Whatever type of business you run, contracts are a
necessary part of daily life. Whether you're looking to secure
drilling rigs, outsource IT services or sell a range of bespoke
hammocks, you should have a comprehensive agreement in place that
clearly sets out everyone's rights and obligations. Here are
our top 5 tips for what to look out for:
What warranties are provided? Warranties are
usually considered essential contract terms, so a party could
terminate if you breached one. If you are providing a warranty,
make sure you only warrant things that are within your
What happens on termination? Not all endings
are amicable so it's best to agree upfront what each party will
be entitled to once the love is gone. Have your out-of-pocket or
third party expenses been covered? Are you entitled to a fee if the
contract is terminated before the end of the term? Or would you
prefer that both parties walk away with no further liability to
Are you providing an indemnity? Indemnities
are contractual obligations that allocate responsibility for
specific types of loss or damage between parties and are usually
the most negotiated part of any contract. Definitely avoid
indemnifying the other guy for things out of your control or for
which you don't have insurance.
What's your liability? We can't stress
enough how important it is to make sure you cap your entire
liability under a contract, particularly where indemnities are
involved. This way you know upfront the most you will be liable for
if the sausage hits the fan. Ideally your liability cap will
capture all claims arising out of a contract although you might
agree to carve out some types of loss. If you do, make sure those
types of loss are manageable or otherwise unlikely to occur.
What about consequential loss? Consequential
loss is a way to describe how remote loss or damage is from the
actual claim itself. If, for example, your rubber duck factory
burns down, you would expect to reimburse customers for their lost
ducks. You wouldn't expect to be liable for the emotional
trauma experienced by someone who didn't receive their duck on
time. This is a consequential loss and you're better off
avoiding it. What is considered consequential loss will depend on a
whole heap of factors so, to avoid any surprises, you should define
it to cover all the types of loss for which you don't want to
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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