By Arjun Ahluwalia
Every contract represents a risk allocation – either pushing risks on to you, or pushing away risks to your counterparty. Getting this balance right is critical. At Argentum Law, we are obsessive about ensuring contracts are clear, to the point, represent industry and market practice and use simple plain English that absolutely everyone can understand. Ultimately this will allow for a healthy, fair and balanced allocation of risks that will allow you to quickly and comfortably run your business.
This checklist of 30 points can be used quite powerfully as a gut check on risk exposure for your business. When a contract comes through to you, whether your company is a customer, supplier of goods or services or other type of counterparty - run through this checklist to get a sense of whether signing the contract makes sense for your business. This list is not exhaustive but will give you a sense of what your General Counsel will look out for in reviewing a contract on your behalf.
1. Identity of the Parties to the Contract. Are they individuals or corporate entities? If corporate, does the person signing have the authority to bind the business?
2. Purpose of the Contract. Is it adequately described? See our article on the importance of the often-ignored Recitals in this edition of our newsletter.
3. Underlying Assumptions. What assumptions have you or the counterparty made in relation to the commercial transaction? If they are vital to performance, then ensure they are reflected as conditions precedent to performance.
4. Definition of Services and Products. Avoid loose language around services/products. Push for having a precise and descriptive schedule of products, services, and roles and responsibilities that are measurable and objective.
5. Duties of Each Party. Be as clear and precise as possible in delineating the obligations of each party, and if time is of the essence, ensure that this is clear and the obligations are indeed time-bound. If standards of performance are particularly important, consider including service level requirements and potential penalties for breach. Look out for the following hard to achieve standards if you are the subject of the standard: “Perform to highest standards”, “do all things necessary or appropriate”, “in the [counterparty’s] sole judgment”. A balanced position on standard of care may reference “commercially reasonable efforts”.
6. Rights of Each Party. If there are any specific rights that you wish to have – for example exclusivity or the right to sub-contract work to a third party supplier, ensure that it is indeed reflected.
7. Relevant Dates, Prices, Quantities. Consider the need for specific measurable criteria for performance such as time-based triggers for payment, product/service pricing (whether attached as a schedule or from a catalog that may be issued annually), or minimum purchase/sales targets.
8. Payment Terms (Lump Sum, COD, Installments). Review the payment terms carefully, and assess the due dates and whether a particular manner of payment is more suitable for the type of products/services being rendered. If favorable, avoid language permitting a counterparty to withhold payment of disputed invoices and push for final work/title/license only transferring on full payment.
9. Risk and Title. If the contract involves the supply of products, assess at which precise point in time risk and title to the product in question shifts from one party to the other. Consider use of Incoterms and verify any abbreviations used that may be customary to that specific industry/market.
10. Taxes and Charges. Who is responsible for any taxes, fees and charges on payments under the contract?
11. Interest and Late Fees. Will any interest or late fees be charged as a penalty for late payment? Consider whether this hurts or benefits you.
12. Representations and Warranties. Consider any representations and warranties about the product or service. Depending on whether you are the recipient or provider of warranty language, either avoid or push for “certifying”, “warranting”, “guaranteeing” and using words like “insure”, “ensure”, “assure” and unlimited language such as “all” and “every”. Where necessary, push for tailored provisions to scope of work and qualifiers, etc.
13. Restrictive Covenants. Avoid any language that limits your ability to operate (e.g. a non-compete) (unless favorable to you). Push for appropriate qualifiers such as geographical and time limits.
14. Disclaimers, Limitations on Liability, Liability Caps, Waivers and Releases. Look out for this type of language or references as they have the effect of limiting liability on the counterparty. Where appropriate, you may indeed push for having some form of limit to your liability exposure. A balanced position may be a well-crafted limitation of liability, for example, damages limited to the contract value. Assess the need for, or removal of, responsibility for indirect and consequential damages.
15. Liquidated Damages. Look out for references to liquidated damages, which may operate to have a party on the hook to pay a defined sum for breach.
16. Intellectual Property, Data Ownership, Data Privacy and Security. Does the contract contemplate any licensing, assignment or transfer of intellectual property rights? Is a limited license required for provision of the services or products? Who owns the intellectual property and data generated under the arrangement? Is personal data being processed by any party and if so does any privacy regulation apply? Are there adequate safeguards on data security?
17. Confidentiality Provision. Is any confidential information being shared between the parties? Does the contract contain a well drafted and appropriate clause regarding confidentiality?
18. Indemnification. An indemnity is a powerful clause that can have massive unintended effects if not appropriately reviewed. Ensure who is indemnifying who and in what situations (such as material breach) and whether the indemnity is payable on demand or on the basis of a successful judicial claim.
19. Default. Assess whether the contract includes any specific consequences for any default by one party or breach. It is important to be clear and precise regarding language surrounding a default or breach, and what consequences flow once a default is triggered.
20. Term. Avoid indefinite agreements, ill-fitting durations and unclear renewability. Push for an appropriate term and consider whether being automatically renewable benefits you.
21. Termination. Avoid unilateral termination (unless favorable) or unclear termination language. Push for termination for breach or default (with perhaps a notice or cure period), explicit consequences of termination and survivability of confidentiality and payment provisions, or perhaps an obligation to transfer the work to another supplier (if appropriate).
22. Assignment/Transfer. Do you wish to have the rights or constrain one party’s right to assign or transfer the rights and benefits under the contract? If you wish to have the right to transfer obligations, consider including a right to novation. Generally avoid freely assignable contracts (unless favorable) and push for approval for assignment.
23. Force Majeure. The 2020 Covid-19 crisis and the 2008 Financial Crisis laid bare how important these clauses are. Include a well-drafted “force majeure” clause relieving you from breach if unforeseen events occur, or exclude specific events where you deem they are indeed foreseeable by the other party.
24. Dispute Resolution. You have a lot of options and combinations here. Look out for references to mediation, litigation under national courts or arbitration under a specific arbitral body. Depending on your posture, location, liability exposure, costs of and time for enforcing or defending a claim etc. under a contract you may consider a national court in your home or a neutral jurisdiction, or a fair and balanced arbitration process under a favorable governing law. Aim to include a mediation clause – they have good success rates nipping a dispute in the bud.
25. Governing Law. Ensure the contract clearly states the governing law.
26. Entire Agreement. Ensure when appropriate that a clause is included that the contract constitutes the entire agreement and replaces/supersedes previous understandings.
27. Severability. A severability clause is one which states that if for any reason parts of a contract are struck out for being unenforceable, that the remaining provisions continue to apply.
28. Due Execution. Ensure you have the signatures of authorized signatories. If the jurisdiction you are signing in, or the governing law of the contract allows it, consider using a verified e-signature service. If you are in a jurisdiction where the subject matter of the contract requires notarization (for example a real property transfer), ensure you are meeting those requirements.
29. General Market Practice. Get a sense of what is market practice in your industry. Get sample contracts from other key players to get a lay of the land and compare positioning and risk allocation.
30. Simple Plain Language. Ensure your contract uses simple, plain language and is not unnecessarily long and complicated.
Argentum Law is an international advisory firm built on leveraging technology and connectivity to provide legal services through virtual offices. With years of experience working remotely, our lawyers are available to provide counsel with minimal disruption during this time of crisis.
