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Clauses to include

Contracts will normally vary depending upon the type of goods and/or services ordered. However, you may come across some typical clauses listed below (although not necessarily in this order).

1. Parties

Ensure that the name, address and company number (if you are dealing with a company) are referred to in the contract. Note that many suppliers have subsidiary and group companies so ensure that you name the right party (for example, the party that has sufficient funds to pay if things go wrong). A search at Companies House in the UK will help you find the right name and can also help you to assess the financial status of your supplier. For details see www.companieshouse.gov.uk

2. Background/recitals

This section explains why this contract is being entered into. This helps staff or others not part of the negotiations to gain an initial understanding of what the contract is about.

3. Definitions and interpretation

Normally a contract will have defined terms. This helps to avoid repetition. For example, “Intellectual Property” might be given a long definition. Each time intellectual property is mentioned in the contract this is a reference to the corresponding long definition. Using capital letters for the defined terms indicates the reader should refer to the definition section.

4. Goods and services

Normally there will be a cross-reference to goods and services in one of the schedules, where it is given a more detailed explanation.

5. Standards

This will normally cross-reference to a schedule with more detail. This is often the service level agreement (SLA) schedule, which dictates the standards to be met, targets to be hit and what happens if they are not met (see service delivery management, page 17). For example, in an IT support and maintenance contract you may have a standard relating to “uptime” (ie, how long your computer system needs to be available for each month).

The target uptime might be 99 per cent. If the supplier does not achieve this target then there could be fixed credits payable to your organisation by the supplier (sometimes referred to as “service level credits”). For example, there may be a payment of £x for every percentage point (or part thereof) that the uptime falls below the target. If the service levels and targets are contained in a schedule then it might be easier to amend the schedule rather than having to amend the main contract. Always ensure the contract has a “variations” clause and that such changes are made by way of numbered variation or change control notice signed and approved by both parties.

6. Supplier staff

You may have specific requirements of supplier staff (eg, that they have the appropriate skill and expertise).

7. Use of premises, equipment, third-party products and contracts

You may want to specify where the supplier will provide its goods and services from and how exactly these will be provided.

8. Customer’s assistance

The supplier should be specific about what you, as a customer, needs to do. This helps in the case of a dispute, because it is difficult for a supplier to say you have not provided it with the relevant assistance if that was not agreed in the contract. Both parties should understand their own commitments.

9. Service charges, payments and liquidated damages

Price and payment terms will be set out here and any specific worked examples/price mechanisms and formulas are normally set out in a schedule. This clause sometimes cross-references the SLA in a schedule and has clauses to explain that any pre-agreed compensation due for service defaults is reasonable.

10. Change control

Your needs may change over time, so you need a formal mechanism to agree any contractual changes and record these as formal changes to the contract (together with any amended timescales and associated costs).

Always check if one side has the right to force a change on the other or whether both parties must agree any changes.

11. Dispute resolution procedure and communication

The parties may agree disputes are to be resolved by the court (or arbitration). However, dispute resolution could be agreed using alternative dispute resolution (ADR) such as mediation. Indeed, the courts often insist on ADR before court/arbitration.

Do not confuse ADR with arbitration. Arbitration is a formal procedure (often using lawyers) where, like a judge in court, the arbitrator makes a decision. ADR is a preliminary step to help the parties reach agreement, but no-one is bound by the mediator’s decision. You can find outmore about ADR at www.cedr.co.uk

Never have a clause providing for both arbitration and court resolution. However, ADR may well precede either. Arbitration is often more expensive than going to court, so most British companies avoid it in their standard contracts unless confidentiality is an issue. Internationally, arbitration clauses are common, as they are in some sectors in the UK such as construction.

Before even getting to court, the parties might also provide in the contract that:

• There are regular meetings to discuss any issues that arise and have the chance to agree possible resolutions;
• Certain people from each party of appropriate seniority attend these meetings so they remain relevant and useful;
• The meetings have agreed minutes so that there is an audit trail of any problems raised, when they were raised and how they are resolved;
• There is an escalation procedure regarding disputes. Escalation provisions in a contract can ensure problems are identified early on and help early resolution.

(See dispute resolution)

12. Assignments and sub-contracting

You would not normally want the supplier to be able to transfer your contract to another supplier or to sub-contract, although this may be permissible if the supplier obtains your prior written consent beforehand.

13. Intellectual property rights

You would normally want any intellectual property rights (IPR) such as copyright, trade marks or patents that are created by the supplier in doing work for you to belong to your organisation, where you are the buyer. However, the supplier may already have intellectual property (IP) that pre-dates your contract. Your organisation may be entitled to use pre-existing IP, but the supplier may not agree that you can own it outright. If you say nothing in the contract then for most IPR, including copyright, the other party retains ownership and all the licensee obtains is a licence to use it but not own it, even where they pay.

14. Confidentiality

Normally this is a mutual provision whereby each party agrees to keep the other party’s confidential information secret.  

15. Customer data and data protection

Normally a customer would specify that all customer data (including all modifications and changes made to it by the supplier) and rights relating to that data shall always remain with the customer. It also provides that the supplier will return such data to the customer upon request and will follow the customer’s instructions regarding the processing of that data. If the contract involves the processing of personal data (ie, the names, addresses, contact and personal details of individuals) then the Data Protection Act 1998 (DPA) will apply. Certain provisions will need to be added into the contract to cater for the DPA.

16. Compliance with relevant laws

This is particularly important if your organisation is subject to checks by regulatory or official bodies and is required to ensure that suppliers conform with any codes of practice, guidelines, rules, regulations and laws when providing goods and services to your organisation.

17. Insurance policies

You would normally ensure that the supplier is sufficiently insured so that it has funds or backing to pay your organisation for losses suffered due to the supplier’s default.

18. Exclusions and limitations of liability

A supplier may wish to limit its liability to your organisation via exclusion clauses and total caps on its liability (and amounts it is obliged to pay your organisation if things go wrong due to the supplier’s default). However, these need to be scrutinised to ensure your organisation is adequately covered for sufficient recourse against the supplier if there is a supplier default.

19. Term and termination

The duration of the contract will need to be specified together with all of the circumstances in which you may wish to terminate.

These can include, for example, your organisation terminating:

• “At will” or “for convenience” (ie, for no reason) upon a certain period of notice to the supplier, eg, 30 days. This provides your organisation with flexibility to change suppliers quickly or “turn off” services that it no longer requires at short notice. However, this is often resisted by the supplier since it may have invested significant resources into the contract. It would be normal to provide that you would pay costs incurred to date in such an event and many suppliers want rights to terminate without cause, too;
• For material breach by, or insolvency of, the supplier;
• If the supplier persistently breaches the contract;
• If the actions of the supplier bring the supplier or your organisation into disrepute or could damage the reputation of your organisation;
• If the supplier undergoes a change of control (eg, if it is taken over by a third party).

20. Consequences of termination

The contract will normally spell out what will happen if the contract is terminated or expires. For example, the supplier may be obliged to return all of the customer information and materials back to the customer. Ensure you state which clauses continue after termination.

21. Non-solicitation

You will want to ensure that neither party will solicit (ie, “poach”) the other party’s personnel. If a party does solicit the other party’s staff then the parties may pre-agree compensation based on each member of staff that is poached.

However, you should take legal advice to ensure the clause is valid.

22. Waiver

The parties may agree that failure by a party to make a claim or take any action straight away will not prejudice its rights to make a claim or bring any action later on.

23. Cumulation of remedies

The parties may agree that if a certain remedy is claimed, this remedy will not bar it from claiming other remedies and that all of these remedies are cumulative.

24. Severability

The gist of this means that if a clause in the contract is deemed to be invalid (eg, by a court), then it will be severed from the contract and will not affect the validity of the remaining clauses in the contract.

25. No partnership or agency

Here the parties will normally make clear that neither party is the partner or agent (as these terms are defined under law) of the other party.

26. Set-off

This is a clause that refers to whether one party can set off monies which it owes to the other party against money that the other party owes it.

27. Currency

For global deals it is important to specify the currency for payments (GBP sterling, US$ or euros, etc).

28. VAT

This normally sets out that the customer is responsible for payment of VAT relating to goods and services received by it.

29. Indemnities

This sets out that a party is liable to pay the other party a full reimbursement of losses suffered if the subject matter of the indemnity is triggered. For example, if one party indemnifies the other party for any IP breaches, if an IP breach occurs then indemnities become payable.

30. Third-party rights

This normally states that only the parties to the contract can enforce the contract. This is required because in some circumstances, parties who are not an actual named party to the contract can still try to enforce the contract (see the Contracts (Rights of Third Parties Act) 1999).

31. Notices

This provides details of to whom notices are to be given, in what form (eg, will email suffice?), how they are to be given and the timescales before they will become effective (ie, if delivered by hand then they might become effective as soon as received, whereas if sent by post they might become effective a few days after posting).

32. Entire agreement

This sets out that only the terms and conditions written down in the agreement will apply to the relationship. If anything was agreed to before contract signature (but was not actually written down in the contract) these pre-contractual actions will not apply. This is very important. If the buyer is relying on statements made or documents supplied they must be referenced in the agreement or this clause will exclude them.

However, there is an exception if any pre-contract actions are subsequently found to have been fraudulent.

33. Governing law and jurisdiction

Typically this will state that the contract is governed and construed in accordance with English law and the parties submit exclusively to the jurisdiction of the English Courts in all matters relating to the contract. Never use “UK law” – it does not exist.

34. Counterparts

If there are a number of parties to the contract then each party can sign a different copy of the contract (with the same terms), then swap copies with one another so as to create a single binding contract (rather than each party having to sign the same paper copy of the agreement).

This can help if the parties are in different countries and signing the same piece of paper is difficult logistically.

35. Precedence

The aim of this clause is to clarify that the terms of this contract will prevail over any supplier terms and conditions that are issued at any time.

36. Force majeure

This is a type of exclusion clause which means that if events occur which are outside the reasonable control of the supplier then the supplier will not be liable for the consequences. Your organisation may wish to be able to terminate if the force majeure event goes on for an extended period of time (eg, for more than 14 days). 

Successful contract management requires:

• The need for flexibility on both sides
• A willingness to adapt the terms of the contract to reflect change and unforeseen problems.
  No matter how thorough your risk assessment process, problems are still likely to arise during the contract period 
• The need for the buying organisation to have clear business objectives and a clear understanding of how the contract will contribute to them
• The need to understand the provider’s business objectives and drivers
• Recognition (especially from senior management) that the service provider needs to achieve its objectives and make a reasonable margin
• Ensuring the right people, with the right commercial, interpersonal and management skills, manage these relationships
• Recognition that all parties need key personnel who can manage upwards and persuade decision-makers
  

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