In Short
- Reviewing contracts thoroughly helps identify potential risks, ambiguities, and responsibilities before you sign.
- Understanding key contract terms, such as termination clauses and liabilities, can prevent future disputes and costly surprises.
- Seeking expert legal advice ensures that your interests are protected and the contract terms align with your business goals.
Tips for Businesses
Before signing a contract, review it carefully for any unclear or one-sided terms. Pay attention to clauses on termination, liability, and payment obligations. If you are unsure about any part of the contract, seek professional legal advice to avoid potential risks and ensure the agreement works in your favour.
Running a business means entering contracts on a fairly regular basis. Whether you are reviewing a contract before purchasing a piece of equipment, sending a contract to a potential staff member or engaging a supplier for your products, knowing what to look out for in a commercial contract is essential.
Despite being time-consuming and complex, contracts are essential in protecting your business and ensuring that you and your customers understand your rights, roles, and responsibilities. Therefore, reviewing a contract thoroughly before entering the written agreement is a good idea. This article will outline some contract review tips and examine six common clauses to consider when reviewing your business contracts.
1. Liability
Liability provisions are often some of a business contract’s most important and high-risk provisions. They generally set out what losses each party will be legally responsible for.
You must consider what liability you are prepared to accept and what liability you may be exposed to from the other side. What is appropriate and acceptable will depend on the commercial circumstances of each deal. Therefore, ensure you review the liability provisions for each business contract you enter.
As well as identifying each party’s liability, a well-drafted contract should also establish any liability limitations or exclusions. Otherwise, you may be responsible for any loss, theft or damage, regardless of who is at fault.
Limitation of Liability Provisions
A limitation of liability provision will limit the extent to which you will be liable if the other party sues you under or in connection with your contract.
For example, your business sells software services, and your online platform goes offline one afternoon due to a technical issue. One of your customers, who relies on the platform to conduct business, cannot continue business during this downtime and loses some trade. The customer sues you to cover their loss. If your agreement with them limits your liability for this scenario, you may not be required to pay the full amount.
Exclusion Clause
An exclusion clause will remove certain types of liability altogether. Consider the example above. Your services agreement might exclude liability for any losses caused due to scheduled downtime. In this scenario, even if a customer loses money during scheduled downtime, they cannot sue you.
Not all limitation or exclusion clauses are enforceable, meaning a court may determine that it is invalid, thereby offering you reduced or no protection. For example, this is often the case in:
- standard-form contracts that do not involve negotiations; and
- liability provisions relating to consumer guarantees that you legally cannot exclude from a contract.
Financial Limitations on Liability
It is also common to see a financial limitation on a liability clause in commercial agreements. These work to set the maximum amount a party is responsible for paying regarding financial obligations or potential losses. For example, you can limit your liability for any losses to the amount paid by the other side for the services you provide them.
What is an appropriate financial limit will largely depend on the commercial circumstances of the agreement. You should also consider what limit you are willing to offer or accept in light of the liability you may be exposed to. For instance, if you are working with a developer, you may be exposed to significant risk of intellectual property breaches. In this case, the cost of the services may be insufficient to cover your losses should you be sued by a third party for intellectual property breaches caused by the developer.
2. Indemnity
An indemnity is a promise from one party to compensate the other party for certain losses or damage suffered by the other party during the performance of the contract. Unlike breach of contract claims, you generally do not have to prove that the other party was at fault for causing the loss or damage to receive compensation. However, since an indemnity can significantly affect your obligations or protections, you should carefully consider these clauses during a contract review.
If you are providing an indemnity, consider:
- what types of responsibilities apply to you;
- the potential cost to your business if you have to indemnify the customer;
- whether you can afford to meet these costs; and
- whether your insurance will cover this type of indemnity.
Alternatively, if you are asking the other party to indemnify you, you should consider:
- the types of liability covered under the indemnity; and
- any exclusions or limitations to the indemnity being provided.
For example, if you are receiving an indemnity, you may request that it cover your actions and omissions for loss or damage that you suffer concerning the subject matter of the contract and all legal costs.
Continue reading this article below the form3. Term and Termination
The term of a contract is a crucial way to identify how long each party must comply with its obligations. Therefore, when you review a contract, you must consider whether your business can comply with this term.
Possible options include:
- fixed-term contracts, i.e. 12 months or until completion of services;
- fixed-term contracts with automatic renewals or extensions thereafter; and
- ongoing contracts, which continue indefinitely until terminated by either party.
Despite best intentions, situations change, and sometimes business relationships do not work out. Therefore, your contract must include an opportunity to end the relationship in certain situations.
Termination clauses specify when and how either party to the contract can exit and any conditions attached. For example, conditions may include:
- early termination fees;
- return of confidential information; and
- documents and payment of costs to the other party.
4. Price and Payment Terms
A business contract should clearly outline payment terms. There are various ways to structure these, but the main objective is to ensure you are protected whether you are making or receiving payment.
Payment terms should specify:
- how your customers can make payment;
- how you receive payments;
- that your customer agrees to pay the price that you advertised plus any additional charges, such as delivery or other expenses;
- the date by which a customer must make payment; and
- the currency.
Download this free Commercial Contracts Checklist to ensure your contracts will meet your business’ needs.
5. Obligations and Warranties
A warranty is a promise one party makes to the other party regarding the business relationship.
Common warranties include:
- that a party has full legal capacity to enter the agreement and perform their obligations;
- compliance with applicable laws and regulations; and
- confirmation that no insolvency event has occurred in respect of either party.
Under the Australian Consumer Law (ACL), certain consumer guarantees may come with your goods and services that you cannot exclude under contract. These include the following:
- goods are of acceptable quality;
- goods match their descriptions;
- a supplier or manufacturer will take reasonable steps to repair products and obtain spare parts; and
- a supplier or manufacturer will honour any express warranties.
These are in addition to any other obligation or warranty you provide to your clients.
6. Intellectual Property
Ownership of intellectual property is a critical consideration in business contracts, particularly in:
- software agreements and software as a service agreements (SaaS);
- marketplace terms and conditions; and
- agreements with content creators and influencers.
Intellectual property is a broad term typically covering trademarks, patents and underlying code. When reviewing a business contract, you should ensure you understand who owns the intellectual property of certain materials, including any materials created as part of the contract. It is common for a customer to own any new intellectual property since they are paying for services. They will then grant you a licence to use this intellectual property as required.
However, if, for example, you are a web developer engaged in building an application or website for a client, you should retain ownership of the underlying code or software that is not specific or bespoke to the client.
Key Takeaways
Drafting and reviewing contracts is an essential part of any business. A good understanding of what to look out for when reviewing commercial contracts can be the difference between protecting your legal interests and suffering significant losses.
If you need help reviewing your commercial contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Liability provisions define each party’s responsibility for losses and may limit or exclude specific liabilities. Reviewing these provisions can protect your business from covering unexpected costs.
Indemnity clauses involve a promise to cover certain losses or damages. These can impact your financial obligations, so it is important to assess the potential costs and whether insurance might cover them.
We appreciate your feedback – your submission has been successfully received.
