[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.

LINKS

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

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.

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)
  • 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?
  • 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
  • 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?
  • 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

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