Clauses in Commercial Contracts
This article, which is the first in our series of articles concerning the sales of goods and services under commercial contracts, considers key aspects concerning the negotiation and drafting of these contracts.
The term ‘commercial law’ includes the various legal aspects of commercial contracts.
One category of such contracts is business-to-business contracts for the sale of goods and services.
Standard terms and conditions versus tailor-made contracts
At the outset of the negotiation stage, the contractual parties must make a choice between either negotiating specific ‘tailor-made’ contractual terms or utilising standard terms and conditions. Relying on a party’s standard terms and conditions is convenient to do, with that party possibly being able to use those terms in contracts with various counterparties. Using standard terms may also reduce the length of any contract negotiations. Ultimately however, the contract must reflect the agreement between the parties, and if standard terms do not adequately do so, a tailor-made contract will be required.
A consideration to bear in mind is that standard form contracts are subject to greater regulation than individually negotiated contracts. In particular, exclusion of liability clauses in standard form commercial contracts are governed by the Unfair Contract Terms Act 1977 (‘UCTA’). The exclusion of liability clause relied on must of course have been validly incorporated into the contract, and its effect will also depend on how it is construed. However, section 3 of UCTA also requires that the clause meet the test of reasonableness. As mentioned, this requirement only applies to standard form contracts. Therefore, if a seller inserts a clause excluding liability for late delivery into a tailor-made sale of goods contract, Section 3 will not apply to this clause. In this regard, contracting parties should note that it is not always clear cut whether one is dealing on standard terms or not, and therefore whether UCTA governs their contract.
The UCTA reasonableness test referred to is whether the “term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made” (UCTA, Section 11(1)). It is for the party relying on the exclusion to prove that it is reasonable and Schedule 2 of UCTA provides the following facts in applying the test of reasonableness: (1) the parties’ bargaining position and choice, (2) whether the buyer/seller was offered any inducement to accept the clause, (3) the extent of the parties’ knowledge of the existence and effect of the terms, (4) whether it was practicable to comply with any condition imposed on the counterparty so that liability would not be excluded, and (5) whether the goods were manufactured to special order.
Basic checklist for a commercial agreement
Having dealt with some initial considerations regarding the contractual parties’ choices between a tailor-made contract or standard terms and conditions, it is important to emphasise the following common elements in either set of contracts in a sale/supply of goods and services contract:
- Conditions precedent, which are contractual conditions that must be satisfied before a contract can take effect.
- Terms, which define the parties’ rights and duties throughout every stage of their contractual relationship, whereby one party promises to sell and deliver goods/services, and another party promises to pay the price.
- Representations and warranties, which are statements of fact or law that induce or lead to the parties concluding the contract. These statements can provide for additional remedies on top of contract damages, and must be distinguished with contractual terms, which are statements of fact that parties intend to be binding. Warranties are different from representations such that they are promises that a given statement or fact is true.
- Indemnities, which are statements that one party should bear the cost in certain scenarios. Often the parties will have evaluated the risk that the scenario referred to occurs with party with greater control over whether the scenario occurs, providing the indemnity.
- Limitations and exclusions, which represent ways of allocating risks between the contractual parties under specific circumstances. These have been referred to above and will be discussed in more detail in a subsequent article.
- Boiler-plate clauses, which are standard clauses that are not usually individually negotiated in either standard form or tailor-made contracts.
Boiler-plate clauses
The typical boiler-plate clauses in a domestic sale of goods and services contract are:
- Prevail, whole agreement and no-authority clauses. In the event of a dispute, prevail clauses provide for one party’s terms to prevail, whereas whole agreement clauses aim to avoid the incorporation of oral discussions into a contract, by providing that the terms between the parties are only those recorded in the contract. Lastly, ‘no authority’ clauses provide for which of the parties’ representatives have authority to vary the contract.
- Waiver clauses aim to prevent one party’s conduct from constituting a waiver of rights or obligations under the contract, which can happen where one party agrees to relax a contractual provision.
- Insolvency clauses are often linked to the retention of title clause and provides for what happens where one party becomes insolvent. The substantive matters with respect to these clauses will be dealt with in our subsequent articles.
- Choice of law and jurisdiction clauses concern the law that governs the parties’ contract. The omission of the clause is usually not problematic in domestic contracts where both parties reside in England. However, the omission of such a clause in international contracts can give rise to disputes over which law applies to the contract. We will discuss this issue in a subsequent article.
- Service of notices clauses provide for the locations, the methods and the time for serving a notice to another party in respect of a contractual matter.
- Force majeure clauses provide for the suspension or termination of contractual obligations where an event occurs outside the parties’ control that prevents performance of those obligations. They are usually beneficial to the seller/supplier who has the obligation to supply and/or deliver the goods.
- ‘No partnership’ clauses prevent the contract from being understood as a partnership between the parties, such that one party may become liable for the other party’s debts or obligations. With regards to this issue, parties should also note that in a particular case, the courts would nevertheless determine the existence of a partnership with reference the Partnership Act 1890.
- ‘No assignment, no subcontracting’ clauses are beneficial to the buyer where the buyer selected a specific supplier and does not want that supplier to subcontract or assign the contractual work to an unknown third party.
- ‘Confidentiality clause’, which protects trade secrets and confidential information on both sides. If it were removed as an express clause, the parties would have to rely on the law of confidential information to protect their commercial secrets, which may not always produce the protection desired.
- ‘Dispute resolution clause’, which provides the procedure for resolving any dispute that may arise. Often the procedure may require the parties seek negotiation or mediation first, failing which they may turn to litigation or arbitration.
- ‘Severance clauses’ provide for striking out or nullifying any illegal or invalid clause, or part of a clause, so as to ensure the enforceability of the remainder of the contract. Although the court has the power to sever a clause regardless of whether a severance clause is included in the agreement, the court will not rewrite or alter the contract’s basic nature.
- ‘Brexit clauses’: Given the legal uncertainty resulting from Brexit and, in that connection, to English law, a Brexit clause enables the parties to revise their contractual rights and obligations to reflect their position concerning Brexit or a Brexit-related event.