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