Boilerplate terms, also known as ‘standard’ or ‘miscellaneous’ terms or ‘general’ terms (and conditions, are clauses that you can find at the end of contracts. The terms set forth common legal provisions you normally can (or should) copy and paste into any contract (but be careful; always check – even if they are ‘standard’).
They play an important role in mitigating risk and preventing contract value leakage after signing of the agreement and are independent from the ‘subject matter’ of the agreement.
Contract value leakage is the difference between the value expected from a contract at the start and the value at the end realized from its implementation. For the sell-side, this means loss of revenue or value and for the procurement-side, loss of savings or value.
Teemu Marttinen, Medium
Disclaimer: all boilerplate clauses described here below are examples. Consult an expert lawyer or contact us for use thereof in contract drafting.
Subject matter clauses versus boilerplate terms
‘Subject matter clauses ‘like the scope, goals, prices, payment and delivery terms in a specific agreement are ‘active’ clauses. They focus much more on business performance.’
Also, the active clauses deal with the product or service that is subject of the contract for which resources are needed to deliver such. It does not concern so much the legalities, and therefore these clauses should come first (the ‘business first principle’: actions that you need to perform, rights and responsibilities come first, ‘what ifs’ and exceptions later/at the end).
The boilerplate terms are then ‘passive’ clauses. They deal for instance with that happens if one of the parties is not fulfilling its obligations. Or clauses like choice of law, or order of precedence needed to interpret a clause or solve a dispute.
So you need to pay as much attention to boilerplate terms as to the ‘subject matter’ clauses, if you don’t want to burn yourself later on when executing the contract.
In this article I will discuss the boilerplate clauses and give examples. I will not so much focus on the legalities but more on how and what they contribute to (future) contract value. I will also not further go into the technical distinction between “terms” (what each party agrees to as part of a contract), and “conditions” (under which specific events or effects are triggered).
Disputes will arise in any sale of products and services and knowing where they are likely to occur, and how to defuse them rather than eventually resolve them will be crucial.
The boilerplate clauses on your our contracts are set up to prevent disputes or, at least, mitigate conflicts.
Contract boilerplate clauses impacting contract value
ACCEPTANCE
Example of an acceptance clause
- Acceptance of Delivery. [Contractor] will be deemed to have fulfilled its delivery obligations if
- within [x] Business Days of the Acceptance Period [Customer] fails to notify [Contractor] that the [Deliverable] fails to satisfy the Acceptance Criteria,
- at any time after the Acceptance Period, [Customer] sells, exchanges, operates, or otherwise uses the [Deliverable] in a way a reasonable person would consider consistent with [Customer B] having accepting ownership of the [Deliverable] from [Contractor], or
- in [Customer]’s opinion the [Deliverable] satisfies the Acceptance Criteria, and
- [Customer] notifies [Contractor] it is accepting the [Deliverable].
- Rejection. If in [Customer]’s opinion the [Deliverable] does not satisfy the Acceptance Criteria
- [Customer] will deliver to [Customer] a written overview detailing each failure to satisfy the Acceptance Criteria, and
- [Contractor] will use reasonable efforts to promptly correct the [Deliverable], and re-deliver the [Deliverables] for [Customer] to re-inspect and evaluate the [Deliverable].
- Continued Failure. If in [Customer]’s opinion, [Contractor]’s corrections fail to satisfy the Acceptance Criteria [Number of Failures Acceptance Criteria] times, then [Customer] may either
- terminate this Agreement; or
- adapt the Acceptance Criteria.
- Acceptance Period. [Customer] may have [Acceptance Period] Business Days after the date of the delivery or installation of the [Deliverable] to inspect and evaluate the [Deliverable] (the “Acceptance Period”).
- Acceptance Criteria. The Acceptance Criteria are the specifications the [Deliverable] must meet for [Contractor] to comply with its requirements and obligations, and detailed in [Attachment], attached to this agreement.
Why do you need an acceptance clause?
Acceptance clauses mainly are related to the delivery of goods or product-based services.
The customer can delay acceptance of a deliverable for reasons that you may consider to be unfair or unreasonable.
But of course, there can be a huge difference of opinion between what one side considers únfair’ or ‘unreasonable’ and what the other side does.
Make sure you add an ‘automatic acceptance’ proviso to prevent such acceptance will not be unreasonably delayed (see 1.1. above).
This clause is very essential because it defines what constitutes acceptance of a deliverable delivery of a product or the recognition that a service has been provided and completed.
It is important for revenue recognition (e.g. IFRS 15) which generally will depend upon the acceptance criteria.
Moreover, since payment milestones are nearly always connected to the acceptance of deliverables your cash flow can be impacted if you have no or incomplete acceptance wording in your contract.
Finally, if the deliverables are goods and delivery is delayed the time to store them and to keep them insured will be longer.
Impact of incorrect or no acceptance terms on contract value
- Lower revenues (termination, change of specification)
- Later revenue recognition (due to delayed acceptance)
- Reduced cash flow (due to later payment)
- Higher costs (storage and insurance costs, liquidated damages)
AMENDMENTS (OR VARIATIONS)
Example of an amendment clause
- Amendments. No amendment, modification, change, rescindment and/or variation to this Agreement and/or no waiver or discharge of any of its terms and conditions shall be valid unless it is in writing and signed by the Parties hereto.
Why do you need an amendment clause?
Consistently issues related to amendments or changes to an agreement comes up in the top 3 of reasons leading to disputes or conflicts between parties during contract execution.
Agreements need to be flexible since things change. The risk allocation that took place when drafting the agreement may need to be reviewed when unexpected events occur. Circumstances change or mistakes were made in the original agreement that the parties want to change. The agreement then needs to be ‘fixed’.
Recognizing that things may change, contracts often include an amendment or modification clause to manage the process by which it can be amended.
You should state in the clauses that your agreement cannot be changed or modified unless both you and the other parties agree to do so in writing.
So it is then clear that agreements cannot potentially be changed verbally and neither party can attempt to claim an agreement was changed in their favor if they cannot show written evidence.
Otherwise, you can find yourself in an increased liability situation (changing regulation) or even breach of contract (materials cannot be delivered anymore). To mitigate such risks you need again to sit down with your customer and agree to amend the contract.
Also, during execution parties agree to deliver more products or services or part numbers change. Again those are reasons to immediately in writing agree on such changes.
Impact of incorrect or no assignment terms on contract value
- Higher costs (an increase of liability)
- Loss of revenue (termination due to breach of contract)
- Loss of opportunity (additions to the specification installed but not written down or agreed)
- Later revenue recognition (due to delayed acceptance)
- Reduced cash flow (due to later payment caused by dispute or conflict)
ASSIGNMENT
Example of an assignment clause
- Assignment. Neither party to this Agreement shall assign or otherwise transfer its rights or obligations under this Agreement to any third party[, except to a parent, subsidiary, or affiliate,] without the other party’s prior written consent or concurrence, either in whole or in part.
- Binding Effect and Successors. This agreement benefits and legally binds the parties and their respective heirs, successors, and permitted assigns.
Why do you need an assignment clause?
Assignment clauses (also called ‘Successors’ or ‘Binding Effect’) typically prevent or limit the ability to freely transfer an agreement to a third party.
If you do not have assignment terms in your contract you may end up with a third party you would never have elected yourself, like a competitor or a party performing at a lower quality level than the party you contracted with. Especially in M&A situations or company reorganizations, this becomes important.
You would want a clause like this in your contract when you want the a contract really needs to be performed by a particular entity.
In the event the entity is a group of companies or has a multi-level corporate structure you may agree to allow a contract to be transferred within a family of companies by adding , except to a parent, subsidiary, or affiliate, like in above example.
Impact of incorrect or no assignment terms on contract value
- Higher costs (e.g. due to getting lower performance from assignee)
- Lower revenues (e.g. competitor taking over your customer)
ATTORNEY FEES
Example of an attorney fee clause
- Attorney fees. In the event of a dispute between the Parties concerning the terms and provisions of this Agreement, or either party brings an action to enforce their rights under this agreement, the party prevailing in the dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorney fees, in addition to all other remedies provided by law.
Why do you need an attorney fees clause?
Attorneys’ fees clauses like the above shift the burden of paying for attorneys in a dispute from one party to the ‘losing’ party.
Parties to a dispute normally (have to) pay for their own attorneys’ fees and costs, independently from whether or not they are at fault or successful in the action brought forward.
Attorney fees clauses are often seen as making the cost of enforcing an agreement more fair and disincentivizes bringing meritless lawsuits.
Of course, parties can still agree that legal fees will be borne by the side that incurring the expenses. Or even that, whatever the outcome, the other party will bear all costs.
Impact of incorrect or no attorney fees terms on contract value
- Higher costs (having to pay all legal fees yourself, even of you are successful in the dispute)
CONFIDENTIALITY AND ANNOUNCEMENTS
Example of a confidentiality and announcements clause
- Confidentiality Obligation. The terms of this Agreement are strictly confidential and shall not be disclosed to any third party, except to the extent permitted by this agreement or with the prior consent of the disclosing Party consents in writing, or required by law.
- Announcements. None of the Parties shall make or release to any person any announcement concerning this Agreement or the transactions contemplated by this Agreement without the prior consent in writing (such consent not to be unreasonably withheld or delayed) of the other Parties to this Agreement, except to the extent permitted by this agreement or with the prior consent of the disclosing Party consents in writing, or required by law.
Why do you need a confidentiality and announcements clause
Confidentiality, announcement, or non–disclosure clauses may be included in a wide range of agreements where the parties disclose or provide access to confidential information.
Before entering into an agreement you should enter into a separate non-disclosure agreement first, using the same confidentiality wording as above. You don’t have to do that for simple or short-term contracts where no or little information is shared.
The clauses safeguard proprietary ideas and the commercial and other secrets of the parties and prevent disclosure of other important sensitive and confidential information.
The announcement clause prohibits or to issue any press release or public announcement regarding the agreement. Often the use of to use the other party’s name, logo, or trademarks is forbidden.
Impact of incorrect or no confidentiality and announcements terms on contract value
- Lower revenues (competition)
CONFLICT OF TERMS
Example of a conflict of terms clause
- Conflict of Terms. To the extent of any conflict or inconsistency in the terms of this Agreement, the precedence shall be given to the terms to the extent of the conflict or inconsistency in the following order:
- The Terms and Conditions of this Agreement
- The Statement of Work to this Agreement
- The other Annexes to this Agreement
Why do you need a conflict of terms clause?
Also called ‘conflicting provisions’ or ‘order of precedence’.
The goal of such clauses is to reduce, or prevent ambiguity when conflicts arise. The wording explains what happens if some of the terms in the contract are in conflict. The problem in certain jurisdictions is that there is no hierarchy in clauses, so neither the earlier nor the more general. nor the later, or more specific, is more valid.
Also used sometimes in contract amendments, stating that if there is any conflict between the terms of the amendment and those of the Agreement or any earlier amendment to the Agreement, the terms of that amendment will be applicable.
Impact of incorrect or no conflict of terms clause on contract value
- Higher costs (arbitration, litigation)
- Later revenue recognition (due to delayed payment caused by conflict)
- Reduced cash flow (due to later payment caused by dispute or conflict)
DATA PROTECTION
Example of a data protection clause
- Data Protection. The Contractor will implement appropriate safeguards to prevent unauthorized access to, use of, or disclosure of any individually identifiable information, included shared or hosted data, as defined under applicable laws and regulations.
Why do you need an data protection clause?
Also called ‘Data Security’. You need to be aware of any data protection considerations created to making available your (or your vendor’s) data to the customer and vice versa.
Impact of incorrect or no data protection terms on contract value
- Costs related to disputes, litigation needed to protect your data (an intellectual property)
- The potential harm caused by unauthorized access or disclosure
DISPUTE RESOLUTION AND ARBITRATION
Example of a dispute resolution and arbitration clause
- Informal Dispute Resolution. The parties shall cooperate to attempt to informally resolve any dispute arising out of this agreement before submitting the dispute to arbitration.
- Arbitration after negotiating. All disputes that may arise between the Parties hereto in regard to the carrying out of the terms and conditions hereunder and/or the interpretation thereof in any way whatsoever or as to the construction, meaning, validity or effects of this Agreement or any clause, matter or thing herein contained or the rights and liabilities of the Parties hereunder, or any breach thereof, which cannot be settled by informal dispute resolution, shall be referred to arbitration.
- Arbitration panel. The arbitration panel shall consist of three arbitrators, one to be nominated by [Customer] and the second to be nominated by [Contractor]. The two arbitrators shall jointly select the third arbitrator.
- Final and binding decision. The decision of the arbitration panel shall be final and binding upon the Parties.
- Arbitration venue. The arbitration shall be held in [City/Country] or another location mutually agreeable to the Parties, and shall be conducted in the English language and shall be conducted in accordance with the Governing Law of the Agreement and the Rules of Arbitration of [type of arbitration and rules] as in effect on the date hereof.
- Award enforcement. The enforcement of the award may be entered in any court of competent jurisdiction.
Why do you need a dispute resolution and arbitration clause?
Arbitration clauses specify that any dispute arising from a contract be settled by an arbitrator rather than the courts.
You should always go first for arbitration instead of litigation since arbitration is less costly and time-consuming than using the courts.
The terms will usually insist that the arbitrator’s decision is final and there will be an implication that if the arbitrator rules against one party, it will be difficult – it cannot be impossible – to take the dispute to court to have another go.
Only use it as a last but one resort. Whatever else happens you will have lost the relationship by going to arbitration, but even going to arbitration probably says there is no value in the relationship anyway.
Impact of incorrect or no dispute resolution and arbitration terms on contract value
- Higher costs (litigation versus arbitration)
ENTIRE AGREEMENT AND ACKOWLEDGEMENT
Example of an entire agreement clause
- Entire agreement. This Agreement constitutes the entire understanding between the parties concerning the subject matter of this Agreement, and supersedes, and incorporates all prior discussions, negotiations, promises, agreements, and understandings.
Why do you need an entire agreement clause?
You need to make sure the parties are restricted to the words of the agreement and the law governing the contract and avoid any party referring to other agreements, letters, emails, phone calls, or other types of information, that deviate from the exact wording in Agreement.
The clause gives you certainty, that if any promises were being made (or terms discussed) prior to or during the contract execution, they are not enforceable, except when explicitly written into the signed contract.
Impact of incorrect or no entire agreement terms on contract value
- Higher costs (due to disputes and conflicts)
- Later revenue recognition (due to delayed payment caused by conflict)
- Reduced cash flow (due to later payment caused by dispute or conflict)
The superseding wording means the newer agreement replaces the old agreement and the old agreement is, therefore, no longer applicable.
FORCE MAJEURE AND EXCUSABLE DELAY
Example of a force majeure and excusable delay clause
- Force majeure. In the event either party is unable to perform its obligations under the terms of this Agreement (other than failure to pay money when due) because of acts of God, strike, war, embargo, governmental acts or damage that is reasonably beyond its control, or any other cause that is reasonably beyond its control, and not caused by gross negligence or willful misconduct of the non-performing party, and such party has exerted all reasonable efforts to avoid or remedy such force majeure ,such party shall not be liable for damages to the other or for any damages resulting from such failure or delay to perform or otherwise from such causes.
- Right to Terminate. In the event such an event of force majeure prevents performance thereunder for a period in excess of [number of days] days, then either party may elect to terminate this Agreement thereunder by a written notice to the defaulting party
Why do you need an force majeure and excusable delay clause?
You need to reduce the risk of failure of or delay in performance of its obligations under your agreement to the extent such failure or delay is due to circumstances beyond its reasonable control. Another name for the force majeure clause, therefore, is the ‘excusable delay’ clause.
A force majeure clause allows parties to discontinue (temporarily suspend or terminate after a specified period of time) performing under a contract in the event there is some unforeseeable, large scale event and performance under the agreement is not possible pr practicable anymore.
Such events include natural disasters, like floods, hurricanes, earthquakes, war, riots, political uprising, pandemics. The force majeure clause acts as risk insurance for both parties.
It is important that such events were not foreseeable at the time the agreement was made.
The following subjects should be included in a force majeure clause:
- Clear listing and definition of events constituting force majeure
- Wording on what happens when a force majeure event occurs
- What occurs if the force majeure event continues beyond a specified period of time.
Impact of incorrect or no force majeure and excusable delay clause on contract value
- Lower revenue (breach of obligations leading to termination)
- Higher costs (having to pay liquidated damages )
GOVERNING LAW AND VENUE
Example of a governing law clause
- Governing law. This Agreement shall be governed and construed according to the laws of [State /Country].
Why do you need a governing law clause?
You need to have this in all of your agreements. It will otherwise create a lot of confusion and lead to lengthy dispute resolution processes.
The impact of incorrect or no governing law clause on contract value
- Higher costs (lengthy dispute resolution)
HEADINGS
Example of a headings clause
- Headings. The headings in this Agreement are solely for convenience of reference and shall not limit or otherwise influence the meaning or interpretation of this Agreement.
Why do you need a headings clause?
You have to ensure with this clause that the words in headings and captions in your agreements don’t affect the meaning of the agreement.
If you use wrong wording or your headings are poorly drafted, or conflict with clause wording the other party cannot interpret your agreement in a way that you may not like.
Impact of incorrect or no headings clause on contract value
- Higher costs (disputes on interpretation leading to arbitration or litigation)
INDEMNIFICATION
Example of an indemnity clause
- Indemnification. Each party (as an indemnifying party) will indemnify the other (as an indemnified party) and hold each other harmless against all losses, claims, suits, actions, proceedings, judgments, demands, damages, injuries, costs, and expenses, including but not limited to, attorney’s fees and costs of defense, arising out of any proceeding:
- brought by either a third party or an indemnified party, and
- arising out of the indemnifying party’s willful misconduct or gross negligence.
- Notice and Failure to Notify
- Notice Requirement. Before bringing a claim for indemnification, the indemnified party will:
- notify the indemnifying party of the indemnifiable proceeding, and
- deliver to the indemnifying party all legal pleadings and other documents reasonably necessary to indemnify or defend the indemnifiable proceeding.
- Failure to Notify. If the indemnified party fails to notify the indemnifying party of the indemnifiable proceeding, the indemnifying will be relieved of its indemnification obligations to the extent it was prejudiced by the indemnified party’s failure.
- Notice Requirement. Before bringing a claim for indemnification, the indemnified party will:
- Exclusive Remedy. The parties’ right to indemnification is the exclusive remedy available in connection with the indemnifiable proceedings described in this section.
Why do you need an indemnity clause?
You need an indemnification clause as an insurance policy between you and the other parties in which you agree on how to shift risk and liability between you and the other parties.
Risk is transferred by stating that one party will reimburse (i.e. “indemnify”) the other party for certain damages as a result of their actions.
Therefore, you need to pay special attention to indemnification clauses since they can be very unfair.
You or the other party (the Indemnitor) will pay for losses you or the other party becomes liable for (the Indemnitee) for certain actions pertaining to the performance of an agreement. This is for any losses related to the agreement, or for losses from certain types of claims.
To further limit risk, you can limit the indemnity to losses only from certain types of claims, or to certain specified amounts of losses (to prevent it from being open-ended).
In other words, the Indemnitor will reimburse the Indemnitee for the Indemnitor’s bad actions in the course of performing the agreement.
Reimbursement usually includes any damages, attorneys’ fees, and costs associated with the indemnitors bad actions.
The indemnification obligation for both you and the other parties is to indemnify the indemnitee against claims from third parties ( someone other than the parties to the agreement).
Given the wide range of risk-shifting that indemnification clauses can effectuate, it is important to understand exactly:
- which circumstances drive the shifting of risk and financial responsibility,
- which party agrees to take financial responsibility under these conditions, and
- how much is at stake in the event a situation that triggers liability arises.
Finally, it is very important to add ‘exclusive remedy’ wording to clauses like this (see also liquidated damages, warranty). It means that there are no other remedies available than what is explicitly stated in the clause. All other remedies are excluded.
The impact of incorrect or no indemnity clause on contract value
- Higher costs (having to hold the other or third party harmless for any loss)
INDEPENDENT CONTRACTOR
Example of an independent contractor clause
- Independent contractor. Parties are independent contractors and this Agreement shall not create any form of partnership, joint venture, agency, or employment relationship between the Parties and neither party shall have any authority or power to bind the other or to contract in the name of or create a liability against the other.
Why do you need an independent contractor clause?
You need independent contractor clauses (also called ‘partnership’) to record that you and the other parties are independent of each other.
Partnership under many laws can be created by means other than a deed of partnership through implied consent. Such partnership laws are treated differently from commercial arrangements
This is important when things come into litigation. It reduces the chance that a judge would find you and the other parties to be partners, agents, or joint ventures. This would incur greater legal risk on you since you could be held generally accountable for the actions of the other parties in the event you would b a partner of an agent or joint venture.
The impact of incorrect or no independent contractor clause on contract value
- Higher costs (due to liability for actions from the other parties to an agreement.)
INTEREST ON LATE PAYMENT
Example of an interest on late payment clause
- Interest on Late Payments. Any amount not paid when due will bear interest from the due date until paid at a rate equal to [monthly percentage]% per month ([total yearly percentage]% annually) or the maximum allowed by law, whichever is less.
Why you need an interest on late payment clause?
The clause defines the consequences of late payment under the agreement.
This can include not only interest accumulating on late payments, but also the right to suspend services or deliveries, and fees for reinstatement.
The whole idea, of course, is to get the other party to pay
Impact of incorrect or no interest on late payment clause on contract value
- Higher costs (chasing payment)
- Reduced cash flow (money coming in later)
JOINT PREPARATION
Example of a joint preparation clause
This Agreement is to be deemed to have been prepared jointly by the parties hereto and any uncertainty or ambiguity existing herein shall be interpreted according to the application of the rules of interpretation.
Why do you need a joint preparation clause?
Or better: when do you need it? You need it when your bargaining power is more powerful and you want to protect yourself from the weaker party breaching the contract and claiming that they were coerced into the contract.
Impact of incorrect or no joint preparation clause on contract value
- Loss of revenue (when you lose the argument before contract that you abuses your bargaining power)
- Higher costs (having to defend yourself in court)
LIMITATION OF LIABILITY
Example of a limitation of liability clause
- Liability. In no event shall the Contractor be liable to the Customer or any third party for any damages, whether in any action of contract or tort, for loss of profits, loss of use, business losses, or any other indirect, incidental, special, punitive or consequential damages which may arise in connection with this Agreement or the services provided hereunder, each of which is hereby precluded and waived by agreement of the parties, even if the Contractor has been advised of the possibility of such damages.
- Limitation of Liability. In no event shall the Contractorss aggregate and cumulative liability for damages hereunder exceed the lesser of (a) $[]amount] or the fees the Customer paid to the Contractor for the Product [or Service].
Why do you need limitation of liability clauses?
Limitation of liability clauses create a cap on the amount of damages one party could be held liable for under the agreement.
Often, businesses selling products or services will use limitation of liability clauses to reduce their risk associated with a sale, service, or transaction.
A limitation of liability clause will always list a monetary value or a formula for calculating the maximum liability under the agreement.
These clauses are useful for limiting risk associated with an agreement in a predictable way, but should be examined closely, as they can dramatically reduce one party’s ability to recover appropriate damages if there is a dispute.
If the liability clause is well drafted in the event of a fault, it also likely that the parties will settle it outside court without even moving in to dispute resolution.
If your agreement is under common law, you and the other parties will only be liable for foreseeable damages. So the limitations on liability clause simply has to restate this .
Limitations on liability clauses can go further and even include foreseeable losses, either those losses arising out of certain kinds of claims (infringement, or disclosure of confidential information for example), or putting a cap on the total losses the party can be liable for.
Beware: some jurisdictions do not allow the exclusion of certain warranties or the limitation or exclusion of liability for incidental or consequential damages, so some of the above limitations may not apply to you.
Impact of incorrect or no limitation of liability clause on contract value
- Higher costs (when no cap on liability)
- Loss of business
LIQUIDATED DAMAGES AND INEXCUSABLE DELAY
Example of a liquidated dames or inexcusable delay clause
- Liquidated Damages. Should a Product not be Ready for Delivery within [number of days] after the last day of the Scheduled Delivery Date and such delay is not as a result of Force Majeure [Excusable Delay, then such delay will be termed an “Inexcusable Delay.” In the event of an Inexcusable Delay, the Customer will have the right to claim, and the Contractor will pay the Customer liquidated damages of US $ [amount]. In no event will the amount of liquidated damages exceed the total of US $ [maximum amount] in respect of any one Product.
- Written claim. The Customer’s right to liquidated damages in respect of a Product so delayed is conditioned on the Customer’s submitting a written claim for liquidated damages to the Contractor not later than [number of days] after the last day of the Scheduled
Delivery Date.
Why do you need a liquidates damages or inexcusable delay clause?
You need liquidated damages clauses in your agreements to protect yourself against damages claims from customers going sky-high when you run into delays in delivering products. At the same time, it is an incentive for you to achieve timely completion.
For the customer it is a way to get compensation for loss or damage that occurs as a result of your failure to deliver on time.
To be enforceable under common law, a liquidated damages provision must be a reasonable estimate of the damages an owner would incur if the contractor fails to deliver the product by the required delivery date.
To evidence ‘reasonableness’ of the amount, you need to document the specific elements of the estimate used, like written records including spreadsheets, minutes of meeting, emails, notes, correspondence and other data.
in common law courts liquidated damages clauses also can be voided if the amount is unreasonable and should etherefor be considered to be a penalty.
Under some laws in the EU (France for instance) this is not the case and liquidated damages and penalties are used both for inexcusable delay and enforceable.
Like with breach of contract, indemnification, breach of warranty, failure to perform, etc.) the liquidated damages clause should also contain exclusive remedy wording. An exclusive remedy clause restricts a party’s available remedies for any particular claim.
Impact of incorrect or no liquidated damages or inexcusable delay clause
- Higher costs (having to pay actual direct and indirect and other damages to the customer
- Lower revenues (if termination wording is added to the clause).
NOTICE
Example of a notice clause
- Notice. Any notice, request, instruction or other document that may be given hereunder by any party to the other shall be in writing and will be deemed to have been duly given (a) on the date of delivery if delivered electronically, or (b) on the second business day following the date of dispatch if delivered by a reputable next day courier service. All notices hereunder shall be delivered to the addresses in the signature block for each respective party.
Why do you need a notice clause?
Notice clauses provide contact information (like address, email and phone numbers) for anything relating to the agreement
A notice clause may also provide instruction on when a particular notice is considered to be ‘effective’, This is important in agreements that require that for specific conditions, obligations or duties written notice must given to the other party as defined in the agreement,
Impact of incorrect or no notice clause on contract value.
- Higher costs (due to disputes, conflicts related to notices)
NON-SOLICITATION
Example of a non-solicitation clause
- Non-Solicitation . During the period starting on the Effective Date and ending [NON-SOLICITATION PERIOD TERM] after the termination or expiration of this agreement (the “Non-Solicitation Period”), neither party will directly or indirectly, on its own behalf or in the service or on behalf of others, in any capacity
- employ or hire for services or otherwise any employee, consultants, agents, subcontractors of the other party
- induce or attempt to induce any officer, director, or employee to leave the other party, or
- solicit or accept, or attempt to solicit or accept, the business of any customer, consultant, or patron of the other party.
Why do you need a non-solicitation clause?
This clause guards you for the future after the termination of the contract. The clause needs to be reasonable and you will have to check the laws governing your agreement which may limit your possibilities to impose too long periods or other conditions.
Impact of incorrect or no non-sollicitation clause on contract value
- Lower revenues (commercial or trade secrets ending up with competitors)
- Higher costs (disputes with ex-employees)
SEVERABILITY
Example of a severability clause
- Severability. If any part of this agreement for any reason be held illegal, unenforceable or invalid in any jurisdiction, the remainder will continue to be valid and enforceable as if the severed provision had never existed.
Why do you need a severability clause?
Severability is a technical term that means that one ‘severed’ clause can’t negate the whole agreement.
In the event one of the obligations in an agreement cannot be performed (‘severed’), this clause makes sure that the rest of the agreement can be continued despite this.
You need it as a form of insurance when particular parts of the agreement become unenforceable. You have to secure that the remaining parts of the agreement are still valid.
Without a severability clause, a contract with many provisions could be completely worthless if even a single, small part is unenforceable. Since enforceability of certain clauses can vary between states or countries, severability clauses serve an important purpose by allowing use of the contract in many jurisdictions without needing to tailor it to the nuances of each jurisdiction’s laws.
Impact of incorrect or no severability clause on contract value
- Loss of revenue (contract provisions or even the whole contract becoming completely worthless)
- Higher costs (litigation)
SURVIVAL OF CLAUSES
Example of survival clause
- Survival of clauses. The obligations of each Party under [CONFIDENTIALITY OBLIGATIONS], [NON-SOLICITATION], [NON-COMPETITION OBLIGATION], and [EFFECT OF TERMINATION] will survive the [TERMINATION, EXPIRATION, CLOSING DATE of this Agreement or the termination and dissolution or liquidation of the Contractor and shall continue to exist for a period of {number of years] 1 year from the date of such termination, dissolution or liquidation, whichever is earlier.
- Accrued Rights and Obligations. All of the rights and obligations referred to in this agreement shall apply during the period of this agreement provided that where any right(s) and/or obligation(s) has been accrued, such right / obligation shall nevertheless be complied with even after the termination of this agreement.
Why do you need a survival clause?
You need this clause to make sure that after your agreement is closed, the content still remains confidential, the customer doesn’t start competing with you etc.
Survival clauses work together with term clauses that exist in most agreements. Term clauses specify for what periods the agreement binds the parties. You may want certain clauses to “survive” and be applicable after the agreement term has expired.
The accrued rights and obligations wording will ensure that your rights and obligations and those of the other parties will continue even after the termination of the agreement. An example is the non-disclosure agreement
You can also opt for including survival language in the specific clauses: “During the period beginning on the Effective Date and ending [number] years after the termination or expiration of this Agreement, the Customer will not…”
Impact of incorrect or no survival clause on contract value
- Lower revenues (commercial or trade secrets ending up with competitors)
- Higher costs (disputes with ex-customers)
TERMINATION
Example of a termination clause
Termination
- Termination upon Notice. Either party may terminate this agreement for any reason upon [TERMINATION FOR CONVENIENCE NOTICE] business days’ notice to the other party.
- Termination upon Breach
- Failure to Pay. If [CUSTOMER] fails to pay when due any amount owing under this agreement and that failure continues for [five] business days, [CONTRACTOR] may terminate this agreement, with immediate effect, by giving notice to [CUSTOMER].
- Any Other Breach. If one party
- commits any material breach or material default in the performance of any obligation under this agreement (other than [CUSTOMER]’s obligation to pay money), and
- the breach or default continues for a period of [CURE PERIOD] business days after the other party delivers Notice to it reasonably detailing the breach or default,
- then the other party may terminate this agreement, with immediate effect, by giving notice to the first party.
- Termination upon Insolvency Event. This agreement will terminate immediately upon the occurrence of an Insolvency Event.
Why do you need a termination clause?
Termination clauses can be of two main types: termination ‘at will’ or ‘for convenience’ and termination ‘for cause’ or ‘default’.
Termination at will means that by giving a certain amount of notice, either party can terminate the contract without any particular reason. This happens for example with government contracts when budgets run out (economic crisis, COVID) and when keeping the contract going is more expensive than closing it down. In such case parties will always try to agree that the other party will be fully compensated.
Be aware of all the likely triggers for termination, including but not limited to insolvency of one side or the other, and notice periods.
Impact of incorrect or no termination clause
- Loss of revenues (less delivered/paid)
- Higher costs (legal bills).
WAIVER
Example of a waiver clause
- Waiver. Waiver by either party of a breach of any provision of this agreement shall not be construed as a waiver of any of their rights and obligations in terms of this agreement, unless the waiver is in writing and signed by the waiving party. The rights or remedies hereof are cumulative to any other rights or remedies, which may be granted by law.
- No such waiver shall, in any event, be deemed a waiver of any subsequent default under the same or any other term or provision contained herein.
Why do you need a waiver clause?
You want to be sure that unenforced provisions, whether intentionally or by not, and the rest of the contract, remain enforceable.
In practice if a term of and agreement is breached, parties may still continue to perform the agreement if it does not have a substantial overall impact.
However, if subsequently there are other breaches by the same party, it might lead to legal action. This clause ensures that in such legal action, the party who breached the clause for sometime cannot claim that the other party has essentially or implicitly varied the terms by their inaction.
For example, you may accept late payments by your customer without charging for late payment interest, even if you have that right contractually or legally. Your customer may allow you to deliver goods with different part numbers.
See also above: the severability clause.
Impact of incorrect or no waiver clause
- Loss of revenue (contract provisions or even the whole contract becoming completely worthless)
- Higher costs (litigation)