Alicia MacRae, a solicitor in Mincoffs Solicitors' commercial team, explores some of the clauses you should look out for and understand in full before you sign a contract on the dotted line.
Engaging lawyers can often be at the bottom of the priority list for businesses, however, when a business faces looming litigation, they realise that lawyers are paramount at the early stages. A commercial lawyer highlights, and mitigates, the risks of a seemingly innocent “standard” contract.
Here are a few key clauses to look out for:
Termination
A contract should have various rights as to termination, including for breach (perhaps on a material or persistent basis) or nonpayment of invoices (to avoid working for free). Often over-looked, a termination right for convenience is also key to include where there is a rolling or indefinite term so that a party can end the contract if it no longer serves them (subject to providing requisite notice).
Pros and cons of these rights depend on which side you’re on, and lawyers will tinker with termination rights to best suit their client.
Warranties
A warranty is a promise of certain facts or future action, and a breach of warranty entitles the non-defaulting party to claim for damages.
Warranties can be made at the time the contract is entered into; however, a warranty could be stated as repeating intermittently, such as warranting that each time a document is provided it is true and accurate – this is an “evergreen” warranty.
Lawyers usually seek to shift warranties from evergreen to a fixed date (commonly at contract entry), as it is more in the control of the warranting party to warrant a fact at one time, or make necessary disclosures against it, and it reduces the likelihood of breach, which may (depending on the contract) result in damages being payable or termination.
Indemnities
Where damages are narrowed by the legal principles of causation, remoteness, and mitigation, indemnities are not so restricted. An indemnity is a carefully-scoped promise to protect another party against loss from a specific circumstance, and is hotly negotiated as a powerful tool of protection.
Lawyers define the type of harm or loss, the triggers, and the interplay with other remedies. It is advisable to have a cap on indemnities.
Limitation of liability
Several clauses can together operate to limit contractual liability: lawyers consider these in tandem, to fill gaps in protection.
Clauses can exclude specified losses from liability, including indirect losses. Indirect losses may include loss of profits, business opportunities, and anticipated savings. Limiting liability to direct loss reduces the scope for an indemnifying party. The court interpretation of “direct” or “indirect” may differ from the parties’ intentions, so it is important to get appropriate legal drafting.
A liability cap will limit the recovery under a contract for loss, and it is crucial to get legal drafting assistance to ensure the right level of protection. Where there are potentially extensive losses, such as for infringement of third-party IP rights arising from the contract deliverable, a party may expect unlimited recovery.
Governing law and jurisdiction
The governing law clause, often tucked away at the end, should be of the desired jurisdiction (usually where a party resides).
The governing law clause is vital for interpretation of the contract, particularly if contracting with parties overseas, and the jurisdiction clause dictates the conduct of disputes (ideally locally, in their own language and subject to their own laws).
If you’re considering entering into a contract, it is important to seek early legal advice. Get in touch with Mincoffs’ expert commercial services team by contacting solicitor Alicia MacRae on amacrae@mincoffs.co.uk or call the office on 0191 281 6151.
www.mincoffs.co.uk