[EP 006] Clauses in Contracts You Sign: The Good, the Bad, and the Ugly

In this episode we are talking about the top things you should be looking out for in contracts that come across your desk, and the risks of glossing over the detail.

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LINKS

  • Download our Checklist on the main things to look out for in your contracts

CLICK HERE to download our 5-minute Contracting Checklist.

EPISODE HIGHLIGHTS

​2:02 Indemnity and Liability Clauses

2:43 Main things you should be looking out for in contracts

4:00 Key responsibilities and service levels

5:25 Timing and deadlines

6:02 Intellectual property ownership

7:26 Pre-contract negotiations and promises

9:05 Indemnity and risk allocation clauses

10:28 Confidentiality clauses

11:21 Subcontracting and assignment

11:57 Termination clauses and conditions

12:23 What are Back to back contracts

13:46 Assess the risks

14:13 Allocate time and use a checklist

14:27 Contract Value vs Risk level

16:23 The case with “Click format contracts”

17:36 Action steps for you to take

 
 
 
 
 
 
 
 
 
 
 
 
 

FULL TRANSCRIPT

 
 
 

Hi, Its Joanna Oakey here, welcome back to Talking Law. Today we are talking about the top things you should be looking out for in contracts that come across your desk.

Why Is This Important?

Hi! It's Joanna Oakey here. Welcome back to Talking Law. Today we're talking about the top things that you should be looking out for in contracts that come across your desk.

So, why is this area important?

I often find business owners and people involved in business just don’t read contracts properly or if they do read them they don’t understand them.

The problem is, if you’re dealing with contracts in any shape or form, if you don’t understand what you’re getting yourself into you’re opening yourself up to risk.

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There’s lots of classic examples of really simple contracts that people sign that open up a whole heap of risk that they never intended at the beginning.

Things like rollover clauses in contracts, so they’re the sorts of clauses where you sign a contract and you think it’s for a fixed period of time and then suddenly at the end of the term where you try to cancel and head off to another supplier you find that the contract had actually rolled over for another period without you intending and you’ve now been caught in a new term of the contract.

This happens a lot with contracts that appear to be fairly inexpensive on the face of them say for example voice management contracts, hosting contracts and various other types of software contracts, but when you find that a contract is rolled over again for a new term you might actually find that it’s really expensive for you to get out of.

Top things that you should be looking for in contracts.

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Indemnity and Liability Clauses

Other sorts of risk that I see quite often that people who’ve signed without understanding what they’re signing relate to indemnity clauses and liability clauses.

Once again these are a sort of area that people often skim over and think it’s too complicated, so don’t really understand what they’re signing when they sign them.

So today we’re talking about all of these areas so that I can alert you to the risks and the areas that you should be looking out for when you’re dealing with these contracts, to give you a bit of a heads up and so you don’t end up in the situation where you’ve committed your organisation to something that ends up holding a lot more risk or a lot more expense than you initially intended.

Key Responsibilities and the Standard of Delivery

Be clear about the key responsibilities, exactly what is required, how it will be delivered to you, the standard that is required, and any reporting required – and be clear about what the remedy will be if any of these items are not met.

Many times we find that key responsibilities, and detail relating to the required performance of a supplier, are deemed to be the most important parts of a contract, yet are given very little attention.

Also ensure that you include a remedy to apply if these requirements are not met. If you want a right of termination for an underperforming contract, make sure you clearly specify that.

Timing and Deadlines

If timing is going to be important, then you must specifically deal with this in the contract. Ensure there is a very clear timeline – and a right of termination or adequate other remedies for you if deadlines aren’t met.

Capturing Pre-Contract Negotiations and Promises

You must ensure you correctly capture any pre-contractual promises that may have been made during the negotiation process. Often a decision will be made to accept the proposal of one supplier over another because of the performance promises made during the negotiation phase. However it is extremely common for these promises to fail to make it to the contract, or to not be included in a way that is enforceable.

You should ensure that comprehensive notes are taken during the negotiation phase, including everything the other party has promised. And that these notes are then used as a checklist for inclusion of appropriate terms in the contract (together with remedies for a failure of the contracting party to meet these terms).

Intellectual Property Ownership

If there is no mention in the contract of who owns the copyright and other intellectual property in the work produced for you, then it is likely that the supplier will be taken as owning the underlying rights, whilst the customer will hold a licence to the use of the works.

In simple terms, in relation to services, this means that if you (as the customer) want to use the work again in the future, you might have issues, or have to pay an extra fee.

There are often reasons why this might be fair and reasonable. There are also often reasons why at times it isn’t. If you aren’t sure – call us. We will give you a balanced view, and ways to deal with it in the contract. Or stay tuned for future editions where we will delve much deeper into this issue and the options for a commercial outcome for both parties.

Indemnity and Risk Allocation Clauses

We often see indemnity clauses that are inappropriate for the contracting relationship that they are used in.

Risks or Value? What should you weigh more in your contracts?

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Start off with a consideration of what risks there are for both parties in this relationship, and how you want to deal with those risks. Then consider how this is best reflected in the contract. Often a generic template will not have the right clauses to adequately deal with your particular contract relationship, so it is important to spend time understanding what risk allocation approaches are possible in a contract and how to effectively use them.

Other Items You Might Also Want to Consider:

  • Confidentiality
  • Variations – how will they be managed?
  • Price – clearly set out the price, and what will trigger a payment obligation (ensure that you wont be required to make payment, if you don’t receive what you had intended)
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  • Sub-contracting and assignment – can the other party sub-contract out parts of the contract, or do you want to ensure that you know exactly who is working on your projects?
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  • Term and termination – what is the term of the contract? If it is an extended term, ensure you have appropriate rights of termination built into the contract in case problems arise. Consider what other rights of termination might be appropriate
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  • Ownership and Risk – when does ownership (title) transfer, when does risk transfer?
  • Contract management and contacts – who will be responsible for managing the contract on both your side, and the side of the supplier?
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  • Insurances – what insurances (if any) should the other party be required to hold
  • Back to back contracts – ensure you consider what contracts need to be in place to ensure that you will be able to meet your obligations under this contract, and what contracts are in place that will require this current contract to be performed properly. Ensure that each relevant term (including termination) is clearly lined up between the contracts
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Need to sign a contract? Be sure to read and understand!

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Action Steps

1. Institute a business wide process of ensuring no one ever signs a contract without someone actually thinking about it

2. If the contract relates to something negotiated, keep notes during negotiations of key terms, and ensure they are in the contract

3. Get a checklist, and use the checklist for every contract that your organisation engages in

4. Ask for legal help if you don’t have time, or you don’t understand what you are reading

Systematise your contract signing process with a checklist

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In Summary

Just a quick recap, in this episode we talked about the top things you should be looking out for in contracts that come across your desk

If you would like more information about this topic, head over to our website at talkinglaw.com.au for a free checklist of the things you should be looking out for

And you will also find details of how to contact our lawyers at Aspect Legal if you would like help with any of the items we covered today.

And finally, If you enjoyed what you heard today, please pop over to itunes and leave us a review.

Thanks again for listening in - See you next time

One common legal issue businesses face are problems that crop up from time to time with clients. This can lead to clients paying slowly, or not at all, costly and time consuming disputes, and brand damage. In this episode we discuss how having the right approach from the start can help you to avoid most of these problems.

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Episode Highlights

1:40 Five customer engagement issues you need to look into

5:11 Setting up the right terms and conditions

6:00 What should you include in your terms and conditions

6:38 Clarity on responsibility of both parties

7:49 Clarify who owns the intellectual property

9:06 Payment terms – incentives and penalties

9:57 Liability clauses you need to include

13:50 Writing your terms and conditions in plain English

14:55 Fulfill your own terms – and be proactive

16:24 Consider the cost of inaction

17:31 Four action steps you need to take

Full Transcript

Today we’re talking about the ways that you can set up your client relationships right from the start.

So, why is this important? One common legal issue that businesses face, are problems that crop up from time to time with clients or customers, depending on which language you use.

That might reflect itself in:

  • Clients being slow payers;
  • Clients not paying at all;
  • Clients that raise issues with the goods or services you’ve provided;
  • Clients that try to terminate contracts with you before they’ve come to an end; or, at the worst,
  • Situations where clients try to make you liable for the loss they have suffered, that potentially could even be greater than the value of the goods or services that you’ve provided to them.

The most common of all of these that I see are payment related issues and disputes about the goods or services that have been provided. Although, I have to note that when disputes occur, they often directly link also to slow non-payment as well because when customers aren’t happy they generally stop paying, so all of these problems can be interlinked.

In most cases these sorts of issues essentially come down to a failure in the process of the original engagement with the customer and the systems you set up right from the start to support them and deal with any issues as they occur. For example, generally I see these issues arising from one of these particular situations:

  1. Terms and conditions or terms of sale that have been used in the beginning that haven’t had the right clauses included or, they’ve had the clauses but they’ve been set up in a way that means that they don’t have the effect that they were meant to have;
  2. There were no Terms and Conditions right from the beginning of the relationship with the client;
  3. The Terms and Conditions were not read and understood by the client;
  4. There was a lack of communication in any engagement process and throughout the relationship, which then allowed issues to bubble up to the surface; or, finally
  5. There was a lack of systems established to monitor the relationship and deal with any issues as they occurred.

Today we’re going to talk about each of these five areas. Essentially, having terms and conditions in place to begin with that include the right clauses, communicated in a way that your customers understand; ensuring that your communications throughout the process of delivering the goods and services are clear, and that your systems support the rights and obligations that arise through your terms and conditions document.

What does that mean? Essentially, that you have systems in place to make sure that you are providing what you have said to your client that you will provide.  Now, if all of these things are ticked off, I think you’re fine and that you’re in a situation where it is extremely unlikely that you will have customer issues going forward.

An example of this having been done really well is a recent case that I worked on where we were able to get a $250,000 win for one of our clients, on the basis of really tight wording that we used in their contract initially and a good negotiation strategy in dealing with the contractor’s view.

That’s an example of where terms and conditions have really correctly and helpfully given you a basis that you can launch from if a dispute does occur in the future even though, if done well, you’re also highly reducing the likelihood of dispute. But, on the flip side, we’ve had many instances where businesses have signed up clients for lots of projects who have then pulled out half way through and refused to pay for the work done, or clients who have come in to see us who have lost tens of thousands, sometimes hundreds of thousands of dollars when their clients refused to pay, because an argument erupted during the period of the provision of the goods or services. All of those usually link back to some issue in one of those five areas that I mentioned a few minutes ago.

What processes should you have in place?

Today, we’re going to start discussing what processes you need to have in place to ward off issues from the start. I’ve also created an action guide for you as a checklist that you can use to guide you through all of these areas because we’re going to be talking about a lot today, obviously too much for you to take note of while you’re listening to a podcast.

So, to make it really easy, I’ve made a checklist available for you related to this episode at talkinglaw.com.au or you can access it via the website of my commercial legal practice at aspectlegal.com.au

Okay, so let’s launch into what you need to do to have the right terms and conditions in place.

The concept of having the right terms and conditions in place comes from, in essence, the concept that a contract is imperative.

  • A contract sets the relationships between parties;
  • It sets the expectations between the parties; and
  • It’s not a document that describes simply what you will and won’t provide but also what you expect of your clients.

When done well, it helps to ward off arguments with clients because, essentially, arguments only occur when both parties think they’re right.

Thatmeans arguments can only occur when something hasn’t been clear, so our task is ensuring that we have documents that make all of these areas really clear that help to protect you from open liability and that helps you to set up the right expectations from the start.

Okay, so what should you be including in these documents? I’ll go through a bit of a checklist of the sorts of things that you should be considering including, but obviously I need to add a caveat that each business is different so you need to ensure that your terms and conditions are a reflection of your business not a reflection of someone else’s.

This is why copying and pasting someone else’s terms and conditions doesn’t really work because they’re not your business they’re a different business. So if you have copied and pasted a set of terms and conditions it’s important that you go back and that you review them thoroughly in light of the things that I’m about to talk about now.

Alright, so what should you be including in these documents?

Clarity on What You’re Responsible for

Firstly, clarity about what you will do and what you’re responsible for. This is, essentially, the crux of the documents. This is something that you should sit down and think about and understand first before you even get started in working out whether or not your current terms are appropriate for you where you are now. Other areas that you need to think about clarity are on payment terms, which sounds obvious but it’s so often not dealt with clearly enough in the agreement and it’s super important. You need to be clear on what the client’s obligations are and what you need from – if you’re going to require anything from them – to be able to deliver your goods or services. These issues are really important and often forgotten. If you need something from them, you need to be clear about this in your terms.

If they’re providing things to you then you need to ensure that you get protection in relation to any information they give you.

For example, sometimes this might look like licenses in relation to your use of those things.  You need to be clear that intellectual property (I’m not going to go into this in too much detail, we’ll do it in some future episodes) but essentially intellectual property you need to think about a few different things.

Clarify who owns the intellectual property

Number one, if intellectual property ownership is important, you need to make it clear about who will own the intellectual property and, if intellectual property will pass over at some point, you need to be clear about when that will pass over.  For example, very simply, many documents just simply say intellectual property will pass to the client but that isn’t making clear that you won’t pass to the client until the client has actually made payment. So that’s an important thing to include.

Also, bear in mind that sometimes, intellectual property clauses need specific caveats. So, that means if you are providing services or goods to your client that are based on some things that you then use with other clients as well, you just need to make sure you’re clear about what you’re actually handing over in any intellectual property clauses.

You don’t want clauses that essentially say all intellectual property will pass to the client, because that’s not really reflective of what’s happening and it might restrain you from being able to use that base intellectual property with other clients moving on into the future. Or, maybe you don’t even own all of the intellectual property yourself, say for example, if you’re licensing images from someone else and you’re providing graphic design or web development services you need to make sure that you’re clear that that intellectual property is not something that you can ever pass over in intellectual property form.

The next area that you might want to consider building into terms and conditions documents are clauses that deal with slow payment.

You might, for example, want to include some sort of incentive for your clients not to want to be a late payer. For example, Interest. Even if you won’t be applying the interest, or administration fees, or whatever else you’re calling fees that you might threaten to apply to slow payers, at least if you have clauses that allow you to charge these figures, it gives you something that you can threaten to apply if you have slow payers. It gives you some carrot to encourage them to pay in a timely manner.

Slow payment is a whole different topic which I will deal with in another episode in the future, but for now it’s enough to say that it’s important that when you’re reviewing your terms and conditions, you have the appropriate clauses to deal with slow payment.

You also need to make sure you have the ability to on-charge your customers for any enforcement cost and you need to make sure you have the right protection against liability and that in this you don’t over shoot the mark. Quite often I see liability clauses that really aren’t appropriate for the situation that they’ve been used in and that really overshoot the mark. The problem with that is that there’s various legislation around that might create an issue or the situation in which that clause then becomes invalid and you, therefore, don’t have any protection from that liability clause at all.

So, it’s really important when you have liability clauses – and when I say liability, I mean clauses that might be under the heading of indemnities or waivers or release clauses or there might be exclusion of warranty or exclusion of liability clauses, anything with that sort of heading – you need to make sure you understand what those clauses actually mean and make sure that they are appropriate for the situation of your relationship with your client.

I often find that people look at these clauses and have no idea what they mean and then decide, therefore, just to ignore them. But, that’s completely the wrong approach because if you do that and the clauses are incorrect for your business, then you don’t want to be finding that out later when it’s too late.

So, it’s really important that you understand what each of these clauses mean in your business and that they are appropriate for your business.

And then finally, you should also be thinking about how it is that you link this document – being your standard terms and conditions document – together with the documents where you provide the specifics of what you’re providing your customer.

Quite often businesses would use separate documents like, for example, proposals or estimates or schedules, or a statement of works where they set out the details of what it is that they‘re going to be providing to the customer, that isn’t something that’s included in the general terms and conditions.

It’s really important that each of these documents are referred to correctly in the terms and conditions and that you work out how they are going to interact together, and that you’ve also worked out a framework for what needs to be included in these documents that are your proposals or estimates, to make sure you’ve covered off the detail that you need to, to link it up correctly with your terms and conditions.

Alright, and the list goes on but these are the major issues that you should be considering.

But it’s not enough to just have your terms and conditions document in place, you also need to make sure they’re up to date with current legislation – and that current legislation, I must say, is changing all the time, so you really need to have your agreement updated at least once a year to ensure that you’re on top of that changing legislation and on top of your changing business phase. Quite often your business will be in a completely different stage now than it was one year before or one year in the future, and therefore, your terms and conditions need to accurately reflect where your business currently is now and the way you interact with your clients now; not how you did in the past or how you’re going to do it in the future.

There’s no point having terms if they aren’t understood by you and if they aren’t understood by your clients.  I’m often surprised by how often people in the business don’t know or don’t understand what’s in their terms. It’s not just the owners and managers that need to understand agreements that regulate your relationship with your clients, but anyone who is part of the initial sale or who is client facing throughout the relationship.

So how do we do this? How do we create the situation where we have documents that are understood by you and understood by your clients? Because, let’s face it, I think the reality is, that many of us click away terms and conditions without ever reading them and I think that’s the reality that many of us have businesses or work in businesses where we deal with terms and conditions that we don’t even understand ourselves.

So where do we start with all of this?

Writing your terms and conditions in plain English

The first thing is we need to have our own client agreements that are written in plain English and that are easy to understand and that aren’t overly long or overly complicated, because the longer they are the less likely that any of the terms are going to be read or considered carefully by the very people that you want to communicate these to.

So, if we think about our agreements, essentially it’s a checklist for us. It’s a way for us to think about the important elements of our relationship with our clients, and that essentially means that we need these documents to be something that we understand and that they understand.

Another important thing to do then is also to review your terms and conditions and to work out what are the really important clauses to you and restate this to your clients in a really clear and succinct way in a separate communication to your client.

A nice way to do that, for example, might be to send out a welcome pack, or onboarding documents, or whatever you call them.

Firstly, as I said you need to understand the documents and then you need to make sure that your clients understand them as well.

Then, the next element to consider is whether or not you’re actually complying with the terms yourself, so you need to put the systems in place to make sure you can deliver your services or goods the way you’ve promise them.

You need to be rigorous about the standard of products and services you provide and the way in which you provide them, and this is particularly important as you grow because sometimes businesses grow quicker than the systems that are supporting them and the reality is that poor customer service  will cost you dearly in the long run. So, if you’re making promises that you’re not going to back up, then you’re going to be creating a difficult contractual situation for yourself, but you’re also going to be creating bad blood with your customers.

So, you need to jump on issues quickly. You need to communicate early and this means that you need to have systems in place that can identify the issues before they escalate.

And fourthly, make sure your clients don’t slip too far away from the obligations that they have under the contract.

This can be a slippery slope. Sometimes, it feels really hard to pull up clients if they are not complying with their end of the bargain, but it’s really important that you reign them in gently at first, but quickly because these sorts of things, as I said, can end up being a slippery slope. So you need to have systems in place that can help you to identify if your client’s aren’t complying with their obligations and you need to ensure that you deal with it as soon as you’ve identified these as an issue.

The cost of inaction

What if you’re busy and you don’t have time for thinking about your terms of sale and you think people don’t even read them anyway? The thing that I would say to you in this situation, which I completely understand – we’re all busy and, as I said before, certainly there’s the belief that people often don’t read the terms and conditions that you send to them.

I think it’s really important that you think about the cost of inaction. So think now about what it would cost you if even just a few clients decided that they didn’t pay. Obviously, this is far, far greater potential cost than the cost of actually sitting down and going through the process properly.

What if, on the other hand you get upfront payments or deposits to cover your initial costs so you figure slow payment isn’t relevant? Don’t think you’re immune in this situation. We see lots of instances of customers demanding money back which then puts a strain on the business. But, simple economics aside, remember that client’s that are unhappy can do a lot of harm to your brand, so the concept of proper client engagement is as much about building and protecting your brand it is about legal and financial protection.

Four Action Steps for You to Take

We’ve talked about what you can include in your terms and conditions, now let’s talk about the Action Steps that you should be following in relation to this whole process, once you’ve got your terms and conditions, to ensure that you’re implementing them in the correct way. And, remember, if you’d like a download of this guide that we’ve gone through today, head over to our show notes at talkinglaw.com.au and download the guide from there.

So, your action steps are four to keep it really simple:

  1. Firstly, as I said review your terms and conditions of sale.
    1. Do you have each of the elements that we’ve discussed above? That’s the first thing;
    2. Are they compliant with current legislation?
    3. Are they easy to read and understand?
    4. Do your customers actually sign them, or do they just a tick a box that you know they’ll never be able to read?
    5. Do you understand what’s in your terms and do your staff or to the other staff in your organization understand what’s in your terms?

So these are the first things to do in relation to your review of your terms and conditions of sale.

  1. Then the second action step, is to think about your process of on boarding. Once you’ve got your terms and conditions right – once you’re confident that they contain all of the right elements and once you’re confident that you have produced them in a way that your clients and your staff will understand them, then now think about on boarding of your clients.

If your clients receive your terms and conditions in a tick a box exercise, then I would suggest that you separately send your terms to your clients as part of the onboarding process to give them the opportunity to have a copy of the terms, so that they can have a read through them. Obviously, it won’t be so exciting for them to read through the terms and conditions if they’re long and boring, so this gets back to ensuring that your terms and conditions are easy to read in the first place. And then, in your process of on boarding, the other thing that I recommend is being clear about the items that are important. So, as I said before, restate them in a welcome pack. You can say things like this in a nice way but just make sure you’re communicating it clearly.

So we’ve talked about the action steps of reviewing your terms and conditions of sale and thinking about your process of on boarding. The third element in your action step here is to review your systems for complying with your terms.

System and compliance reviews

  • Do you measure how you are delivering your goods and services?
  • Do all of your client-facing staff understand the terms and conditions and your obligations and your client’s obligations?
  • Do you pick up your clients if they aren’t complying?
  • Are there review periods in these terms?

Think about all of these issues in relation to how you can build systems to ensure that you are complying with the terms.

And finally, and this is action step number four, have a process for ensuring that you jump on emerging problems quickly before they gather speed.

So that’s it. That’s all I have today to say about this episode so just a quick recap. In this episode we talked about:

  • Ways to set up your client relationships correctly right from the start. If you’d like more information about this topic, as I said, head over to our show notes at talkinglaw.com.au for your free download and through that website, you’ll also be able to get a transcript to this podcast episode if you’d like to hear or read each of these elements in more detail, and there you’ll also find details of how to contact our lawyers at Aspect Legal if you’d like help with any of the items we covered today.

We can certainly help guide you through what can be a bit of a complicated process if you’re trying to do it on your own.

And finally, if you enjoyed what you heard today, please head over to iTunes and leave us a review. We’d be very grateful and if you’d like us to talk about a particular topic, feel free to head over to our website and leave us a voice message with a particular question or issue that you would like covered.  We’d be more than happy to cover any of the questions that you have and certainly I’d really like this podcast episode to be all about what you want to hear about.

Ask me what you want to hear about commercial law and business law and I’ll try to cover it in the future.

Thanks for listening in to what can sometimes be a dry topic, but I really hope you’ve got some pointers to take away that will help you really super charge those client relationships and help you ward off problems before they occur.