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Negotiating and signing contracts is part of life for almost every business in New Zealand. You may manage small-scale contracts with a new provider. On the contrary, you may deal with lengthy manufacturing contracts that represent a significant investment for your business. Nonetheless, it is important to ensure that you understand the contracts that you are signing. You must ensure they provide your business with the flexibility and options that it needs if circumstances change. The devil is in the details. This article sets out three things to watch out for when negotiating and drafting contracts in New Zealand. This includes the terms for cancelling the contract, whether there is an automatic renewal policy, and any last-minute changes or revisions.

1. Cancellation Terms

Once you have signed the contract, its terms will bind you, and if you breach those terms you may be liable for breach of contract and face legal penalties. Therefore, an important thing to watch out for is the cancellation terms of contracts. You will not be able to exit your obligations under the contract unilaterally. You will have to follow whatever process the agreement prescribes. This is legally binding on you and your business as well as the other party. 

Make sure you understand and are comfortable with how you can end the contract before any termination date. Also, think through whether the cancellation terms are too open. For instance, they may open up some risk of the other party cancelling and putting your business in a tough position. Your business may rely on the other party to carry through on their contractual obligations in some way. Therefore, if they can cancel the contract in a short space of time, this can create some dangers for your business’ supply chain or operations. If you are unsure if the cancellation clause is satisfactory in the context of your business and the agreement, talk to a commercial lawyer. 

2. Renewal Clauses

Another key aspect of contracts to watch out for is whether there is a renewal clause. In particular, there may be an automatic renewal clause that you may not otherwise be aware of. These are tricky clauses as the contract may seem to have a set date where obligations terminate. Still, an automatic renewal clause will extend the obligations if neither party cancels the contract. Therefore, you need to watch out for these and make sure that the contract ends when you expect it to. 

If there is an automatic renewal clause that you only realise later in the contract’s lifespan, ensure you consider your options. You may want to end the contract before it automatically renews. Usually, you will have to provide advance notice of your intention to end the contract before this kind of clause takes effect.

Remember, this can be tough to do if you are not aware the clause exists. 

This is another good example of why making sure you are across the details of a contract is important.

3. Last-Minute Changes Or Revisions

It can be a frantic exercise to get a contract over the line. Often, parties will send through several changes or proposed revisions to the contract in the dying hours before the contract needs to be signed. You have to be watchful and careful if these kinds of last-minute changes or revisions are being sent around. It can be tempting to agree to whatever the contract says to get it signed and completed. However, sometimes a party will include something in their edits or changes that is advantageous to them. You may not have agreed to such clauses if they had come up in the substantive negotiation. 

To avoid this, make sure to check every last-minute change or revision that the other party is sending through. Even if the other party says there are no substantive or major changes to the contract, it is still worth checking if this is the case before ultimately signing off on the contract.

Key Takeaways

There are a range of things to watch out for when negotiating and signing contracts in New Zealand. Among the issues that can cause problems down the road for your business if not picked up in the negotiation stage are cancellation and renewal clauses. Make sure you are fully across how the contract can be cancelled (including by the other party, and what the consequences for this would be for your business) and whether it can automatically renew. Also, watch out if there are any last-minute changes and revisions, and make sure you check those to ensure they still reflect what the parties have agreed to. 

If you would like more information about drafting effective commercial contracts, contact LegalVision’s commercial lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

Can a contract be cancelled in a way other than through a cancellation clause?

No, apart from exceptional circumstances. The contract will be legally binding until it terminates or one of the parties cancels in accordance with the contract’s cancellation clause.

What is an automatic renewal clause?

A clause that automatically renews or extends the contract unless notice is given or the contract is otherwise cancelled. 

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