Legal jargon for SMEs – How to Understand Your Contracts and Reduce Business Risk

Non-lawyers will know this – legal jargon (aka “legal ease”) can be intimidating, irritating and overwhelming. For business owners, entrepreneurs and SMEs, having a basic understanding of common legal terms will be instrumental for business success and risk management.

What is legal jargon, exactly? Legal jargon refers to specific words, phrases and expressions used by lawyers or in legal documents. Think words like – liability, indemnity and “IP”.

In this article, we demystify some of the more common legal terms used in commercial contracts and explain them (in plain English), highlighting the importance of understanding such terms.

The importance of contracts in business

Contracts are fundamental to the smooth-running of any serious business. Not only does a (good) written contract protect you as a business owner, but it also protects the other parties involved, too.

A contract can be oral, written or a bit of both. Oral contracts (whether fully or partly) can create a high degree of legal risk (think: “he said she said” type disputes) and are generally not recommended. A considered, well drafted, properly negotiated written contract that is signed properly will be mutually beneficial for all involved. Disputes and court action will usually be more common, and more costly, if there is no written contract.

A written contract is also not a bullet-proof vest; you need to know what it says and what it means. If you have or need contracts and you have been gifted a template, downloaded a template, drafted it yourself or otherwise do not fully understand every clause of that contract – take care – you are in high-risk territory.

Common legal terms & their meanings

There are several legal terms that are commonly used in contracts and broadly misunderstood. We identify some of these below, and give a simple and clear (“lay person”) explanation of the term from a legal POV:

·?????? Liability: Liability is a legal responsibility. “I am responsible for maintaining plant and equipment” could read “I am liable for maintaining plant and equipment”. There are different types of liability too (such as limited liability). For example, well written Terms and Conditions (T&Cs) may help a business limit its liability.

·?????? Party: A party is a person involved in a legal matter, whether a contract or a court proceeding. A party can be an individual (human) person or a company/business structure. A contract will have at least two parties but may have more than two parties; the more parties a contract has often the more complex the contract is.

·?????? Indemnify or Indemnity: An indemnity is a legal promise given from one party to another party for specific damage or loss. If you agree to give an indemnity in a contract (to indemnify), then it means you are promising to compensate a party for loss/damage they have or will incur due to a specific event. If you are the party receiving the indemnity, you may be able to claim compensation if and when the specific event happens.

·?????? Due diligence: Due diligence is a legal process that involves collecting information and assessing risk. This process is often taken before a significant commercial decision or investment is made, such as prior to purchasing a business. Doing your due diligence properly will mean you are managing and reducing your risk. It can also mean taking reasonable steps in assessing a situation.

·?????? Intellectual property (or “IP”): IP refers to creations of the mind. In business, it commonly includes your brand’s logo, a design, artistic or creative work, an invention or a trademark. You can protect some forms of IP by registering it (ie. a trademark – such as a logo you wish to trademark so it cannot be copied). Some forms of IP cannot be registered, such as the words you write or “copy” (this is covered by copyright laws, which is free and automatic protection that you do not need to register). Most businesses (big or small) have some form of IP. Your IP is important because it is what makes your business unique. In addition to registering certain types of IP you can protect your IP by ensuring you include a strong clause in your commercial and workplace contracts.

·?????? Breach or breach of contract: A breach of contract occurs when one party fails to perform their obligations under the terms of the contract. There are different types of breaches – a material breach (the most serious); a minor breach (less serious); and repudiation (when a party says they won’t do something they said they would do in the contract). There may be consequences, including negative financial consequences, for breaching a contract.

Tips for reading and understanding contracts

Always read the contract, in full, multiple times, before you sign it. Before you sign, review the obligations you owe and the obligations you are owed (your “liability”). Do your “due diligence” by asking questions, or seeking additional formation, along the way. If the contract says you are indemnifying the other party – understand why and whether you are ok with that.

In summary, take the following steps before signing on the dotted line.

Review thoroughly

Start by thoroughly reading, reviewing and digesting the information within the contract. Pay careful attention to termination clauses, obligations and payment terms.

Clarify legal jargon

Read the definition section (if there is one) carefully. If a term is used, and the term is not defined or the term/definition is unclear (for whatever reason), clarify this – do not risk any uncertainty.

Focus on the fine print

So many contracts have a key terms schedule (which most people read) and then the tiny font “general” T&Cs. We know that everyone is guilty of not properly reading the T&C's from time to time, however we caution against this. Do not run the gauntlet – read every word. Also, if another document is referred to in the contract (but you don’t have access to it) – ask for it – it may just be critical.

Ask questions

Assume nothing and question everything. If you've researched it, broken it down, and are still not 100% sure, we always recommend seeking the advice of a qualified and reputable lawyer to help you fully understand the contract.

Kennedy Vinciullo is a boutique commercial law firm that specialises in contract and property law, disputes and litigation and workplace relations and employment. We are based in Perth, Western Australia; our clients are local, national and international organisations who see us as their first point of call. If you're interested in knowing more about our services, please reach out: https://kvlaw.com.au/contact/