UK: An A to Z of Contract Clauses - Key Terms for your Contracts

Last Updated: 6 October 2010
Article by Alex Beal

Navigating a commercial contract and appreciating the implications, both legal and practical, can be a daunting task. This article provides a snapshot of key clauses typically found in a standard commercial contract and looks at the implications of those clauses for the contracting parties.

A is for Assignment

English law states that, in the absence of express drafting to the contrary in a contract, either party to that contract may:

1. Assign their rights to a third party (subject to limited exceptions); but

2. May not transfer obligations arising under that contract to a third party.

This 'default' legal position exposes the parties to the undesirable reality that a contract they have entered into can be freely assigned to a third party without their consent. Particularly in services contracts this is far from ideal as it could expose the service provider to the situation where a third party of which they have no knowledge (including its ability to pay) is utilising its services under a contract.

It is therefore common to see the inclusion of the following clause, or some variation on it:

Neither party may without the prior written consent of the other, such consent not to be unreasonably withheld, assign or in any way dispose of its rights under this agreement to any third party.

Such drafting is neutral and protects both parties from the eventuality discussed above. However, it would not be unusual to see a one way obligation to seek consent to assign, if the party seeking to impose that obligation on the other party has concerns as to who might end up providing it with services or products.

B is for Boilerplate

'Boilerplate' describes provisions which are common to most commercial contracts and which do not relate to the main object of the contract but which are required for regulate its operation. Although such clauses are often considered 'standard', their ramifications are far from so, and careful thought should always be given to the impact of the clause in the specific commercial context of the contract.

C is for Confidentiality

Contracts will typically include a clause requiring the parties to protect each other's confidential information. The inclusion of such a confidentiality clause is imperative in the situations where the parties' confidential information will be exposed to the other. The wording below is a simplified example of a confidentiality clause:

The parties shall keep confidential all Confidential Information and not, without the prior written consent of the other party, disclose the Confidential Information to any other party save to the extent required by law.

The definition of 'Confidential Information' is often drafted widely to include all written, pictorial, machine readable or oral information which relates to trade secrets, customers, suppliers, or business associations or information that is financial, technical or commercial in nature. It is vital that the definition of 'Confidential Information' satisfactorily captures the information particular to your business to ensure all such information remains confidential and protected from disclosure to third parties who could be potential competitors.

D is for Dispute Resolution

In the early stages of contract negotiation, dispute resolution provisions are rarely given much consideration. Focus tends towards level of payment, defining the scope of the service or product(s) to be provided, negotiating warranty and indemnity provisions and payment mechanisms. However, it is important to ensure that your contract contains suitable and appropriate wording dealing with disputes which may arise under the contract to ensure clarity for all parties as to the precise procedure to be followed in the event of a dispute.

Frequently the parties will agree to an escalation procedure, whereby clear steps and processes are stipulated prior to the matter being referred to the courts. As a matter of principle, it is the duties of the parties to a contract to "help the court further the overriding objective" (Civil Procedure Rules - Part 1 CPR 1.3). This "overriding objective" is to ensure that all cases are dealt with justly and "to encourage the parties to cooperate with each other in the conduct of proceedings" (CPR 1.4). In the light of these duties it is important that pre-court conduct also adheres to these principles which in short encourages communication and cooperation between the parties.

Typically a notice setting out the dispute/ breach will be served on the breaching party, giving them a specified period of time to rectify the breach. In the event that the notice is not complied with, there will be a number of steps to be taken – for example the managing directors meeting to attempt to resolve the dispute/ an arbitrator is appointed to settle the dispute. Only after these steps have been followed will the non-breaching party be able to take the dispute to court. You should always ensure that the escalation procedure and time frames given are feasible in the circumstances.

E is for Entire Agreement

It is common to see the following clause (or similar) inserted into a contract:

This agreement constitutes the entire agreement between the parties with respect to its subject matter. It supersedes all previous agreements and understandings between the parties and each party acknowledges that, in entering into this agreement, it does not do so on the basis of or in reliance upon any representations, promises, undertakings, warranties or other statements (whether written or oral) of any nature whatsoever except as expressly provided in this agreement.

The purpose of such clause is as follows. Under English law, a basic principle is that outside evidence cannot be admitted to supplement or vary a written contract (this is known as the 'parol evidence' rule which was established in 1833). However, if it can be shown that the written contract was not intended to capture the entire agreement between the parties, outside evidence can be adduced to vary or supplement the contract. This exposes parties to the potential of unwritten non-contractual terms being added into the contract which is far from ideal.

The entire agreement clause is designed to exclude this exception and provide certainty to the parties that the written agreement they have signed has captured all terms agreed between the parties. This clause is standard boilerplate, is rarely reviewed and yet it commonly generates litigation. In essence the clause is a statement which stipulates that the document contains the entire agreement and any preceding statements, negotiations or representations, unless encapsulated by the contract, are of no relevance and it is the contract alone which can be relied upon. In short, if such a clause is included in your contract, ensuring all agreed terms are encapsulated within the contract is vital as it is this document alone that can be relied upon.

F is for Force Majeure

The effect of a force majeure clause is to excuse the affected party from performance under the contract as long as the force majeure event continues. It should be noted that there is no legal definition of 'force majeure' and accordingly the precise definition as provided for under the contract is important. The clause will typically provide for a time limit whereby if the force majeure event continues, the contract will terminate automatically with both parties being excused from their liabilities under it. Examples of force majeure events are fire, explosion, strikes, riots, terrorist activity and acts of God.

Recently the clause has been extended to include 'acts of nature which prohibit travel' to capture the recent disruptions caused by volcanic ash. This serves as a reminder that force majeure clauses are not set in stone – so thought should always be given to the potential risks the contract could be exposed to and drafted accordingly.

I is for Indemnity

In the context of commercial contracts, an indemnity is an undertaking (in other words a legally enforceable promise) to meet a specific potential legal liability of another. The purpose of an indemnity is to provide a guaranteed remedy for a specified event. Indemnities are a highly negotiated point in commercial contracts and consideration will have to be given to the specific risk(s) arising under the commercial contract and indemnities sought as required.

J is for Jurisdiction

A commercial contract will stipulate which court will have jurisdiction should any dispute arise which requires resolution in the court system. In commercial contracts there is often a foreign element involved and it is essential to ensure the jurisdiction selected best suits the context from a practical perspective. Many European countries' judicial authorities place much greater emphasis on written submissions as opposed to the oral evidence favoured by the UK courts. Practical considerations might include the economics of pursuing a case, the limitation periods under each jurisdiction (which can range from 1-30 years) and research into the costs position (in some jurisdictions legal costs are not recoverable from the losing party), as well of course as the locations of the parties.

L is for Liquidated Damages

A liquidated damages clause sets out the fixed sum (or calculation of that sum) agreed by the parties that will be payable on breach by either party. If the figure is deemed by the courts to be punitive, the clause will be unenforceable so care should always be taken to ensure the clause includes an appropriate figure which reflects the contractual context and could not be deemed to be punitive.

N is for No Partnership or Agency

Contracts frequently contain boilerplate provisions stating that the relationship between the parties is not to be construed as a partnership or agency. This is because both of those legal forms may arise implicitly, without the parties realising that they have done so, and both have a range of legal and tax implications for the parties. If the parties do not intend for them to arise, it may be safer to state expressly that the contract does not create either form of relationship, to ensure that no unintended consequences flow from the contract.

R is for Retention of title

Retention of title provisions are often hotly debated in contractual negotiations. Where a supplier sells a product to its customer and is not paid immediately upon delivery, then the supplier will wish to provide that it retains title to (ie ownership of) the products until payment is made. The supplier will also want to impose various related obligations on the customer, covering issues such as how the products are stored, how they are identified as belonging to the supplier and whether or not the customer may sell them on before title has passed.

T is for Termination

It is common is most commercial contracts to see a termination clause which enables the parties to terminate the contract prior to the expiry of the contract's stipulated term. The clause sets out automatic triggers which enable immediate termination of the contract or termination on notice. The clause may provide that the position of both parties in respect of termination is equal – thought should be given as to whether this is appropriate or desirable in each individual case.

W is for Waiver

In the absence of a waiver clause, where a party fails to take action in respect of a breach or default under the agreement, or delays in taking action, that party may lose its rights to take action in respect of that breach of default. A waiver clause is designed to ensure that a party's rights, powers and remedies will not be lost as a result of any delay or omission in exercising or enforcing them and to expressly provide that any partial exercise/ enforcement of a party's rights or remedies shall not thereby extinguish or otherwise reduce those rights and remedies.

X is for eXclusion of Liability

An exclusion clause's purpose is to exclude or restrict liability and (where the contract is between businesses) will often exclude or restrict the party from pursuing a right or remedy (for example the right to reject goods where they are not of satisfactory quality).

Such exclusion clauses are subject to a 'reasonableness test'. What can and cannot be excluded will turn in the facts of each case but as a general rule it may be permissible to exclude the following if the clause satisfies the reasonableness test:

  • negligence (save where the negligence causes death or personal injury);
  • breach of the implied conditions of fitness for purpose or correspondence with description or sample;
  • breach of contract; or
  • misrepresentation.

It is important to remember that if an exclusion clause is found to be unreasonable, it will be wholly unenforceable.

www.lg-legal.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.