Contract Review 101: Essential Clauses to Consider

Contract Review 101: Essential Clauses to Consider

Introduction

Businesses enter into contracts on a regular basis and contracts are often a necessity to any business. As such, before entering a contract it is important to understand exactly what the contract states and what your rights and obligations are.

However, reviewing a contract can often be quite difficult, time-consuming, and complex but if it is not reviewed properly, you can expose yourself to unnecessary risk.

We recommend engaging an experienced contract lawyer to help you navigate this process but in the first instance this article will outline some general tips and clauses to look for and consider when reviewing any business contracts.

Contract Term and Termination

Term and Termination

The term of a contract refers to the duration of the contract and specifies how long each party is obligated to fulfil their obligations.

It is worth noting that despite the term of the contract, some contractual obligations will continue after the expiration or termination of a contract.

Common clauses that often survive the expiration or termination are confidentiality clauses and liability clauses.

As to the types of terms that a contract can have, they include:

  1. Fixed term contracts, whether that be for a fixed time period (say 12 months) or until a certain project or service is complete;
  2. Fixed term contracts with automatic renewals or extensions on that initial period; or
  3. Ongoing contracts, where the term is indefinite until the contract is terminated by a party.

Specifically, when considering ongoing contracts, there needs to be provisions to allow the parties to terminate the contract.

Termination clauses need to specify when and how a party can terminate the contract.

These clauses can also stipulate any conditions that may be attached to terminating the contract such as early termination fees, the return or destruction of confidential information and the payment of costs to the other party.

Contract Warranties

Price and Payment

Of key importance in any contract is the price and payment for the goods and services.

A good business contract should clearly outline the payment terms for the goods and services.

The main objective of a payment term provision is to ensure that you and your business are protected in making or receiving payments under the contract.

Payment term provisions may include whether a deposit is required, and if so, how the remainder is to be paid, whether interest will be charged on late payments and how and when payments are to be made (i.e. on receipt of a tax invoices, or every calendar month etc).

It is also important to ensure that a contract specifies the currency in which payment is to be made, particularly when dealing with parties in different countries and whether the price includes any additional charges.

Warranties

Warranties are often included in contracts. A warranty is essentially a promise that one party makes to the other in the contract in relation to their obligations and the overall business relationship.

When reviewing business contracts, common warranties provided by parties include:

  1. That each party in the contract has full legal capacity and authority to enter into the contract and perform their obligations;
  2. That each party agrees to comply with all applicable laws and regulations; and
  3. That each party is not insolvent or bankrupt.

It is worth noting that just because a warranty is not explicitly listed in a contract does not mean that it is excluded. For example, under Australian Consumer Law (ACL) there are certain consumer guarantees such as that goods are of acceptable quality and are fit for purpose that cannot be excluded under the contract.

Intellectual Property Rights

When entering into a contract, you must consider intellectual property rights.

Intellectual property refers to trademarks, copyright and patents that you or your business may have and use in the course of providing your goods or services.

When reviewing a contract, you must consider and look at who owns any intellectual property used or created under the contract.

Generally, any intellectual property that is created under the contract is owned by the customer as they are paying for the services and there are occasions where licenses to use intellectual property are stipulated under a contract.

Ensuring that this provision protects you, is essential in protecting your intellectual property which can be key to your business and the goods or services it provides.

Liability Provisions

Liability provisions in a contract can be the most important but the most high-risk provisions and are usually quite complex.

However, they are important as they usually set out what losses and damages each party will be legally responsible for under the contract.

When reviewing a contract and considering any liability clauses, you must consider what liability you are willing to accept and be exposed to under the contract.

You should also review the contract to ensure that there are some limitations or exclusions on your liability, so you are not responsible for any loss or damage regardless of who is at fault.

Limitation of Liability

A limitation of liability clause is used to limit the extent of your liability if the other party was to sue you in connection with the contract.

Liability may be limited to losses or damages that you are directly responsible for and there may also be a limit for the amount you can be pursued for, such as you are only liable for any losses or damages up to the value of the contract (i.e. the price of any services or goods).

Exclusion Clause

In comparison to a limitation clause, an exclusion clause removes certain types of liability entirely.

One example of this can be seen in circumstances where you deliver goods to customers, and you exclude liability so you cannot be pursued by the customer if the goods are delayed and that delay was outside of your reasonable control.

However, not all limitation or exclusion clauses are enforceable.

A court may find this in cases where a standard form contract is used and the other party was unable to negotiate any terms or where the liability provisions exclude consumer guarantees which is not lawful.

Indemnity Clauses

Indemnity clauses are another complex but highly important provision that is often included in a contract, which must be reviewed.

An indemnity is a promise by one party in a contract to compensate the other party for any losses or damages they suffer as a result of them performing their obligations under the contract.

If you are being asked to agree to an indemnity clause where you are required to indemnify the other party, you should consider:

  1. Your responsibilities under the contract and whether you can meet them;
  2. The cost to you if you indemnify the other party;
  3. Whether you can afford to indemnify the other party; and
  4. Whether your insurance will cover this indemnification.

On the other hand, if you are asking someone to indemnify you in a contract, you should consider:

  1. The types of liability that are covered under the clause; and
  2. Any exclusions or limitations that are provided for in the contract.

Conclusion

No matter what type of business you are in, entering into contracts will be a critical aspect of your business and business operations.

Whilst contracts can be incredibly complex, having a solid understanding of your obligations and rights is integral to safeguarding yourself and your business.

This article aims to provide you with a general understanding of what you should look at when reviewing a contract, however it cannot replace the knowledge and advice that an experienced contract lawyer can provide.

The information in this article is general in nature and does not constitute professional advice.

Get in touch

If you or someone you know wants more information or needs help or advice in reviewing a contract, please contact us.

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