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As a business owner, you will most likely enter into contracts on a fairly regular basis. Likewise, you will ordinarily be reviewing a contract before moving forward. So, for example, you enter into contracts when you:

  • purchase equipment;
  • hire a staff member; or
  • engage a supplier for your products.

While these contracts can often seem time-consuming and complex, they play an essential role in protecting your business and ensuring that you and your customers are aware of each other’s rights, roles, and responsibilities. Therefore, it is a good idea to review a contract thoroughly before entering the written agreement.

This article will outline some contract review tips and examine six common clauses to consider when reviewing your business contracts. 

Liability

During contract review, you should closely examine liability provisions. Liability provisions are often some of the most important and high-risk provisions in a business contract. However, what will be an appropriate and acceptable risk level will depend on the commercial circumstances for each deal. Therefore, it is worth considering the liability provisions for each business contract individually.

As well as identifying each party’s liability, a well-drafted contract should also set out any liability limitations or exclusions. Otherwise, you may find yourself responsible for any loss, theft or damage that occurs, regardless of whether you are at fault. For example, most business contracts will only include liability for something foreseeable but not for something outside of your control.

Limitation of Liability Provisions

A limitation of liability provision will limit the extent to which you will be liable if the counterparty 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 type of scenario, you may not be required to pay the full amount.

Exclusion Clause

However, an exclusion clause will remove certain liability altogether. In the example above, your services agreement could exclude liability for any losses caused due to scheduled downtime. In this scenario, even if a customer lost money during scheduled downtime, they wouldn’t be able to sue you.

Note that not all types of limitation or exclusion clauses are enforceable, meaning that 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 are not negotiated, and liability provisions relating to consumer guarantees that protect consumers and cannot be excluded in a contract. 

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, these clauses should therefore be considered very carefully during a business contract review.

If you are being asked to provide an indemnity, you should consider:

  • what types of responsibilities apply to you; 
  • what the potential cost to your business will be if you have to indemnify the customer; 
  • whether you can you afford to meet these costs; and
  • if your insurance would 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 covers your actions and omissions for loss or damage that you suffer concerning the subject matter of the contract, as well as covering all legal costs. 

Term and Termination

The term of a contract is an important way to identify how long each party must comply with its obligations. Therefore, when you review a contract, it is important you consider whether your business can comply with this term.  

Possible options include:

  • fixed-term contracts ie. 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. 

Tip: Remember that certain contractual obligations will continue after termination or expiration of the contract, such as confidentiality and liability obligations. 

Despite best intentions, situations change, and sometimes business relationships don’t work out. It is therefore important for your contract to 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 to this, for example, early termination fees, return of confidential information and documents and payment of costs to the other party. 

Price and Payment Terms

A business contract should clearly outline payment terms. There are various ways to structure these, but whether you are making or receiving payment, the main objective is to ensure you are protected. 

You may want to consider whether to:

  • require a deposit be made upfront, followed by the remainder of the payment upon delivery of the goods;
  • charge interest on unpaid goods; or
  • include a fee for late payment of invoices.

These strategies will ensure your business does not bear any unnecessary payment risk. 

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. 

Obligations and Warranties 

A warranty is a promise that one party makes to the other in regards to the business relationship.

Common warranties include:

  • that a party has full legal capacity to enter into an agreement and performs its obligations;
  • compliance with applicable laws and regulations; and 
  • that no insolvency event has occurred in respect of either party.

Under the Australian Consumer Law, certain consumer guarantees may come with your goods and services that you cannot exclude under contract. These include that:

  • the goods are of acceptable quality; 
  • the 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 you may have or other warranty that you may give to your clients. 

Intellectual Property

Ownership of intellectual property is a key consideration in many 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 that commonly covers trademarks, patents and underlying code. When reviewing a business contract, you should make sure you understand who owns the intellectual property of certain materials, including any materials created as part of the contract. It is quite 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 and engaged in building an application or website for a client, you should retain ownership of the underlying code or software which is not specific or bespoke to the client. 

Key Takeaways

A well-considered and well-drafted business contract will minimise any legal risks and future disputes with customers arising. If you have any questions or need assistance with drafting sales terms and conditions, contact LegalVision’s commercial contract lawyers on 1300 544 755 or complete the form on this page.

Frequently Asked Questions

What are the key clauses I should review in a contract? 

When reviewing a contract it is important to carefully review the clauses for liability, indemnity, term and terminations, price and payment, obligations and warranties, and intellectual property.

What is a liability clause?

Liability provisions are often some of the most important and high-risk provisions in a business contract as they determine what will be an appropriate and acceptable risk. An indemnity can significantly affect your obligations or protections, so you should carefully consider them.

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