Most companies whether they be small businesses or large multinationals provide their goods and services subject to terms and conditions in a contract. Apart from the obvious legal protection that this provides the seller in particular, the buyer also knows what “they are getting into” provided of course they have read the fine print. Not reading or understanding terms and conditions is no excuse later when something goes wrong and the contract is the subject of litigation between the parties.
It is also important to ensure the terms and conditions actually reflect the practices of the business. If not, the very terms being relied upon may actually work against the business they are intended to protect!
This article is intended to provide a thumbnail sketch of some of the more controversial and highly negotiated terms and conditions found in many contracts between commercial parties. Although the size and complexity of transactions vary the clauses below occur most frequently. This article also does not include any reference to any legislation which may also apply to the transaction such as the Trade Practices Act 1974 (Commonwealth).
Essentially however the following terms and conditions are important to keep in mind;
- Term – How long is the contract for and when does it start from? This depends on each individual transaction and the types of goods and services being sold.
- Termination Rights – Can the contract be terminated by either party at any time or is there a penalty for terminating early? It is a good idea to try and eliminate the payment of any termination fee for terminating the contract early. This is usually a heavily negotiated issue between the parties.
- Seller’s and buyer’s responsibilities – Again these clauses are intended to clearly state what the seller will do and what the buyer is also required to do. Again the seller will usually try to do as little as possible and extend the buyer’s responsibilities further than most buyers would typically be prepared to go.
- Limitation of Liability – Sellers typically try to limit their liability if there is a breach of the contract. The liability can sometimes be limited to a specific monetary cap which does not necessarily reflect the full value of the contract. From a buyer’s perspective it is important to increase the cap as much as possible and to ensure that there are carve out’s for the criminal or fraudulent acts of the seller or its employees.
- Warranties – a warranty is a statement of fact forming part of the contract which the party giving the warranty asserts to be true. Warranties can be given by one or both parties to the contract. Warranties are usually related to issues which are central to the due performance of the contract but which cannot be easily verified by the other party. Breach of warranty entitles the aggrieved party to sue the other party for damages.
- Indemnities – It is usual to find indemnities in contracts. It is a legal term which effectively means that the party indemnifying the other is prepared to compensate the other party for wrongdoing, expense or loss incurred. This is a contractual right given by one party to the other. Sellers typically do not like providing indemnities and buyers like to be given indemnities. For example, for breach of any intellectual property rights of a third party if the contract relates to the purchase of an IT solution. These are quite complex clauses and will in most cases require the advice of a lawyer to negotiate and draft.
- Jurisdiction and Governing Law – If the parties are both in one place then this is not an issue. However, interesting discussions occur when one party is in Victoria and the other in the US. Which law applies to the contract? It is important to remember that if the governing law is outside the geographical area of one party then they will have to incur additional time and expense to litigate in an area outside their jurisdiction. Again this is a complex issue and requires the advice of a lawyer.
It is therefore important when negotiating or entering into any contracts to make sure that you read the “fine print” and negotiate clauses to ensure you maximise your legal position.
Frieda Grant is the General Counsel for ADP business services
Accounting service ADP Employer Services is the worlds largest provider of payroll and HR solutions for SME's. The product - 'Payline' services organizations ranging from 4 - 150 Employees. Services include; payment of employees, payment of PAYG Withholding Tax, payslips, payment summaries etc