A Brief Introduction About the Onerous Contract
Can you define an onerous contract? Well, before we get into the details of this contract, let’s try to find why it is needed. Almost all businesses or companies need their finances to be maintained and want to ensure that the profits they gain are more than their daily, weekly, monthly, or yearly investments.
What is an onerous contract? This is an accounting term that is used where the expected profit is lesser than the actual investment. According to the definition provided by the IAS (International Accounting Standards), this type of contract contains unavoidable costs of meeting the given obligations. When these costs exceed the economic advantages, then the company is likely to suffer.
Who Take the Onerous Contract? – People Involved
Anyone who makes a deal with an organization or company is said to be taking the contract. In some circumstances, the person is provided with the onerous lease so that he gets easily attracted to the deal. For instance, if a company is selling properties, then it will do everything to engage people or to attract potential buyers, and the two parties (meaning the company and the buyer) will be responsible for signing or taking this contract.
Purpose of the Onerous Contract – Why Do You Need It?
What is onerous? What is the core purpose of this contract? Why do we need it? These are some of the questions that might strike your mind, and we are here to give you proper and understandable answers. The first purpose of this contract is to encourage the company owners or managers to keep their investments or costs to a lower level. It is understandable that big brands or companies cannot do so, but if the outcome is not as desired, then there is no reason to continue spending money on further projects.
Another purpose of this contract is to pave the way for new companies or startups to the peaks of success. By looking at the examples or following the footsteps of established companies, the small companies will be able to understand how unavoidable costs can actually be avoided.
Contents of the Onerous Contract
What are the onerous terms and conditions? In order to be able to understand all the terms and conditions, we are better to look at the contents of this contract. This contract consists of the following contents.
- Scope of work
- Terms of the agreement
- Termination of the agreement
How to Draft the Onerous Contract?
The process of drafting the contract begins with negotiations. First of all, the company that is going to offer some products to its customers has to call them to the office to discuss matters. It would be great to make things clear and understandable at an early stage so that confusion and problems are avoided once the deal is finalized or the contract has been signed.
In the next step, a rough draft should be prepared before handing over the final piece of paper or contract to the subcontractors. In this rough draft, things like how long it would take the contract to finish have to be mentioned. It is essential for the two parties to sign this contract only when they have read and understood all of its clauses.
One of the major things to bear in mind is that the two or more subcontractors fully agree to the terms and conditions or rules and regulations.
[ Also Read: Project Finance Agreement]
You can check the onerous contract example to have an idea of how the negotiation is done. The negotiation strategy is in which the two parties agree with the given clauses and promise to respect the interests or concerns of one another. And if a third party is involved, then it is also responsible for respecting the privacy of the two parties, and all of this process requires proper negotiation or discussion.
Benefits and Drawbacks of the Onerous Contract
The first benefit of this contract is that it helps the company understand how to resolve the problem of unavoidable costs. If these costs are more than the expected profit or earning, then there is no use to keep spending the money unnecessarily. Secondly, the example of established companies can help startups or new firms set favorable or suitable rules and regulations. If they get an idea of how to avoid unavoidable costs, it will be easy for them to increase their earnings or profits.
A disadvantage of this agreement or contract is that it does not clarify how much unnecessary costs can actually be reduced.
What Happens in Case of Violation?
First of all, we should take serious measures to avoid violation(1). And if it still happens, then the subcontractors or parties involved in the agreement should discuss matters and try to resolve the issues outside the court. However, if something still does not work as expected, then the affected party reserves the right to take the legal action against the other party that has cheated on it. The clauses of the contract and the interests of the two parties need to be respected and valued, as this will save both of the subcontractors from problems and legal hearings in the future.
In conclusion, we can say that an onerous contract or agreement is meant to help a company or more companies to know what types of costs or expenses they need to avoid in order to get more and more profits. For example, if a particular, low-priced property is on sale and the company is spending a lot on its marketing, then these costs need to be reduced or minimized to an extent. Instead, the company should spend only what it can get in return by doubling or tripling the actual amount. This will help the organization avoid all of those unavoidable costs to the extent that is not giving it the desired results.