Commercial

6 things to look for in contracts

Athena Commercial
July 27, 2021

Too often businesses sign any terms a customer throws at them in eagerness to get the deal. No deal is always better than a bad deal.

Contracts are a complicated beast. Written by lawyers arguably for lawyers they can be hard for businesses to comprehend.

This leads to opinion "lock the contract in a draw and pull it out if something goes wrong". That's the wrong way to treat contracts, but we understand why people think like that when contracts are layered with impractical terms which make very little sense and seem unimportant.

A well written contract can really help a business engagement succeed, but regardless of the quality of the contract here are some key things for sellers to watch out for in their contracts.

1. Contract Term Period

Sounds simple enough, but make sure the contract clearly defines when the start and end date is. The start date of the service may be different to the effective date of the contract.

It's also important to ensure your clear on any extension terms, and to make sure they are by mutual consent and not only at the customer's discretion.

2. Contract Payment Term

Make sure the contract defines the invoicing process and the payment terms. Payment terms should be no more than 30 days.

Be familiar with what evidence is required for each invoice and what the dispute process is if they customer has an issue. Where undisputed invoices are not paid you should have the ability to add interest and if still not paid a termination right.

3. Contract Termination

Firstly on what basis can you terminate the contract? If the client is a bad one or things aren’t working out then it'salways helpful to have a termination for convenience clause.

If you don't get that, at the very least it’s reasonable to request a termination right for non-payment.

In terms of the clients rights, it's reasonable to have a termination for material breach clause, but make sure the contract defines what is meant by a material breach.

Avoid "death by a thousand cuts" clauses which state a series of small breaches can be classed as a material one and be sure to understand "termination triggers" I.e. under what events you could be terminated (none performance, change of control, financial distress etc).

The customer will usually have a termination on convenience right. This isn't unreasonable as long as the contract defines which costs will be chargeable/ recoverable in this event. It's not recommended to accept a termination for convenience clause without such "breakage costs" defined.

4. Contract Liabilities

Always a hot topic, make sure your liability limit for Breach, negligence etc is capped to a reasonable amount that's backed by your insurance (100-150% usually works).

The customer may very well only include YOUR liability limit, it's best to make sure the limit is always reciprocal, or a tthe very least defines the customers liability limit.

5. Contract Indemnities

Indemnities are a topic of it's own, but in short an indemnity is kind of like an insurance policy in the sense it is provisioning for a future event and stating who will cover costs.

Watch out for unlimited Indemnities, and its advised not to accept any of these. Always seek to cap your Indemnities in line with your liability limit.

Common Indemnities include claims from Breach of confidentiality, intellectual property, data protection, breach of laws etc. They can be pretty broad so best to review carefully.

Also watch out for sneaky Indemnities stealthy inserted in other parts of the contract. Run a find function on "indem" to catch them.

6. Contract Termination

Dependencies often get mixed up with assumptions, but in short they are what you NEED the customer to do in order to deliver the contract. They are often overlooked and can be difficult to get a customer to commit to.

Our view is that's madness, if a customer expects you to deliver and contract against a set of requirements then they should have skin in the game and contract against what they need to do in order for you to deliver.

7. Contract Dispute Resolution

Make sure the contract defines what will happen in the event of a fall out and who will deal with it.

It's best to have a structured escalation path starting with the people working on the project, then management, then the exec board.

Following that, if it's not resolved its recommended to add in an alternative dispute Resolution step (such as meditation) before the final stage of mediation in the courts.

This is a basic overview of contracts for SME's, contracts are complex and you should get professional advice before you sign.  Athena Commercial specialise in contract reviews for SME's and we are much more affordable than lawyers. Get in touch.

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