Ideally you should check you understand and are comfortable with all the clauses in a contract before you sign it. But the following are always amongst the most important aspects.

How long does it last for?

All contracts should state how long they are to last for. That might involve a rolling renewal mechanism or it might be a set period. There are a lot of factors which are impacted or influenced by the duration of a contract (e.g. price, resource and risk profile) so it important that the contract is clear on this point and that parties understand what is involved.

It is not uncommon for a company to discover it is tied into a contract for longer than it realised. This might be because the other party had a right to renew the contract unilaterally which hadn’t been appreciated, or where a deadline to give notice to avoid the contract renewing had been missed. Either way, the company risks being tied into a contract which it no longer wants or needs or where the commercial terms have become unattractive.

What are the termination rights?

Normally a party to a contract can terminate if the other party is insolvent, or is in material breach. However, contracts can often include a variety of additional termination rights which are often overlooked or misunderstood.

For example, some contracts (particularly ones involving US parties) will contain a no fault right of termination. This “termination for convenience” right allows a party to essentially change their mind and terminate, even if the other party has done nothing wrong. Another potential banana skin is a right of termination if the other party undergoes a ‘change of control’ – i.e. if it is sold or if new investors/shareholders come on board.

These rights can completely undermine any security of contract. They also can play havoc with pricing. If you believed you were entering into a five year deal you might agree to reduce prices in the early stages of the contract on the basis that you will make this up later.

What is your maximum liability?

The liability clause will state what exclusions of liability apply (i.e. what types of losses you are not liable for) and what liability caps apply (i.e. what is your maximum liability for a particular situation).

For good reason this clause is often considered the most critical one in any contract. Get it wrong and the consequences could be catastrophic for your business.

You should be clear what levels of liability you potentially face under a particular contract. This allows you to make sure you have appropriate insurance cover in place and also to assess whether the level of risk in terms of liability levels is justified by the likely benefit of the contract.

Liability provisions can be complex and it can be easy to misinterpret them. For example, not all losses you might cause under a contract will be covered by the liability cap. Some contracts can include rather disingenuous wording which means that despite the contract stating that there is a liability cap, you won’t actually get the benefit of it!

Payment

This should be a simple clause but if often overlooked, leading to confusion over what has to happen before you can get paid. A good (or more accurately bad) example would be if you were providing certain services to a customer company, and the payment clause provided for payment when the services had been completed “to the satisfaction of the customer.” This leaves you entirely in the customer’s hands as to when you will get paid.

Payment should always be tied to a fair and measurable standard, and not left to one party’s discretion.

Governing law and jurisdiction clause

A contract will normally contain a governing law and jurisdiction clause. Often it will be the last clause in the contract.

The ‘governing law’ is the law which will apply if there is a dispute relating to the agreement. The ‘jurisdiction’ means the country or state where any litigation (court action) must be held to decide that dispute. This clause is basically stating that if there is a fight, then this is where the fight is to be held and these are the rules which apply!

Where both parties are in the same country this clause is straightforward. But it becomes a key issue where parties are in different countries. Entering into a contract with a ‘foreign’ governing law and/or where litigation has to take place in that foreign territory can significantly impact on the options you realistically have if you end up in a dispute. It may make litigation to expensive. Or you may discover that the law of that territory has consequences you were not aware of (for example it may render some clauses invalid).

Recommendation

These are just five example of clauses which can cause significant issues if not properly understood before entering into a contract. There can be many others (e.g. retention of title, intellectual property and data protection clauses). Each has the potential to create major unintended consequences that can cause serious disruption to a business. In the worst examples it can cause a business to fail.

What is important to you will depend on many factors. While contract types can be similar (e.g. supply agreements or patent licences) the context will help shape what are the key concerns in each case.

That is why it is important to get help before you enter into a contract. The best time to seek legal advice is when it is preventative advice, helping you put a fence at the top of the cliff: not when when you need an ambulance at the bottom!

We can help you with that legal fence. And it doesn’t have to be an expensive exercise. We are happy to provide a free 20 minute strategy discussion to discuss your concerns, aspirations and budget so we can propose how we could help highlight the risks you may face, based on your specific circumstances and/or industry sector.