6 Key things to watch out for when signing commercial contracts

August 22, 2023

6 Key things to watch out for when signing commercial contracts

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By Emily Shingler

Ideally, businesses will always want to contract on their standard terms of sale or purchase. However, depending on where you fit in your supply chain, you might be required to sign up to the standard terms of your customers or suppliers.

You should ensure that you review and take advice on any commercial terms you are required to sign. Our commercial team has explored a few of the key issues you should look out for when faced with someone else’s standard terms:

1. Payment terms
Reviewing the payment terms is especially important if you are the supplier – often a large business’s standard terms of purchase will include long and sometimes complicated payment periods which might not work for your cash flow.

Also look out for any provisions in the terms relating to:

• Discounts you (as supplier) are compelled to apply – typically these might apply if the customer purchases a certain amount of product, but also sometimes can require you to match any other offer or preferred payment terms you give to other customers.
• Any fixed pricing provisions – if you are a supplier, be careful that you do not inadvertently agree to fix prices for a prolonged period, especially if your industry means you are exposed to fluctuations in raw material costs. Conversely, if you are the buying party, look out for any provisions allowing the supplier to increase costs periodically. Ensure that you have the ability to terminate the agreement if you are not happy with the cost increase.
• Interest for late payment.

2. Delivery terms
Delivery terms can be a contentious issue. As a seller, you typically want to ensure that time is not of the essence for delivery. Often delivery provisions will be incorporated by reference to INCOTERMS, so ensure that you are comfortable you understand what is required in relation to delivery and that you’re happy with it.

Also look out for:

• Any liquidated damages which may apply in relation to late payment.
• Provisions in relation to the packaging of products to ensure that you can comply.

3. Warranties
The warranty relating to any products being provided can be contentious. As a supplier, watch out for any standard terms of purchase providing for very long (or unlimited) warranty periods which is a key risk area. Conversely, as a purchaser, ensure that the supplier is providing a sensible warranty for the products provided. Some standard terms of sale seek to exclude any warranty period.

Also look out for the remedy for any breach of warranty:

• As a supplier, you will want the opportunity to repair or replace the product. Ideally you will want to exclude the possibility of the customer going to a rival supplier to repair the products.
• As a customer, ensure that the supplier is obliged to act promptly to repair and replace any defective goods – or that you can be refunded accordingly.

4. Termination
Check the termination provisions – do you have the right to terminate? Is it clear when that right arises?

Also look out for the consequences of termination. Are they practical/achievable from your perspective? Some standard terms of purchase require an outgoing supplier to facilitate the handover to a new supplier. This is unlikely to be relevant to a lot of contracts, so ensure that you are not tied into some post-termination obligations you are unhappy with.

5. Intellectual property issues
Make sure that any intellectual property issues are clearly dealt with. You do not want to inadvertently give away any IPR to the other party. Be clear as to who will own any IPR.

This can be especially important in IT and website design contracts. It is quite common for businesses to think they own the copyright in their website, only to later discover it is owned by the website designer who created it.

6. Overall liability under the agreement
Ensure that your total liability under the agreement is clear – this is especially important for suppliers who will typically want to ensure that their total liability is capped and often that any consequential and indirect losses (such as loss of profit) are excluded.

However, from a customer’s perspective, be mindful that depending on the nature of the product or service being supplied, it might not be reasonable for consequential losses to be excluded altogether. Ensure that you are sufficiently protected if something were to go wrong.

The above is a snapshot of some of the key terms to look out for. Other key considerations can include data protection, restrictive covenants/non-poaching clauses, indemnities, jurisdictional issues, confidentiality provisions and others.

If you require assistance with any of the above, please contact a member of our commercial team, Emily Shingler via email on eshingler@arwingray.com or via telephone on 029 2082 9102 for a free initial chat to see how we can help you.