The Magnificent Seven is a classic 1960’s American Western about seven rugged gunslingers, hired to defend a humble Mexican village from a ruthless band of marauding outlaws. After much excitement, the village is saved. It’s well worth a watch if you’re into this genre.
Much like these gunslingers, there are certain clauses in commercial agreements which exist for the sole purpose of protecting your business and we’ll be looking at seven of the most important ones. All of them may not be relevant in every case, but understanding them can save your business from major legal and financial risks.
Limitation of Liability clauses:
When things go wrong, the knock-on effects can have disastrous consequences from a financial and reputational perspective. It is important that liability is appropriately distributed to provide the right mix of protection and pragmatism.
The allocation of liability is often a sticking point in contract negotiations. The reality is that neither party wants to take on risk unless it must, but factors like negotiating power, who controls the high-risk aspects of a transaction and general commercial experience all play a part in these discussions.
For smaller parties, trying to push back on risk can be very difficult and where an SME feels that it is being forced to take on liability that it just can’t handle, difficult decisions need to be made. The reality is that, just because you can enter into an agreement that looks enticing and profitable, doesn’t mean you should. You need to assess whether or not your systems, people and cash flow can sustain your obligations under an agreement. It may be that with some insurance in place and a proper legal and financial strategy, the risks of entering into a commercial arrangement where the liability provisions are disproportionate are worth it. However, these decisions are best made with a cool head and some external input from advisors who have a more detached view and a thorough understanding of how to mitigate risk.
Indemnities:
At their core, indemnities safeguard against, or compensation for, a loss or liability. Where an agreement provides for an indemnity, one party promises to pay an identified loss to the other if a particular trigger event happens.
There are certain areas of commercial relationships where indemnities may be appropriate such as the duty of confidentiality, data protection breaches, and third-party intellectual property infringement claims against the recipient user of IP licensed by the indemnifying party. These aspects of the agreement are, broadly speaking, more heavily in the control of the person giving the indemnity than the person receiving it. The consequences of a breach of these kinds of obligations may go far beyond the usual loss or damages which may arise but often go the heart of a party’s business operations and reputation.
However, some parties seek to extend the application of an indemnity to any breach, including a breach of warranties. Service recipients are particularly keen on this, because while the indemnity scope may be expressed in mutual terms, the service provider will inevitably always bear the lion’s share of service and warranty obligations.
Where possible, we advise our clients who are providing goods and services not to indemnify the other side for warranty breaches. Why? Because indemnities provide legal cover less onerous for the indemnified party than normal rules applying to contract breach. Indemnities do not require the usual obligations to prove the loss itself of the amount of this loss, and do not require the innocent party to take steps to limit the loss it suffers. These are very powerful differences.
Warranties:
To warrant something in a contract means to promise it in a way which leaves the door open to some remedies but not others. Crucially, if a warranty is breached, the innocent party can claim damages but cannot necessarily rely on the warranty breach to terminate the contract. Often businesses do not understand this and think that, if they receive a host of warranties from the other party, they have better or more extensive protection which is not the case.
Termination clauses:
Termination can be more complex than you would think. We are frequently instructed by our clients to provide for a fixed term and a clause allowing for the termination for convenience without realising that these concepts don’t work well together.
Under standard conditions, termination for convenience allows for a party to terminate for any reason on notice whereas a fixed term ties parties into the agreement for an agreed period during which termination can only be exercised in the case of a breach of the agreement. There are pros and cons to both constructions and, it is important to look at what suits the contract best in the light of the arrangement between the parties.
What’s more, it may be that the party with more bargaining power expects that it be able to terminate for convenience where the other, less powerful party, may not. This situation requires careful negotiation and, if the party insisting on a one-sided right of termination for convenience refuses to budge on this point, the other party needs to consider the impact of this on its planning and revenue forecasting before entering into this agreement.
Payment clauses:
Tight and accurate payment terms are foundational to any agreement. When considering the timing of invoicing and payment, matters such as your payment obligations to suppliers must be considered. You do not want to be receiving payment on 90 days when your suppliers expect payment within 30 days.
Negotiating the right to suspend services for non-payment, requiring payment of the non-disputed aspects of an invoice in situations where are there concerns about the payment for services and ensuring that the right of set-off is excluded (or included as the case may be) requires an evaluation of the commercial realities of the relationship between the parties.
Intellectual property clauses:
The protection of intellectual property is tricky especially in build to print, software and general services agreements. The granting of limited licenses to allow for the performance of services must be accurately drafted. In the case where ownership of intellectual property passes from one party to another, the requirements for this transfer must be carefully set out.
Data Protection clauses:
This is one of the most mis-understood aspect of contracts. Where there is a controller-processor relationship, the terms of this arrangement must be clearly set out to protect both parties and comply with the complex legal obligations under data protection legislation.
Recently, our engagements with the Information Commissioner Office on behalf of clients has seen a tougher stance being taken by the regulator. A failure to comply with the data protection legislation can see not only financial consequences in the form of fines but also reputational damage and, in the worst case scenario, criminal penalties.
Conclusion:
Properly negotiated and drafted, these seven gunslingers can protect your business in the case where a legal dispute arises. Assessing how best to put the appropriate protections in place is not purely a legal exercise. It requires a thorough understanding of the commercial and operational aspect of your business. No contract can protect you from being unable to fulfil your obligations because you overestimated your internal business capabilities and, conversely, protect you from a counterparty unable to fulfil theirs.
Our Commercial team offers enhanced legal advice. Our team members are not only seasoned solicitors and legal advisors but have experience ranging from senior positions within corporates to being business owners in the SME environment. We understand business and law and that you can’t separate them when negotiating the best possible contractual outcomes for clients. Working with us is a smart move so reach out and we will even provide excellent coffee at our meeting!
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
