Raise the draw-bridge: how to fortify your Commercial Contracts

Every year a large number of commercial contracts are challenged in the courts as businesses seek to free themselves from unprofitable terms contained within. Quite often the points that are being litigated appear clear cut at first glance, which is an aspect that highlights the difficulties faced by those drafting commercial contracts. There is always scope for differing judicial views on what a particular provision means, however the courts will not necessarily use a “business common sense” approach to save a party from a bad bargain if the wording is clear. Consequently a methodical approach that produces a comprehensive, clear and unambiguous contract can be highly valuable.

This article therefore seeks to advise on the key points for businesses to look for when drawing up and signing up to commercial contracts, and focuses on particular areas that we have found particularly susceptible to dispute. We at Forbes regularly prepare commercial contracts for our clients, and this article should therefore also assist you in the process of making sure that the contract drafted for you reflects exactly what you want.

Firstly it is worth pointing out the most common overarching problem that we encounter when preparing contracts – becoming blinkered by one’s own understanding of the words used and being unable to recognise the scope for alternative interpretation. This problem can be countered by considering how the wording of the contract might be viewed by an outsider some years later and in different scenarios, or by viewing the contract from the perspective of a litigator to try to spot potential holes in the drafting.

Limitation and exclusion clauses are a frequent source of dispute and any ambiguity will be construed against the party wishing to rely on the provision in question. Issues can arise as to whether a particular type of loss, such as indirect or consequential loss, has been excluded; whether loss of profit has been excluded; caps on liability; and the position of the clause within the contract as a whole.  In light of these potential issues it can be advisable to look for an inclusive approach that specifically states which losses are covered, not just those which are excluded – this will enable greater certainty and less room for dispute.  Moreover, if limitations and exclusions are intended to apply to the contract as a whole they should be set out in a separate and distinct clause.

Indemnity provisions also deal with the allocation of risk between contracting parties and, like limitation and exclusion clauses, they are often the subject of litigation. The events that trigger the right to claim under the indemnity should be set out clearly and thereafter you will need to consider how to define the losses covered by the indemnity.  In this regard you will have two general options – a wide term such as “all sums payable” which gambles on judicial interpretation or a specific list that covers the different types of loss.  Please bear in mind that although the latter can provide greater certainty, it does not prevent a court restricting the ambit of losses included.

A further consideration is the extent to which any indemnity is to be limited, either within the indemnity provision or by the general limitation clause. If you have agreed to an unlimited indemnity the contract should expressly state that the indemnity is not covered by the limitations in the contract. Of course an indemnifier will normally want contractual limitations, in which case the beneficiary should ensure that any contractual cap is high enough to cover any potential indemnity claim and still cover other claims, such as for breach of warranty.

Termination is one of the most common causes of contractual disputes and for a business looking for a way out of a contract that is no longer cost-effective or required, any contractual termination provisions are crucial. Much of the uncertainty comes from deciding whether a particular default is repudiatory – that is, sufficiently significant to entitle the innocent party to accept the breach and treat the contract as terminated. Terms such as “material breach” and “substantial breach” can lead to uncertainty, and we would therefore advise that if you wish for a breach of a particular clause to give rise to a right of termination this should be expressly stated in the clause.

Termination clauses should then go onto set out the process for termination and addresses the legal consequences of termination, such as which clauses are intended to survive termination. After all, when a contract terminates it is not erased from existence – it is just that both parties are excused from further performance of their primary obligations. You will be able to obtain greater certainty by including a list of clauses that are intended to survive termination, which commonly include limitation and exclusion clauses, confidentiality provisions, and any terms that deal with the consequences of termination.

Although boilerplate clauses typically receive less attention than the substantive provisions, it is still essential to check that they reflect the nature of the deal and give the required level of protection. If the boilerplate clauses are not checked for each deal there is a risk of inconsistency between the substantive contractual provisions and the boilerplate provisions which can ultimately undermine the substantive terms’ enforceability.

Whether you are drawing up a commercial contract or reviewing a contract presented to you, there are numerous considerations for you to be aware of when entering into a commercial arrangement. Consequently although the tips set out above provide a helpful overview they are not designed as a substitute for professional advice which can be tailored to a particular set of circumstances.

If you have any questions arising out of this article or would like assistance or advice please contact me at nick.pickup@forbessolicitors.co.uk or on 0800 321 3258.

Nick Pickup

About Nick Pickup

Nick Pickup is a Solicitor within the Corporate and Restructuring team at Forbes Solicitors. Nick’s blogs cover his specialism of work on mergers and acquisitions, business start up’s, joint ventures, shareholder issues, company restructures and general company advice.
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