Most commercial contracts are signed with optimism. The focus is understandably on agreeing the price, finalising the scope of work and getting the deal over the line.
However, many commercial disputes do not arise because one party intended to act unfairly. More often, they stem from assumptions about what would happen if something went wrong, assumptions that do not reflect what the contract actually says.
The provisions that receive the least attention during negotiations are often the ones that become the most important later. Spending a little extra time reviewing a handful of key clauses before signing can help businesses understand the risks they are accepting and avoid costly surprises and litigation further down the line.
1. Limitation of Liability
A limitation of liability clause determines who bears the financial risk if things do not go according to plan. It may cap the amount one party can recover, exclude certain types of losses altogether or restrict the circumstances in which liability arises.
Imagine your business appoints a software engineering firm to develop a bespoke system for £50,000. Shortly after the launch, the system fails, disrupting operations and resulting in significant financial losses. You may assume those losses can be recovered, only to discover that the contract limits the supplier’s liability to the amount paid under the agreement. Even if the losses are considerably greater, your ability to recover them may be capped.
This does not necessarily mean the clause is unreasonable, but it does mean you should understand the commercial risk before signing.
Ask yourself: If something goes wrong, would this clause leave your business adequately protected?
2. Payment Terms
Payment clauses often receive only a cursory glance. Once the headline figure has been agreed, it is easy to assume the remaining provisions are straightforward.
In reality, payment clauses often contain detailed mechanisms governing when invoices become payable, whether payment depends on certain milestones being achieved, whether interest can be charged on overdue sums and whether payment can be withheld in particular circumstances.
For example, a manufacturer delivers £30,000 worth of goods expecting payment within 30 days. The contract, however, provides that payment is only due once the customer has completed its own internal acceptance process, with no longstop deadline for doing so. Although the goods have been delivered to the customer, payment is delayed for several months, placing unnecessary pressure on the manufacturer’s cash flow.
Understanding precisely when payment becomes due can be just as important as agreeing the price itself.
Ask yourself: Does the contract clearly explain when payment is due and what happens if either party fails to meet its obligations?
3. Termination Rights
No business enters into a contract expecting the relationship to fail. Nevertheless, commercial circumstances change, priorities shift and sometimes a working relationship simply no longer functions.
Termination provisions set out when an agreement can be brought to an end, how much notice must be given by either party and whether specific steps must be followed before termination takes effect.
Consider a business that appoints a marketing agency under a twelve-month contract. After only a few months, the quality of service falls well below expectations, and the business wishes to appoint someone else. On reviewing the contract, it discovers that termination is only permitted in limited circumstances and that ending the agreement early could itself amount to a breach of contract with potential financial penalties.
What initially appears to be a straightforward commercial decision can therefore become a much more complicated legal and financial issue.
Ask yourself: If this arrangement no longer worked for the business, would you know how, and when, you could bring the contract to an end?
4. Dispute Resolution
When relationships are positive, it is easy to overlook the clause explaining how disputes will be resolved. Yet this provision can have a significant impact on the time, cost and complexity of dealing with a disagreement.
A dispute resolution clause may require the parties to negotiate first, attempt mediation, refer disputes to arbitration or issue proceedings before a particular court. A standard clause will also specify which country’s laws govern the contract.
Imagine two UK businesses entering into what appears to be a routine supply agreement. A dispute later arises and one party discovers that the contract requires disputes to be resolved through arbitration overseas under foreign law. What initially appeared to be a relatively modest disagreement suddenly becomes considerably more expensive and procedurally complex.
Understanding where and how disputes will be resolved before signing the agreement can help to avoid unwelcome surprises later.
Ask yourself: If a dispute arose tomorrow, does the contract specify where it would be decided and what process you would need to follow? In the absence of any such provision, are you happy for the relevant legal system to determine those issues for you?
5. Notice Provisions
Notice clauses rarely attract much attention during negotiations, yet they can have significant practical consequences.
Those provisions often specify precisely how formal notices must be served, who they should be sent to and when they are deemed to have been received. Failing to comply with those requirements can affect a party’s contractual rights.
For example, a business decides to terminate a long-standing supplier agreement and emails the termination notice to its usual point of contact. Weeks later, it discovers that the contract required notices to be served by recorded delivery to the supplier’s registered office. The email did not satisfy the contractual requirements, meaning the notice was ineffective and the agreement continued. This leads to additional cost to the firm, and if they had already lined up an alternative supplier, a period of time paying for two duplicative services.
A simple administrative oversight can therefore have significant costly consequences.
Ask yourself: If you needed to exercise an important contractual right at short notice, could you confidently comply with the notice requirements?
Contracts are intended to provide certainty, particularly when commercial relationships come under pressure. The clauses discussed above are unlikely to receive much attention while negotiations are progressing smoothy, but they are often the provisions that determine each party’s position when difficulties arise.
Taking the time to understand these terms before signing does not mean approaching every contract with suspicion. Rather, it allows businesses to make informed commercial decisions, allocate risk appropriately and reduce the likelihood of avoidable disputes. Equally, if issues do arise during the course of the contract, understanding the rights and obligations that have already been agreed can often place a business in a much stronger position when seeking to resolve them.
Whether you are negotiating a new agreement, reviewing existing contractual terms or facing a contractual dispute, obtaining legal advice at an early stage can often help clarify your position and identify risks and ensure that informed decisions are made from the outset.
Where disputes do arise, legal advisers can often help the parties explore pragmatic commercial solutions, reducing the need for court proceedings and, where appropriate preserving valuable long-term business relationships. If you are facing a commercial dispute and would like to discuss your options, please contact Eugenia for advice and support.