When negotiating and drafting commercial contracts, some common issues which should be considered are as follows:
- Are the parties sufficiently identified?
- Have all the appropriate parties been included? A contract cannot confer rights and obligations on anyone who is not a party to it.
- Does the contract make clear who is to do what and how, when and where it is to be done?
- Is it within the power of the relevant party to comply with the obligations? Check the relevant constitutional documents
- Should the contract set out a procedure to be followed in the event that it is necessary to vary the scope of the work to be undertaken or its terms?
Remedies for breach of Performance Obligations
- Should a failure to meet certain obligations be regarded as material and entitle the other party to terminate?
- Should the contract state that time is of the essence, in which case failure to meet a deadline would allow the other party to terminate?
- Should a liquidated damages clause (i.e. setting out the specific amount of damages) be included to cover delays?
- Should the performing party be obliged to have certain insurance policies in place in connection with the work to be undertaken?
- Might any potential claims by third parties arise in connection with the performance of the contract? e.g. infringement of intellectual property rights. If so, are appropriate indemnities included in the contract?
Limitations on Liability
- To what extent, if any, should the liability of the parties for breach of contract be limited or excluded?
- Who is to pay what, in what manner and in what currency? If the contract may be affected by currency fluctuation, is it clear which party bears that risk?
- Is the price stated to be inclusive or exclusive of VAT? Will any withholding taxes apply?
- Can prices be adjusted after the contract has been entered into? If so, in what manner?
- What happens if payment is not made? Will interest apply? Will goods supplied be subject to retention of title? Should a third party guarantee for payment be sought?
- Should the contract set out a procedure for resolving disputes? Would it be appropriate to agree to arbitration or mediation to determine matters?
Term & Termination
- Is the contract for a specific period or for an indefinite term?
- In either of the above cases how is the contract terminated – only at the end of the specific term or on a party giving a certain period of notice?
- In what circumstances can the contract be terminated earlier?
- Does the contract need to specify what is to occur on termination? For example, will there be an obligation to complete work in progress? Will parties need to hand over documents or materials?
- Have formalities for execution of the contract been complied with? These will depend on the identity of the parties and the nature of the contract.