October 6, 2022
There is a lot to think about when entering into a legally binding contract and the task of reviewing seemingly endless pages of legalese can be a daunting prospect. While you can always decipher terms via our legal glossary, what terms should you check when entering into a contract? In this blog, we break down the key terms in a contract, from warranties to remedies, and everything in between.
There are many different types of contracts, and there will be certain aspects of every agreement that are unique to that particular type of contract – for example, the issues covered in an employment contract will be very different to those addressed in a lease. As a start-up, you’ll need to enter into contracts for the provision of the goods and services that you need to get your business going, and so we’re going to focus on those types of contracts in this blog.
We’ll run through certain clauses that will crop up in the majority of goods and services contracts and flag some key issues, so you know what to look out for when reviewing one of these contracts.
Of course, if you’re entering into a high-value or high-risk contract, or one that is of strategic or commercial importance to your business, it would be wise to get this checked by a lawyer before signing on the dotted line. So, let's get started!
This sounds obvious, but can often be overlooked – are the names of the contracting parties accurately recorded? Each party needs to know who they can enforce the terms of the contract against, should things turn sour. You need to be confident that the other party has the financial means to withstand any claim you make.
Check the description of the goods or services to be delivered – is it clear what you will receive? Are there any specifics that need to be covered – for example, are the goods and services for a particular purpose? Do they need to be delivered by a certain date?
A warranty is essentially an assurance of fact, and if a warranty is breached the innocent party will have the right to sue for damages (in other words, compensation). We would expect to see certain warranties in a well-drafted sale of goods or services contract, including that goods will be of satisfactory quality and fit for purpose and that services will be provided with reasonable skill and care, and in compliance with the terms of the agreement and applicable law.
Check what remedies are offered under the contract and think about, practically speaking, whether the remedies are meaningful to you. Typical remedies include offering to replace or repair goods, offering a refund, re-performing services and giving you the right to obtain alternative goods or services elsewhere at the supplier’s cost. In your circumstances, what will be most useful to you?
If you’re receiving digital services, such as hosting services, are service credits (i.e. rebates or a reduction in the cost of your next instalment of fees) offered for service downtime? And are these service credits of real value – would they adequately compensate you if your website was constantly crashing and you were losing business?
Ensure the price to be paid is correct and that you’re comfortable with the payment terms. You should also be clear on how to pay and when.
Check the provisions relating to intellectual property – who owns what? This is particularly important if you have commissioned bespoke work and you wish to own the IP rights. If the creator retains ownership, check that you are able to do everything that you want to with what has been developed – for example, if a design had been created on your behalf, do you have the right to print that design on your products and distribute them for sale?
If you’re sharing confidential information, ensure that the contract includes appropriate obligations of confidentiality. The provisions should prohibit the sharing of your confidential information without your consent (though contracts typically permit sharing with regulatory authorities and the courts).
The liability provisions are some of the most important provisions in a contract. Does the supplier seek to limit, or even exclude, their liability? It is unlawful for liability to be limited or excluded in certain circumstances, for example in relation to liability for personal injury or death caused by negligence or fraud.
Think about what could potentially go wrong and what the fallout would be for you. Consider whether you feel any limitation or exclusion of the supplier’s liability would leave you with an adequate remedy. It is typically accepted that a supplier’s liability should be uncapped in certain circumstances – for example, for breach of third-party intellectual property rights or confidentiality obligations.
Could you be liable in any way under the contract? For example, are you providing the supplier with designs that they will use to provide the services? If so, is your liability adequately limited?
Check whether any caps on liability apply to a certain time frame – for example, does the cap apply to each separate year of the contract or across the whole term of the contract?
Liability provisions are not straightforward and are absolutely key, so if you are unsure about how to interpret these provisions, seek legal advice.
The contract should have a clear start date. Bear in mind the date of the contract itself and the delivery of the goods or commencement of the services themselves may be different and consider whether this will impact on notice periods in any way.
How long will the contract run for? Will it renew automatically? Is there a right to extend the agreement on the same terms or is there a risk that certain terms, such as cost, could be open to renegotiation?
Does either party have the right to terminate or suspend the performance of the agreement? Many contracts provide for certain circumstances in which a party may terminate – for example, when the other party breaches the contract or suffers an insolvency event. A party may also have a right to terminate for ‘convenience’ meaning they can simply choose to terminate. Carefully check notice periods to see when either side may terminate and how much notice is required.
If either party will process personal data on behalf of the other, the contract must include appropriate data protection provisions. These are prescribed by law and if personal data is being shared as part of the working relationship, we recommend the contract is checked by a data protection lawyer to ensure that the contract is compliant with relevant legal requirements.
Key terms to watch out for: Infographic
As you can see, there's quite a lot to watch out for when it comes to reviewing contracts. If only there was a handy infographic that had all of that info in one place...
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