examples above) defines who can assign the contract and on what conditions.

When Do You Need This Clause?

If you buy a business, you usually want to keep the current customer base and existing contracts with suppliers (at least for the short term). If you sell a business, you want a clean break from the debts and obligations of your existing contracts. In this case you want the ability to novate your customer contracts.

At other times you may only want to deal with a particular party. E.g. when start a new company, or contracting someone for their unique skills. In this case you want to restrict assignment.

Sometimes you may only want to meet and approve the new party, to make sure you get along, or ensure they have skills your business actually needs.

We recommend you restrict assignment any time high value confidential information is disclosed, as the new party has the same access rights to your confidential information as the original party.

Note: Assignment and Novation clauses can go one way if needed – a clause can grant a Supplier the right to novate, without giving Customers the same right.

What Can Go Wrong?

Without a restriction on novation you may end up bound to a contract with someone you don’t know, with different skills, different views, and a completely different situation from the original party. This can be catastrophic for business – creating stress and deadlock in even basic business decisions.

On the other hand, if you can’t novate your customer or supplier contracts, your business will have a much lower value to a potential purchasor.

Note: this clause doesn’t stop a party ending the contract (in that case clauses about termination will apply).

Severability Clause

If a clause in a contract is unenforceable – usually because it is illegal or too broad – the entire agreement may fail. This clause allows the offending provision to be struck out, while keeping the rest of the agreement in force.

It may look something like this:

If any provision or part provision of this agreement is ruled by a court to be illegal, invalid, unenforceable or in conflict with any law, it will not affect the validity and enforceability of the remaining provisions.

What Is It For?

A severability clause gives the court greater flexibility to retain as much of the contract as is valid and enforceable, when a small problem with only part of it would otherwise make the entire contract unenforceable.

When Do You Need This Clause?

Include this clause in all contracts, but especially in any contract with:

  • a restraint of trade or non-competition clause; or
  • a non-solicitation clause (don’t take our staff or customers).

What Can Go Wrong?

Without this clause, if any part of the contract is unenforceable, usually because it is vague, illegal, or too broad, the entire contract may be struck out.

Please note: a clause may be deemed ‘too important’ for the courts to keep the remaining contract in place after striking it out; and even with this clause the whole contract may fail.

Force Majeure Clause

Most people are familiar with the term Force Majeure, sometimes called an ‘Act of God’, but the clause itself is often misunderstood.

Generally a Force Majeure Event is an event outside a party’s control, that stops or delays them from performing their obligations under a contract.

While the Force Majeure Event is still continuing, both parties’ obligations under the contract are suspended. The contract then resumes from when the Force Majeure Event ends.

It may look something like this (a very broad example):

Neither party is liable for any delay or failure to perform its obligations under this agreement to the extent that such failure is caused by anything outside its reasonable control. Nothing in this clause excuses payment of money due.

Often the clause also includes a long definition of a ‘Force Majeure Event’, specifically including natural disasters, war, industrial action, etc. It may also include requirements to notify the other party of the extent of the outage, steps taken to minimise outage, ETA to resolution, etc.

Contracts also often state that if a Force Majeure Event continues for too long, that either party has the right to end the contract.

What Is It For?

Without a force majeure clause, if a natural disaster or other event entirely outside your control prevents you from performing your obligations on time, you might be in breach of contract. That would mean the other party could terminate the contract and sue you for damages [depending on the termination provisions of the contract].

With this clause, the obligations of both parties are suspended until the event ends, so you can later fulfil your side of the agreement without breach.

Even if the Force Majeure clause doesn’t set out specifics, it’s a good idea to give the other party notice as soon as possible about any Force Majeure Event – including information about the event, what you’re doing about it, and how long you expect the delay to be.

When Do You Need This Clause?

This clause is useful in almost all contracts for services, but especially:

  • agreements with an ongoing provision of services, a long or undefined term, or hard deadlines for performance;
  • anytime performance of services can be affected by things outside your control (e.g. a supplier or third party action is required for your performance);
  • agreements with a Service Level Agreement (SLA), particularly one with rebates.

What Can Go Wrong?

Like insurance, a force majeure clause seems irrelevant – until an unforeseen event actually occurs. There’s nothing like a natural disaster to send lawyers scrambling for contracts to check the Force Majeure clause. Without it, you may be in breach and liable for damages, or the other party may terminate the contract and seek damages, even though there is nothing you can do.

If the clause sets out steps that you must take, follow them, or the suspension may not kick in and you could be in breach for non-performance.

It’s important to keep in mind that a force majeure clause is not a ‘get out of jail free’ card. It is not an excuse for negligence and will not assist you if you should have foreseen or prevented the event, or if your delay is not caused by a Force Majeure Event at all.