Key contract clauses

Key contract clauses

1. Indemnities

   • Promise to compensate for a trigger event including breach of contract, fault/negligent act, any specified event
   • Useful when damage remedies alone wouldn't be sufficient to cover the loss suffered
   • Cap so that indemnity isn't > consideration and negotiate a limit of liability
   • List types of losses (liabilities, costs, expenses, damages, taxes, penalties), exclude events, specify if direct losses only

2. Liabilities

   • Legal responsibility vs. commercial one
   • If limit is too low or exclusions too wide, entire clause may be unreasoanble and unenforceable - risk of unlimited liability

3. Guarantees

   • MUST be in writing
   • Promise to fulfil any liabilities/debts owed to beneficiary if the principal is unable to meet them
   • Secondary obligation, can never exceed responsibility of the principal
   • If guarantor fulfils requirements of the principal, entitled to the same rights and all legal remedies against the principal

4. Liquidated damages

   • Financial damages awarded upon breach of contract. Genuine pre-estimate of the damaged caused by the breach
   • Advantages: do not have to wait for loss to happen in event of breach, less time/expense than court, courts usually enforce their application, practical for minor breaches, deterrent
     • Disadvantages: no duty to mitigate the loss i.e. losses above liq. damages value need to be covered by injured party
   • Good practice to state circumstances under which liq. damages apply - specified value or % of amount - and how it was calculated
   • Unlikely to rule as penalty as commercial parties are free to negotiate the amount
   • Contract for services = service credits

5. Payment

   • Open account: delivery in advance of payment
   • Documentary collection: seller delegates to bank to collect payment. Most common in international trade. Cheaper/less complicated than letter of credit but riskier to supplier
   • Advanced payment e.g. mobilisation fee, cashflow purposes, allow work to start
   • Letter of credit: agreement between banks to transfer funds in exchange for goods/services on presentation of specified docs
   • Overdue payments - rate of 8% above the base rate of the bank applies (UK)

6. Incoterms

   • Roles and responsibilities o f parties, risks sharing, responsibility for custom clearance
   • Transport by land, sea, air
   • State clearly when delivery is considered to have been made due to impact on payment schedule

7. Acceptance criteria

   • Delivery only made once customer accepts the standard/quality of goods.services as per the contract. Helps set expectations, benchmark for testing.