Common Contract Terms

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By Daniel Burns, Partner and Head of Company Commercial

This article looks at common contract terms and explains their use in many contracts.

Parties

One of the first things that will be on any written contract is the names of the parties. To avoid any confusion, the full names and addresses of the parties should used. Any party that is a company or limited liability partnership should also have their registered office address and company number inserted. The company’s name can be changes, but the company’s number always remains the same.

Commencement Date

The start of the contract will also, usually, include the start date of the contract. Normally, once all parties have signed the contract, the contract will be dated and it is at this point that the contract will commence. However, in some circumstances it is possible for a contract to begin either before or after the time of signing.

Performance

A clause setting out the obligations of the party providing the goods, services or other obligations is normally needed. A contract for the supply of services over several years may require a clause setting out a detailed set of steps and milestones which the performing party must deal with in order to satisfy its obligations. However, if the supplier is simply supplying off the shelf goods, then less detail will probably be needed as to how those goods will be supplied.

You should consider including clauses that anticipate what should happen in the event of poor or even non-performance of contractual obligations. There are a number of remedies available depending on the nature of the contract and whether you are the supplying party or the customer (for example clauses can be inserted with allow a supplier to suspend their services, or a customer may have rights to terminate the contract as a result of poor service).

Payment

A clause that deals with payment will have to deal with a number of details, ranging from the obvious – what is the price to be paid? – to more complicated provisions, such as the inclusion of VAT or other taxes; frequency of multiple payments (if any); and payment methods (cash, bank transfer, cheque, etc).

There are also a number of clauses that can be added to the contract to protect or incentivise on-time payments, for example:

  • A clause that causes interest to accrue in the event of late payments – typically this is at a rate of 4% – 8% per annum;
  • Having the paying party’s obligations guaranteed by a third party, where you are not confident that you will receive full payment. For example, where you are dealing with a limited company with little to no trading history, it can be a good idea to have an individual (such as one of the directors) personally guarantee the company’s obligations. If you do not, you run the risk of the company being dissolved in order to avoid its payments;
  • Asking for a deposit or part payment up front; and/or
  • Carrying out a credit check or financial viability check on the business.

Any clause concerning payment needs to be looked at very carefully – this is not something that the parties should be unclear about before signing.

Excluding or Limiting Liability

A party who tries to reduce or all together exclude their legal liability to the other party, is considered to have made an attempt to “exclude or limit” their liability.

For example a supplier may include a clause in their contract, which states that if the buyer has a claim against the supplier, the most the buyer can financially recover from the supplier is capped at the amount that the buyer has spent with them.

Limitation of liability clauses are considered to be fairly essential protection for anyone providing goods or services.

In practice, a limitation of liability clause does need to carefully considered; if the clause is too one-sided it may be considered unfair and therefore unenforceable.

It is also important to note that certain liabilities can never be excluded, such as death or personal injury resulting from negligence; and liability for fraud or fraudulent activity.

Termination

Lastly, parties should be clear about what rights they have to end the contract under the termination clause. These rights can be invaluable if, for example, one party is not properly performing the services, and as a result the other party wishes to end the contract quickly and without and financial penalty.

These are just some of the points that needed to be looked at closely when drawing up a contract.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.