One of the much-despised realties for business owners is that they must read and sign many contracts on a daily basis.
Often, those contracts are filled with legal jargons, making them almost impossible to understand.
Today, Sabrina, principal lawyer from Varity Law, will walk everyone through 7 relevant and common clauses in business contracts.
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Not Understanding Contracts Usually Not a Viable Defense
Frequently, our clients would have signed contracts that is completely one-sided and against their interests without reading or understanding them thoroughly. Unfortunately, as long as they signed the agreement, they are legally bind to everything that is on it. To argue that they did not understand the agreement is often not accepted by the Courts. Thus, it’s crucial to get a crystal-clear understanding – fine print of all – of any documents before you sign.
As for the person writing the agreement, it’s always good to include clauses that recommend the other party to either hire a lawyer to interpret the agreement or to voluntarily waive lawyer review requirement. In most cases, this will eliminate any risk (though very little risk to begin with) that the other party may succeed in arguing they did not understand the agreement before signing it.
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Compensation vs. Specific Performance
When one party breaches a contract, the most common solution is for the breaching party to pay the innocent party money. Very rarely will Courts rule in favour of specific performance – which is forcing the breaching party to stop the breach and complete their contract obligations. In construction contracts, often the innocent party prefer specific performance, because it’s difficult to find a replacement construction company after so much work (or damage) was already done by the first company.
However, in most cases Court will ask the innocent party to find a replacement party to fulfill the contract and ask the breaching party to pay for any damages suffered by the innocent party.
Here, it’s important for the innocent party to properly document actual damages that it suffered – such as property repairs fee, furniture storage fee, etc. Other non-tangible damage, such as mental stress and suffering, are harder to quantify and Courts are usually unwilling to award those.
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Non-Solicitation Clauses
Non-solicitation clauses are frequently used to bind parties after they end a contract. It aims to prevent all contractual parties from soliciting former employees and clients from when the parties worked together and the contract is still effective.
For example, the contract established a partnership relationship between Joe and Claire. If Claire decides to leave the partnership later on, the non-solicitation clause would require her not to solicit the partnership’s employees or clients.
However, in practice this type of clause has limited use, because clients and employees are not assets that can be “owned” by any business. They are free acting agents who may choose with whomever they work with. Thus, absent any obvious solicitation, if the employees and clients voluntarily chose to leave with Claire, there is little Joe can do.
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Non-Competition Clauses
Non-competition clauses prevent all contractual parties from competing with the business relationship established by the contract, either during or after they leave the business, or both.
However, to be valid, non-competition clauses should not be limited in scope in terms of time, geography, and industry.
For instance, an overly broad non-competition clause would be: Claire shall not operate any food related enterprise indefinitely in Canada.
A more narrow and more enforceable non-competition clause would be: Claire shall not operate a north American style coffee shop for a period of 5 years within 5 kms of the parties’ old business.
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Punitive Clauses
Punitive damages are aimed to punish a party if they breach a contract. In general, Courts are resilient to enforce punitive damages, and prefer if the breaching party compensate the innocent party for actual damages suffered.
Punitive clause example: Claire shall pay Joe $100,000.00 if she breaches any term of the agreement.
Actual damages example: Claire shall pay Joe for any and all damages suffered by him due to Claire’s breach of the agreement.
Here, again, it’s important for Joe to properly document all of his actual losses/damages.
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No Consideration Clauses
In general, contracts are meant to be a give and take relationship. While the Courts usually do not care about whether the “give and take” is fair, meaning that if Joe decides to enter into an one-sided contract with Claire, then the parties’ choice should be upheld — Courts do not like when Joe gives Claire “something for nothing”.
Therefore, if Joe states he is transferring to Claire 100 shares for $10,000.00, it’s fine. But if Joe states he is transferring to Claire 100 shares for no consideration, then it may be hard to enforce.
Nevertheless, “consideration” does not need to be money per se. Instead, Joe can say he is giving Claire 100 shares in exchange for her time and expertise with the company.
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Contracts vs. Legislation
It’s important to keep in mind that legislation always triumph contracts. Therefore, if there is a conflict between the legislation and the contracts, legislation always prevails.
For instance, Ontario legislation Employment Standards Act, 2000, S.O. 2000, c. 41 dictates that an employer should not withhold tips or other gratuities from an employee. If the employment contract then says that the employer is entitled to those tips, then the legislation would win.
In areas where legislation is heavy, such as employer-employee contracts, it’s best to have a lawyer look over or draft the agreement for you, to avoid including unenforceable clauses.
Conclusion
Legal agreements can be daunting for many business professionals. Often, the business owners are unsure of which clauses to include in the agreements and how to property draft or read them. Hopefully, this article gives you a good start and overview of some of the most common clauses in business agreements. Of course, it’s always ideal to have a knowledgeable and experienced lawyer walk over each clause of the contract with you to ensure you are protected before signing that binding document.
This article is only meant to give general legal information. For legal advice on your specific situation, please consult a legal professional.
Yi Dan (Sabrina) Ding is the Owner & Principal Lawyer at Varity Law Professional Corporation. Varity Law is a one-stop-shop law firm offering immigration law, business law, real estate law, and wills & estates law services.
To learn more about your business law options, book a free 30 minutes consultation with us by clicking HERE.
