Whatever type of business you run, contracts are a necessary part of daily life. Whether you’re looking to secure drilling rigs, outsource IT services or sell a range of bespoke hammocks, you should have a comprehensive agreement in place that clearly sets out everyone’s rights and obligations. Here are our top 5 tips for what to look out for:
- What warranties are provided? Warranties are usually considered essential contract terms, so a party could terminate if you breached one. If you are providing a warranty, make sure you only warrant things that are within your control.
- What happens on termination? Not all endings are amicable so it’s best to agree upfront what each party will be entitled to once the love is gone. Have your out-of-pocket or third party expenses been covered? Are you entitled to a fee if the contract is terminated before the end of the term? Or would you prefer that both parties walk away with no further liability to each other?
- Are you providing an indemnity? Indemnities are contractual obligations that allocate responsibility for specific types of loss or damage between parties and are usually the most negotiated part of any contract. Definitely avoid indemnifying the other guy for things out of your control or for which you don’t have insurance.
- What’s your liability? We can’t stress enough how important it is to make sure you cap your entire liability under a contract, particularly where indemnities are involved. This way you know upfront the most you will be liable for if the sausage hits the fan. Ideally your liability cap will capture all claims arising out of a contract although you might agree to carve out some types of loss. If you do, make sure those types of loss are manageable or otherwise unlikely to occur.
- What about consequential loss? Consequential loss is a way to describe how remote loss or damage is from the actual claim itself. If, for example, your rubber duck factory burns down, you would expect to reimburse customers for their lost ducks. You wouldn’t expect to be liable for the emotional trauma experienced by someone who didn’t receive their duck on time. This is a consequential loss and you’re better off avoiding it. What is considered consequential loss will depend on a whole heap of factors so, to avoid any surprises, you should define it to cover all the types of loss for which you don’t want to be liable.