10 key things to look out for in a commercial contract
March 11, 2009Commercial contracts form the basis of every commercial transaction but often they are negotiated and agreed in haste which can leave the parties unprotected and/or in breach of the agreement from the very start.
Here we briefly highlight those areas of most concern:
Legally binding or non-legally binding?
If there are to be heads of terms put in place it must be clear whether they are to be legally binding or not legally binding or whether they are to be a combination of both as many times this is unclear. In addition, all correspondence should, where appropriate, be marked as “Subject to Contract/Contract Denied” in order to make it clear where the parties stand.
Avoid loose language
Certain liabilities and rights may be carried into the agreement by the use of loose or ambiguous terms such as “consumer”, “agent” etc.
Try to keep the language tight and avoid long clauses which can cause confusion.
“Best”, “all” and “reasonable” endeavours
Generally speaking if there is an obligation which either party would like the other to undertake then it should be clearly expressed as the above expressions are unclear at best and useless at worst.
Exclusion clauses
These have to be very clearly drafted in order to be effective - if they are not, then they will be construed against the party attempting to rely on them.
Implied terms
In B2B contracts, implied terms can be modified subject to them being reasonable.
Therefore, if you are the seller then ensure that implied terms as to quality, fitness for purpose and specifications are approximations only, and, if you are the buyer ensure that the goods/services conform in every way with the sample/specifications provided.
Passing of risk in the goods
In B2B contract the seller should try to get the risk to pass as early as possible but delay the passing of ownership in the goods until paid if there is a credit risk involved.
The buyer should try to get risk to pass as late as possible but obtain ownership early.
Payment terms
If you are the seller then you will want payment as quickly as possible and late interest charges for late payment. You should also state clearly how payment is to me made (cleared funds preferable) as this sometimes causes problems with cheques clearing etc.
If you are the buyer then you will normally be happy with delay on payment and seek the longest credit period possible. Any ambiguity in payment methods can only work in your favour if needs must. Consider reductions for prompt payment and look out for any mechanism whereby the seller can increase the price - look for certainty where it favours you.
Breach
It needs to be made very clear what constitutes a breach of the agreement - depending on which side of the coin you are on you will want the ability to have a “notice and cure” period which provides that a breach will be notified to you and you will then have a set amount of time within which to fix it.
Termination
What event or events will result in a termination of the agreement? If there has been a breach of the agreement that goes to the root of the contract such as payment then this should represent a breach that will result in termination of the agreement.
What will then happen on termination? Will there be a return of fees or a termination payment? Destruction of documents/software? Who will pay for the exit?
Bear in mind that certain clauses should survive the termination of an agreement. Just because a party has had an agreement terminated against it should not mean that it is no longer bound by any confidentiality provisions contained within the agreement.
“Boiler-plates”
The above named clauses are in most agreements but because of that most people (including lawyers) tend to gloss over them - don’t, because the other side may be paying very close attention to them!
These clauses contain items of importance, such as law and jurisdiction in the event of a dispute, as well as entire agreement clauses which will exclude oral statements and so-called “side letters” from any agreement.
Conclusion:
As commercial lawyers, we often hear people comment that “not using a lawyer saves you money, or “when the lawyers become involved the trouble starts!” OK, we accept that: Yes, it will cost money to go through it and yes, most times there will be matters that the lawyer will have picked up on that may have been “missed” which may result in further negotiation (or “trouble”).
However, if you are the person with the chequebook, we ask just one question: would you rather have the fight now or would you rather wait for the cheque to clear and then have the fight? …. better still, how about a well documented and clear arrangement between the parties and no fighting at all? We can help you with that.
Please contact David on dreilly@dreilly.ie for further information on this topic or any other legal problem or matter.
