What to look for in commercial contracts
29 Mar 2018
By Colin Millar, Wright, Johnston & Mackenzie LLP
Whether you are buying or selling goods or services in Scotland, the rest of the UK or elsewhere, it’s important to get the terms of your contract right and at least understand what you might be getting into. Very often, parties will focus only on more “obvious” provisions e.g. pricing. Pricing and the core commercial clauses are very important but it’s also wise not to overlook various other aspects. The terms of your contract will depend on factors such as your own negotiating strength but there are certain key things which it pays to take heed of before you commit yourself.
- What does your contract consist of? In a perfect world, it would be a single document signed by both parties but many commercial contracts are far from perfect! Contracts can be informally constituted (even verbally) so take care to ensure that you can identify all the documents which may, together, make up your contract.
- Which law governs your contract and how will disputes be dealt with? If you are dealing with another party based or resident in Scotland, it may not be an issue but if you are dealing with parties in the rest of the UK or abroad, you need to understand (1) what the governing law of the contract is and (2) which courts will deal with disputes or will they be dealt with through arbitration? Bear in mind that even if you can understand the “plain English” of your contract, when it’s governed by the law of another country, its effect and enforceability will never be certain unless you take appropriate legal advice.
- Termination and break clauses – at the start of a contract you may overlook the fact that things don’t always work out. You should ensure that your contract contains the right to terminate in the event of breach by the other party and possibly also an “early break” option if, commercially, things are just not working out. If you have accepted a long term contract, you should fully consider the consequences of being tied in for such a long period.
- Beware “agreements to agree” – bear in mind that an agreement to agree doesn’t create any enforceable obligation on the other party. If your contract says that certain things will simply be left to be agreed, you need to consider the consequences of failing to agree. Is there a default position for how a failure to agree would be dealt with? This could be any number of different things, even a right to terminate.
- Incorporation of standard terms or other documents – if your contract incorporates or refers to other documents then have you checked them to understand their terms and ensure that they “fit”? It may be worth specifying a hierarchy of documents with the more “bespoke” elements prevailing over standard form documents.
- Do you need to add a specification, KPIs and or service levels? If you don’t have specific “benchmarks” which detail the standards expected of the party providing the goods or services then the default position is that goods will be of satisfactory quality and or services provided with reasonable skill and care. That may not be sufficient or very helpful in defining specifically what you are to provide or get.
- Be careful with warranties and indemnities – if you are being expected to provided indemnities (to compensate the other party for loss in specific circumstances) or warranties (assurances that specific facts or circumstances are true or will happen) you should carefully consider the consequences. You should consider limitations (financial caps, time limits and, often, an exclusion of liability for any remote or indirect losses). You should also consider very carefully whether you will able to provide any assurance on events in the future.
- Intellectual property – if you have asked someone to create something for you then make sure you acquire the intellectual property rights.
- Data protection – with GDPR on the horizon, consider whether any personal data may be used or transferred in connection with your contract and make appropriate provision.
Colin Millar is a Partner in the corporate law team at Wright, Johnston & Mackenzie LLP. Wright, Johnston & Mackenzie is a full-service, independent Scottish law firm, with a history stretching back over 160 years, operating from offices in Glasgow, Edinburgh, Inverness and Dunblane. Further information on WJM can be found at www.wjm.co.uk