High value commercial contract? What to look out for.
If you have or are thinking of entering into a high value commercial contract, there are certain key provisions and clauses you would expect to see, regardless of your working relationship with the other business. Fundamentally, it comes down to the risk you are prepared to take as a business, but it is always worthwhile to ensure as a minimum that the following clauses are in your contract:
Exclusion of liability
If you are selling goods or services, you will want to ensure that you are liable for the least amount of occurrences and scenarios relating to your products and services as possible. Similarly, if you are purchasing, you will want to ensure that you have strong rights of recourse against the other party in the event that they fail any of their obligations under the contract. If a limitation of your liability under a particular contract is absent, action needs to be taken to rectify this before entering the contract.
How long is the contract for? Can either party terminate early? Does there have to be a reason to terminate? These are the questions you should be asking when reviewing a contract. Typically, if a contract is for a fixed term, you may only be able to terminate when a party fails its obligations under the contract. Such clauses are usually a hot topic for negotiation in a contact and the ability to exit a contract when there is a business need for such an action is vital to ensure business stability.
A boilerplate clause is a term applied to provisions of a contract that are often of a standard nature and do not relate to the substantive parts of the contract but are necessary to make it work and regulate the operation of the contract.
The following are good examples of boilerplate clauses you would expect to see in all commercial contracts:
This clause covers events outside the control of the parties, for example, natural disasters or the outbreak of hostilities. A force majeure clause will not make a defaulting party under the contract liable if a force majeure event prevents the party from performing its obligations. The concept should always be fully defined in a contract as it will not be assumed that the parties wish for such a clause to be included.
Entire agreement clause
This is also known as a whole agreement clause and is contractual provision which aims to prevent a party to the contract relying on any statements or representations (including representations before the contract was made) except as expressly set out in the agreement. Having an Entire Agreement clause allows for certainty of contract for both parties as documents outside of the contract cannot be relied on under the contract. Often however, other documents are excluded from this clause as it is necessary to do so for the contract to work (i.e. an order form which commences the transaction).
Governing law and jurisdiction clause
A governing law clause enables the parties to specify the system of law that will apply to the interpretation of an agreement and its effect if a dispute arises. If there is no express choice of governing law in an agreement, the manner in which a court will determine the applicable law may not always be certain.
Jurisdiction on the other hand, refers to the competence of a court to resolve a dispute. Some points to consider when deciding jurisdiction are:
• It enables the parties to agree, before entering a contract, which country’s courts are to have jurisdiction to hear disputes arising from the contract;
• It can allow the parties to avoid the jurisdiction of certain courts; and
• It can save considerable time and costs involved in disputes over which courts have jurisdiction.
This is by no means an exhaustive list and will certainly not cover you across all of your contracts with various suppliers, customers and services providers to your business, although it will be a useful starting point when looking for key omissions in a proposed contract.