Important Contractual Clauses: Things You Must Consider Carefully
Not everyone knows what to look for when reading a contract.
The following are some items to consider when you review a contract:
- Term: Outlines the duration of the contract. It’s important because it tells you for how long you must meet your obligations, and for how long the other party must meet theirs. Keep an eye out for ‘evergreen’ clauses, which create a ‘rolling term’ or automatic renewal. An ‘evergreen’ term is constantly renewed, meaning your obligations remain until the contract is terminated in writing.
- Termination: It is important to know how to terminate. You should ensure that you have a right to terminate and that this right applies in scenarios relevant to you. An example might be for a supply of building materials contract where you are the manufacturer and you need to ensure that you have the right to terminate the agreement in the event that you cannot obtain the raw materials necessary to manufacture the supplies. You must also consider whether you’d need to be able to terminate effective immediately or terminate after a specified notice period.
- Indemnity: An indemnity is a right of reimbursement and/or to make good loss, damage or liability. Always ensure that any losses you are liable for are those that you can afford to reimburse. To the extent permitted by law, always ensure that the liabilities for which you agree to be responsible are reasonable and within your control to avoid. It is helpful to check with your insurer whether they will cover the types of indemnities under the contract. Watch out for wording that requires an indemnity for ‘consequential loss’. Consequential losses may also be expressed in a contract as ‘indirect losses’, ‘incidental losses’, ‘special damages’ or even encompassed by the broad wording ‘ANY loss or damage’ or ‘ALL loss or damage’. Consequential losses are distinguished from direct losses, as they are those losses that are incidental to and stem from direct losses.
- Security/Guarantee: Security takes many forms and largely depends on the type of transaction. For example, a supply of goods contract would usually require a deposit amount as security, whilst a contract for the provision of services might require a retention amount, personal guarantee, or a company guarantee.
If you are the provider of security-
- in the form of a bank guarantee: it should be noted that bank guarantees come at a cost that you may wish to build into the contract sum that you receive for your goods/services;
- in the form of a company guarantee: ensue that if you are guaranteeing performance of the contract that you are able to so perform it if required;
- for retention: ensure that any payment which is retained by the other party must be paid to you upon the occurrence of a clearly defined event which you are confident you can objectively achieve, (e.g. ‘Upon practical completion’, as opposed to ‘Upon the complete satisfaction of the other party’); and
- for a personal guarantee: ensure that you receive legal advice about the risk involved to your assets and the terms of the guarantee.
- Dispute Resolution: This is important so that you know what the mechanism for resolving disputes. Stalemates caused by contracts which are silent on how to resolve disputes are highly inconvenient, cause delays and are costly.
Help in understanding your rights, liabilities and obligations, as well as how best to negotiate more favourable terms is available.
In addition to the clauses referred to above (which are examples only) there are many other important clauses to consider in a contract. For assistance with reviewing and/or drafting contracts or for more information about the above, please contact us.
The material contained in this publication is meant to be informational only and is not to be construed as legal advice. Tisher Liner FC Law will not be held liable or responsible for any claim, which is made as a result of any person relying upon the information contained in this publication.
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