Contract Law Does Not Tolerate Sloppy Contract Preparation

An agreement reached may not be enforceable if it is not clear as to the matters agreed by the parties or incomplete as to the essential terms required to make the subject matter work (i.e. all the all the pieces of the puzzle must be there). An agreement must set out all the essential terms clearly.

Judges are there to determine what the parties have agreed upon and enforce it. If the agreement is incomplete, vague and uncertain, judges cannot be sure they will do justice, so they will not intervene at all. In such cases, the contract is void for uncertainty.

The three essential terms to any contract are:

1. the parties;
2. the subject matter; and
3. the price.

Without these terms, there cannot be a contract. However, with business sales, a contract on these essential terms alone is still arguably incomplete. At the very least, it is likely to cause a dispute between the buyer and the seller requiring legal intervention.

A complete business sale contract requires agreement on the following terms:

• exactly what assets are included or not included with the business;
• how the lease for the business premises is to be dealt with (i.e. new lease or transfer of lease);
• what licenses are required for the business and how/when are they transferred or applied for;
• the mechanism for transferring employees and dealing with employee entitlements;
• how the purchase price is to be paid;
• how stock and WIP are to be valued between the parties and what happens if there is a disagreement on value; and
• a date and place for settlement.

Then there are all the other usual terms that are for the benefit of the buyer or the seller. Clauses that benefit the buyer:

• subject to finance;
• subject to due diligence;
• warranties by the seller as to the state of the business;
• arrangements allowing for favourable delivery of possession;
• restraints of trade against the seller or key employees;
• tuition and assistance for the buyer;
• confidentiality;
• trial periods; and
• no debts or liabilities taken over.
• Clauses that benefit the seller:
• what deposit is payable and how it is to be dealt with;
• warranties by the buyer;
• dealing with debtors;
• confidentiality; and
• guarantees by the buyer’s directors.

Contract law is tough on poor and sloppy contract preparation, business brokers must complete contracts thoroughly and accurately, even if it takes more time.

Author

Joe Kafrouni
Legal Practitioner Director
Kafrouni Lawyers

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