Managing risk in commercial contracts – Four key points you should always address

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Ed Rimmell

As legal advisers to businesses of all sizes, across a variety of sectors, at VWV, we assist our clients on a very broad range of commercial contracts.

However, whilst the needs of no two businesses are the same, there are common themes that we see when businesses are trying to manage risk in commercial contracts.

Here we take a look at four key points that we often come across and that you should always consider when entering into commercial contracts.

The Parties’ Obligations

It is important that you set out clearly each party’s responsibilities under the contract.  A clear set of obligations provides the baseline against which ongoing performance of the contract can be monitored.

This sounds obvious, but in our experience one of the main reasons for contract disputes arising is that the parties have not clearly and unambiguously set out at the outset what each of them is responsible for, to what standards, and the limits of that responsibility.

Don’t fall into the trap of assuming that the contract just deals with the ‘legal stuff’.  Getting the commercial and operational obligations right is just as important (if not more so) than much of the legal detail.

Limitation of Liability

One of the more effective ways to manage your contractual risk – particularly where you are the party responsible for delivery under the contract – is the inclusion of a robust, enforceable cap on liability under the contract.

If you are comfortable with the level of the cap, and that the key potential liabilities are covered by it, that will help in your consideration of the other risks that you are invited to accept under the contract.

Being clear as to what is (and what isn’t) covered by the cap is key.  You should consider whether, for example, any indemnities in the agreement should fall within the cap.

You might also consider whether any particular liabilities should be excluded from the liability cap (and bear in mind that in relation to some types of liability, the law doesn’t allow you to limit your liability).

You will need to be careful though in all contracts (but particularly when dealing with consumers) that any limitation of liability is drafted in a way which is properly enforceable.

Contract Termination

The right to bring a contract to an end (whether on breach of the agreement by the other party, or in some cases simply because it is not working out for you) is an important tool in allowing you to manage contractual risk.

You should consider how long you are locked into the contract for, and the circumstances in which you will be entitled to bring it to an end.  Do you want the right to bring it to an end for convenience?

If there are particular circumstances in which you would want to be able to terminate the contract early, they should be spelt out in the contract.

Many contracts will contain a right to terminate for ‘material breach’ by the other party – you should spell out any particular breaches that you want to ensure fall within the category of ‘material’.

Contract Expiry

When will the contract come to an end (assuming that it isn’t terminated early)?  Will it automatically expire on an end date, or does one of the parties need to give notice to the other that it will expire on that date.

It is not uncommon for contracts to ‘automatically renew’ on a periodic basis, if neither party notifies the other that it should come to an end on the expiry date.  You should think carefully before agreeing a provision of this nature.

Our experience is that it is often preferable for the parties to need to take a positive action to renew the contract.

We are often approached by businesses who have missed the deadline for notifying the other that the contract should expire, and have then found themselves locked into an unwanted contract.

Summary

Depending on the nature of the contract, other aspects will have particular importance.

For example, some contracts will have a particularly important intellectual property angle, where ensuring that your valuable IP is robustly protected will be the key element of the contract.  In other contracts, data protection elements or KPI mechanisms might be particularly important.

The themes above will be key in almost all contracts that you enter into.  In our experience, businesses which deal carefully with these matters will have made a good start in managing their risk in their commercial contracts.

Ed Rimmell is a partner at award-winning regional law firm VWV.  Ed can be contacted on 0117 314 5232 or at erimmell@vwv.co.uk.

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