New contract? Limit your risks before you sign

Nobody likes reading contracts. Well, except contract lawyers of course. So, make sure you give the contract to your lawyer for a quick sanity check.

End of article, everyone has found something more interesting to read. But, if you’re still reading, here are a few ways in which you can reduce your risk.

If insuring liabilities is the answer, you’re asking the wrong question

Of course, it’s important to obtain insurance against your liabilities. But beware: the policy may specify that you have to limit your liability in your contracts so make sure you do so. Also, don’t forget that your particular losses might fall outside the scope of the insurance cover. Or you might not get full recovery. It’s far better to seek to exclude the losses in the first place than insure against them.

Customers should include a liability clause with their suppliers

Customers should include a clause that limits the liability of their suppliers. The supplier will insist on one anyway and the customer can propose a first draft identifying losses it can recover. The customer might also want to limit its own liabilities if it has obligations other than just paying the supplier.

A business person can sometimes qualify for the extra protections afforded to consumers

When dealing with sole traders beware they might be classified as a consumer for the purposes of statutory protections. To avoid this, you might have to show that they are actually trading in the course of their business. You should specify this in the contract.

Excluding consequential losses doesn’t mean you’ve prevented a claim for lost profits

This is a common mistake and I’ve lost count of how many times I’ve had to explain this. English law usually regards a consequential loss as one which is unusual and not recoverable. A loss of profits caused directly by a breach of contract would not be “consequential” and thus would be recoverable. If in doubt, get your lawyer to draft this.

Indemnities can either be inside or outside a liability cap

Indemnities are onerous remedies and effectively give you a top-up over the general legal position for a breach of contract. US lawyers love indemnities as it switches as much liability to the other side as possible. I will normally seek to strike out any indemnity which is not for breach of IP or confidentiality. And there is an ongoing debate about whether a cap on liabilities will catch an indemnity. It’s best to address this in the contract.

Judges won’t step in because the agreement is unfair

In B2B contracts, judges will not normally step-in and strike unfair or onerous provisions. Sure, they have the right to do so, but it is rare these days. So if the agreement is on standard terms and is unfair or unreasonable, you shouldn’t sign and hope a judge would rule the provision unenforceable. You should push back against the terms and seek to amend the offending provisions.

Standard terms are negotiable

It is lazy for a party to say the terms are standard and so not negotiable. Sometimes the contract value is too low to be worth their while negotiating the terms. But that doesn’t justify sending out unreasonable terms and claiming they’re non-negotiable. In these scenarios, I always advise clients to follow the money. Check (and adjust) the payment terms, warranties & indemnities, liability caps & exclusions and your ability to get out of the contract.

If you’ve got this all covered, then that’s great. If not, drafting contracts is literally what I do every day.

If you need advice, contact me or +44 (0) 20 7611 2338.

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