Ensuring your contracts with third parties strike the right balance between commercial opportunity and risk can be daunting, particularly when those contracts are often complex and lengthy. In this article, we highlight ten top issues your commercial contracts should cover.
1. Scope: Be clear about what you intend to gain from the contract. Consider carefully what it is intended to cover and, just as importantly, what it is not. Ensure the contract reflects this.
2. Obligations: Ensure both parties understand their own, and the other’s, obligations, when those obligations are to be performed and the consequences of failing to do so. Failure by one party to fulfil an obligation will have a knock-on effect on that party’s other obligations and trigger remedies for the non-breaching party. Ensure sufficient remedies are in place to enable the contract to continue where the non-breaching party may not want to simply terminate for breach.
3. Change: Once a contract is binding, its terms cannot usually be changed without the parties’ agreement. Therefore, consider including a change control clause to establish a clear procedure for what is to be done if a change is perceived to be necessary or if one party considers that the other party has forced a change upon it. No contractual provision can force a party to agree to a change which it does not accept. However a properly drafted change control clause will require the parties to follow a set procedure when dealing with changes.
4. Payment: Who pays what, how, when and where? Whilst a supplier will want its prices to remain competitive, it will also want to be able to adjust prices to take account of factors outside its control (such as increases in the cost of raw materials, delivery costs or import duties). However, it is unrealistic for a supplier to expect to be able to increase prices whenever and by however much it wants. In contrast, a customer will always want the best price but without sacrificing quality. However, it is unrealistic for a customer to the get best price and the most favourable payment terms without any price increases. To achieve a commercial balance, ensure payment terms are clear. Set out what is included in the price, what is payable and when, how payments can be disputed and the procedures for escalating disputes regarding outstanding payments.
5. Performance: Ensure the contract contains provisions to ensure performance takes place to prescribed levels. As a customer, put mechanisms in place to ensure you get the services or goods when you want and that the supplier is incentivised to perform. Consider service level requirements and what remedies you want if these are not met (e.g. LADs for failure to meet key milestones and service credits for failure to meet service levels).
6. Warranties: The customer will want to ensure it obtains from the supplier warranties around a number of key areas including fitness for purpose and quality, that all consents/licences have been obtained and that a third party’s intellectual property rights have not been infringed. The supplier will want the customer to warrant that it has the right to enter into the contract.
7. Liability: Both parties will want to exclude and limit their respective potential liabilities arising out of the contract. Some liabilities (e.g. for death or personal injury), cannot legally be excluded. All other liabilities can be excluded or limited only if the terms doing so are reasonable. As a supplier, ensure that your any financial cap on liability can be explained, given that it is commonplace for customers to compare liability caps as between their preferred suppliers.
8. Intellectual Property: Most commercial contracts involve the use of the party’s intellectual property. Ensure therefore that the contract is clear on any obligations and restrictions around the use of existing IP and newly created IP.
9. Remedies: Terminating when things go wrong is not always the preferred option. Parties may want to resolve issues quickly and continue with the contract. A supplier may want to remedy a breach by offering a replacement or refund for goods or services not supplied or performed to the correct standard. Even before then, whether a breach has in fact occurred may be disputed. Consider including therefore an internal dispute resolution procedure between the parties which allows a dispute to be determined simply, swiftly and economically.
10. Termination: Aside from either party being able to terminate the contract for the usual insolvency events of the other party, the supplier will normally want to ensure the contract contains provisions allowing it to stop supplying goods or services in the event of breaches that cannot be remedied at all or within a specified period of time. Ensure that your contract is clear as to what events give rise to termination rights and when.
11. GDPR: Ok, we lied. There are eleven (not ten) top things your commercial contracts should cover, the eleventh being the current hot topic, GDPR. Review, and if necessary re-draft, your commercial contracts (particularly those you are, as a supplier processing your customers’ personal data) so as to ensure they are GDRP compliant. From a commercial, legal or risk perspective, having a GDPR compliant contract is now an absolute must for organisations engaging third parties. Unless your organisation has taken preparatory steps to comply with GDPR, complying with your contractual obligations will become increasingly onerous and your ability to demonstrate to customers how you comply with GDPR will likely be the difference between winning and losing business.