THINGS TO LOOK OUT FOR IN COMMERCIAL CONTRACTS
10 July 2020
Adam Haffenden/Amy Cunliffe-Rowe
One of the most common mistakes made by businesses is to underestimate the importance of getting the wording right in commercial contracts. Our Dispute Resolution/Commercial teams at 3CS are regularly instructed to provide advice to clients on how to solve problems when a contract dispute arises. This is often because the contract was poorly drafted and did not include adequate terms. It is common for one party to the agreement to argue that specific terms incorporated are unenforceable, as they are ambiguous or unreasonable.
Some businesses take the view that they will not incur the expense of asking their lawyers to review documents before they are signed. Sometimes they feel there is no time, or that the other side has presented them with a draft and implied that the wording could not be changed. Our advice is that, wherever possible, you should not be rushed into signing something which could potentially have severe adverse financial implications in the future. Here are some of the most common features of commercial contracts to which special attention should be given.
Do you have the right legal name included in the contract?
Unless you have the right legal name for each party to the contract, you might have trouble enforcing it if there are problems as to the terms of the agreement. Likewise, you should consider carefully whether affiliates and subsidiaries should be included within the contract before it is signed.
Are the intentions of both parties set out clearly in the contract?
Surprisingly, many commercial contracts do not set out the fundamental points of the agreement - i.e. who is doing or getting what? Are other agreements referenced? Is everything clear? Be sure that a third party reading your contract can understand its fundamental terms in the event of a dispute. Clear, simple language (and examples) will serve you well. Precise drafting will help to avoid expensive conflicts in the future.
What is the length of the contract, and how can the parties terminate it?
An important point to cover within the contract is how long it will be for and if it will renew automatically. You should ensure that there are suitably drafted clauses in the contract identifying how each party may terminate the agreement, by what method, and using an appropriate notice period. The wording should also address what happens when the agreement ends.
What price and payment provisions should be included within the contract?
It is paramount to include terms as to how much will be paid, on what terms, and what happens if payment is late or not made at all. Having these clauses within the contract will provide certainty as to the amount, and what will happen if there is a dispute over non- payment. It is also essential to consider if the other party to the contract is creditworthy.
Have you addressed the allocation of risk and reasonableness within the contract?
Perhaps the most critical sections in any contract are the limitations on liability, indemnities, warranties, and considering what types of damages are excluded. Thought should be given as to whether there is a requirement for joint and several liability in the contract if a dispute arises, to maximise potential recovery from the defaulting parties. It is important to consider whether the contract terms are reasonable. It is essential to avoid any future claims of unreasonableness. Otherwise, the contract may be rendered unenforceable in court.
Should the contract cover issues of confidentiality?
Is the agreement confidential, will the parties exchange sensitive information, how will it be protected, and what is the remedy for any breach of confidentiality? All of these terms are central to having a well-rounded commercial contract and should not be overlooked. You should reserve the right to take legal action against anyone breaching the terms of confidentiality and even set out what the remedies would be in the event of a breach.
Is it essential to include a clause in the contract on intellectual property (IP) rights?
Be sure to include within the contract adequate provisions in respect of the use and ownership of IP. For example, should the IP be licensed and, if so, on what terms. The contract should cover any IP created and who will own it, what each party can do with it, and how it is protected. It is prudent to have such a clause within your contract, as not to do so could have serious financial consequences for you if a dispute were to arise. Without the protection of express wording in the contract, settling any claim may be much more difficult and costly.
How should any Notices subject to the contract be served?
It is imperative to have a provision within the contract dealing with situations that require official notice to the other party. How and to whom that notice should be delivered, and what form the notice takes, is fundamental to the contract. If you do not validly serve notices under the terms of the agreement, this can prove seriously detrimental when it comes to resolving a dispute. Always consider this in your contracts and comply with the provisions on service of notices to avoid future disappointment.
How will the parties resolve disputes that arise under the contract?
Wording should address how the parties would resolve disputes that arise in the event of a breach of contract. Will any breach of contract claim proceed through the court, arbitration or mediation? Where will the disputes be litigated, which country has rights of jurisdiction to hear the argument and what law will apply? These are all important considerations that parties to a contract should focus on from the outset.
What should you be considering for new agreements given the impact of COVID-19?
You could consider what the realistic effect of another COVID-19 type virus would be on the abilities of the parties to perform the contract. Consider also whether either side's obligations can be performed using contingency measures, such as working remotely. Can insurance be obtained to cover the risks of non-performance of the contract or a delay? It may be essential to discuss with the other party to the contract how risk or liability should be apportioned should the contract be delayed or not performed. Finally, review the terms of the agreement thoroughly, and in particular, give thought to whether such an event requires force majeure/material adverse change provisions in the contract, or perhaps termination or another form of relief.
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Senior Associate and Head of Dispute Resolution/Litigation