Contracts with Suppliers or Other Third Parties
Virtually all businesses deal with contracts of one form or another.
These can include contracts with suppliers or vendors, or contracts with other third-party service providers. Most businesses will have contracts or agreements with their own clients or customers which govern the relationship between the parties.
While standard-form printed contracts are increasingly common, a business contract or agreement does not have to be in writing to be legally enforceable. A verbal or ‘handshake’ agreement is just as binding as a written contract for most commercial contracts, although in cases where agreements are not put in writing, disputes can arise over the specific terms of what was agreed to. There is also an exception to this general rule as contracts respecting land or a disposition of land must be in writing. As a general rule, it is good business practice to put key agreements in writing.
If a dispute arises, the very first thing to do is review the contract carefully. The terms of the contract govern the relationship between the parties and will set out each party’s obligation. If the terms of the contract have not been complied with, the contract will often set out the rights and remedies available to the party that is not in default.
In addition, the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71, found that in regards to the performance of all contracts, the contracting parties owe a duty of honest performance flowing from a common principle of good faith. This means that parties to a contract must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.
It is important to carefully review the section of the contract dealing with rights and remedies on non-compliance. Often the non-defaulting party must give some notice of the default to the other party and give them an opportunity to cure the default before other steps can be taken. If the defaulting party fails to cure the default, then the contract may specify whether the non-defaulting party can then terminate the contract (and how notice of that termination is to be given). In some cases, the contract may provide for liquidated damages for breach – a set sum of money payable to the non-defaulting party. In other cases, the non-defaulting party may have to make a formal claim for damages for breach of contract. In some situations, the contract may contain limitations of liability which restrict the ability to claim for damages or place limits on the amount of damages that could be recovered and these limitations need to be considered when settling the dispute as they may affect your best approach.
In many cases, the breach of contract arises because one party has not paid for goods or services rendered pursuant to the contract. In that case, provided the non-defaulting party has discharged their obligations under the contract, they can advance a claim in debt against the non-paying party. More information on Debt Claims can be found in that section of this website.
Formal Dispute Resolution Mechanisms
Many contracts will have specific provisions governing how disputes are to be resolved. It is not unusual for the contract to specify where claims for breach of contract are to be brought or what law will apply. Many contracts will have formal dispute resolution mechanisms built in – for example, mediation or arbitration. Depending how the contract is worded, these dispute resolution mechanisms may be mandatory – meaning that the parties cannot sue in the courts to enforce their rights under the contract but rather must follow the procedures set out in the contract. More information on Arbitration can be found in that section of this website.
If the contract has no termination date, ending the contract requires some care. For example, if you have been regularly supplying goods or services, you will need to give sufficient notice before terminating. It is important not to cause harm by ending a contract without sufficient notice as a damages claim may be brought against you for failing to give adequate notice. You may wish to obtain legal advice prior to terminating for this reason.
Some written contracts can be quite complex and are often written in complicated legal language. Standard-form contracts, while convenient, may not be appropriate for use in every situation. In addition, standard-form contracts may be quite one-sided in favour of the party who drafted them and this should be evaluated before an agreement is made. Also, a standard form contract may be read against the party that drafted it, where it is ambiguous, which is another reason to avoid them.
Where standard-form contracts are frequently used, it is prudent to have a lawyer review standard forms in order to determine whether changes need to be made to properly protect the interests of the respective parties. In some cases, for example involving particularly large or significant transactions, it is advisable to have a lawyer prepare a more customized agreement in order to ensure that the terms of the agreement between the parties are properly documented, and hopefully minimize any disputes.