Understanding Contracts

Ask for an indemnity.

Posted on by thelegalknow

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Commercial contracts are packed with risks. In fact the contract itself is one big risk. However, ironically, contracts are the safest way to conduct business; we need them! So, since we cannot avoid contracting with each other we have to ensure that we protect our interests in every contract that we sign. A key way to do this, is to ask for an indemnity clause.  An indemnity clause is a contractual transfer of risk between two contractual parties to prevent loss (you are not liable if X happens) or to ensure compensation for a loss (the other party reimburses you for any loss suffered if Y happens) which may occur as a result of a specified event (X or Y event). Let’s take a look at some examples of indemnity clauses:

  1. Basic Indemnities – Party A indemnifies Party B for all liabilities or losses incurred in connection with specified events or circumstances. For example, if you are contracting with a construction company to build your new store, you will want a basic indemnity saying that the construction company will compensate you for all losses if one of its subcontractors fails to do the job to the specification set out in the contract. If a subcontractor tiles the roof poorly, the construction company is liable for all losses ensuing from that subcontractor’s poor job. Pretty good right? However, basic indemnities can be troublesome as they do not set out any specific limitations on the indemnity. They are silent as to whether they indemnify losses arising out of YOUR own acts and/or omissions that cause the subcontractor to tile the roof poorly. What if you give the sub-contractor the wrong instructions or you don’t give the subcontractor access to the site on time?  This basic indemnity operates so that the construction company indemnifies you for the poor job of the subcontractor, even if the poor job was your fault. You may be thinking well, that’s great, but it’s only great if you are the party receiving such an indemnity. That’s why basic indemnities should be avoided where possible.
  2. Proportionate or Limited Indemnities – These indemnities rectify the potential unfairness of a basic indemnity (explained above) as they limit the indemnity. Sticking with the example above, say you obtain an indemnity from the construction company to the effect that the construction company is liable for all losses ensuing from a subcontractor’s poor job – a limited indemnity will go on to state “except those losses incurred as a result of [your] own acts and/or omissions”. If the subcontractor’s poor job is your fault you don’t get compensated. Seems fair.
  3. Third Party Indemnities – If third parties are involved in the operation of the contract, as in the example above, you may not want anything to do with them since you are contracting with them. Following on from the above example, what happens if a subcontractor isn’t paid for their work? You wouldn’t want to be liable for that. You can protect against this by asking the construction company to indemnify you for all liabilities relating to its subcontractors so that the subcontractors are always the construction company’s issue and not yours.

These are very high level examples which would make most lawyers (if they’re good) chuckle. Indemnities can be very complex and they should at the very least always be more than a basic indemnity. Here are some of the things your lawyer should consider when drafting an indemnity clause for you:

  1. Scope – The scope of the indemnity must be clear so that the intended protection is given.
  2. Context – An indemnity clause should always be drafted in consideration of the wider commercial context of the agreement. Is it applicable?
  3. Extent – Who does the indemnity cover and are there any limitations to the indemnity? If the indemnity is given by the other side but not its contractors or representatives, then the extent to which this offers protection will be limited.
  4. Insurance: There is no point in having an indemnity if the indemnifier cannot pay out in an event of breach. An obligation to insure to a level consistent with the indemnity obligation will provide comfort that the indemnifier has the means to back up the indemnity given.
  5. Caps: Indemnities can be capped but any such cap should be subject to careful consideration. Where an indemnity has a financial cap, the indemnified party may, depending on any other limitation clauses, still have an uncapped claim in contract law for any breach of contract.

As with many of my posts, this is a very simplified overview. You really need a lawyer to draft indemnity clauses because they are essentially financial obligations with very serious consequences. The aim of this post is to make you aware of them so that you can ask your lawyer about them. You may want receive indemnities as added protection or you may want to offer indemnities to show the other side that you mean business (they can be great for negotiation)!  So go ahead and ask your lawyer about them. Pick up one of your contracts and check to see if you have a few in there already.

I must also emphasise that an indemnity is a distinct right from the right to claim damages for breach of contract. If the construction company breaches a clause in the contract you still have your common law right to sue for damages. Any limitations under an indemnity will be for that indemnity only. This is important because limited indemnities often exclude any loss ensuing from your own negligence whereas a claim for breach of contract can be brought even where you too have been negligent. Ask your lawyer, they’ll break it down for you!

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Essential Contracts: An Overview

Posted on by thelegalknow

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Right so you’ve set up a business. Great! HOWEVER, don’t pat yourself on the back just yet. You need to ensure that you are legally ready to actually start FUNCTIONING as a business. So what am I talking about? I’m talking about those ESSENTIAL CONTRACTS that you should have READY at your fingertips so that you don’t a) look like an amateur (even though you may actually be an amateur) b) fall prey to the lawyers for the other side (if they present you with their standard contracts first, they MAY get the upper hand…depends on whether you’re legally smart or not) or C) miss out on fantastic opportunities because you don’t have the necessary documents ready and rearing to go.

There are many standard contracts a company should have depending on the industry within which the company operates. However here is a list of contracts that are applicable to all industries.

1. Shareholder Agreements

In the UK, if you are setting up a limited company, you will need a Shareholder Agreement. This contract regulates the dealings between the shareholders of the company. It sets out who owns what and who can vote and make decisions on what. It also sets out what particular shareholders cannot do. It effectively contains the framework for operating the company. This document should be drafted and agreed by all shareholders of a company at the outset. NEVER assume that just because you are friends or respectable members of society that things will not, one day, get ugly (this is business we’re talking about). A shareholder agreement protects every one.

2. Investor Agreements

Money, money, money…MONEY! If somebody is investing or loaning money to your company they will want to see the terms written down….SIMPLE. If you don’t have a standard form of this document ready for negotiation, you could run the risk of not being taken seriously and missing out on a great opportunity to gain capital for your business. An investor will want to know specific things and they will want to see these specific things neatly set out in concrete. What shares do they get? What is the value of those shares? Will those shares get diluted if more money comes in? What control do they get? What are the procedures for running the company? What is an exit for the investor if they want out? Setting these terms out clearly also protects YOU.

3. Website Terms and Conditions

Do you have a website? Of course you DO. You’re not living in the stone age BUT did you know that you cannot just have a website, you need a collection of documents covering the way that the website is run. Consumers/clients/customers need to see your policies on data, privacy, cookies and cancellation. Make sure you draft Terms and Conditions that are bespoke to your company. DO NOT copy and paste from another company’s Terms and Conditions – something in the small print WILL come back to bite you later. Instead, think about what terms you need in place that are relevant to what you offer and to how you run your business for example “this company operates on a 12 day cooling off period, if you change your mind within 12 days of ordering, we will cancel the contract, no strings attached” or “bookings are only confirmed upon receipt of a confirmation email from our head office”.

4. Non-Disclosure Agreements

Your business is your secret. Everything from your trademarks, patents, copyright, software, recipes, formulas, processes, financial information and so forth is your business IDENTITY. Don’t make it easy for people to steal your identity. This is what makes you unique – McDonalds, Apple, Nintendo! Before prospective investors, trade partners and purchasers will deal with you, they often need to know more about you – a Non-Disclosure Agreement offers you some protection in relation to the information that you disclose. It is a deterrent against breach of confidentiality by the other party. If they breach it, you can take them to court and sue them for virtually all damage ensuing from that breach…the price to pay could be very costly, consequently, they won’t want to breach it and your business identity is SAFE.

5. Employment or Consulting Agreements

If you have employees or consultants, you need a document that clearly sets out your relationship. There are many considerations that you as an employer will need to consider and set out clearly in line with the law. For example the process of terminating the contract, dealing with employee data, dealing with disciplinary matters, and (currently at the fore front in the UK) employee pension rights. Additionally, considerations such as wages, bonuses, working hours, holiday, sick pay, shares etc. all need to be addressed and codified somewhere clearly. This is where you really need a lawyer. There are some benefits to engaging contractors over employees (basically that you are not responsible for them) BUT just because you label someone a contractor does NOT mean that they are LEGALLY a CONTRACTOR. If they are working full time and only for you, tax and the law may classify them as an employee. So again YOU NEED A LAWYER HERE.

So there you have it. This is NOT a comprehensive list BUT it is a very good start. If you operate in another jurisdiction, such as the USA or Singapore or Dubai, the above themes and considerations are pretty universal save for any legal particulars. So go and put your house in order. You can actually buy most of the templates to the above agreements online HOWEVER whilst you can certainly make a start on them ALWAYS get a lawyer to give them at LEAST the once over, remember these documents are ESSENTIAL so you kind of want to get them right.

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Read the SMALL print

Posted on by thelegalknow


Yup! It’s as simple as that. Read the small print! Read the disclaimers (this blog has one). Read the exclusion clauses. Read the terms and conditions.

I get so annoyed when I see companies or blogs or ANYTHING referring to the small print as “legal mumbo jumbo”. I can assure you that the small print it is NOT mumbo jumbo. It is a coherent stream of dos and don’ts that could NEGATIVELY affect your business – the SMALL print can have BIG consequences!

So do yourself a favour and take the time to read and understand the small print. Ask questions too! If you see something you don’t like, can you get a waiver? Can you negotiate out of it? Or maybe it’s not worth going ahead with at all? Again, reading and understanding contracts, offers etc gives your business options.

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Before you sign: Dispute Resolution

Posted on by thelegalknow


Contrary to what the majority of people believe, when you have a contractual bust up with the other side litigation or arbitration should be the last resort. THE LAST RESORT. Taking a dispute to court is extremely expensive in any country and it should only ever really be done when you can’t do anything else. This is why good lawyers review the dispute resolution clause before signing to ensure that a dispute between the parties can be RESOLVED by cheaper alternative methods and is not just fast tracked to formal litigation or arbitration. These other ways are known as alternative dispute resolution (ADR) and it is becoming more and more common for dispute resolution clauses to build in some of these alternative forms of dispute resolution as a precursor to any formal proceedings.

The forms of ADR are abundant. ADR can be anything from SIMPLE NEGOTIATION between senior members of either party to MEDIATION whereby an independent third party (called a mediator) helps you and the other parties to talk things through and guides you to a settlement agreement (a document setting out the agreement reached between the parties). ADR is less confrontational and is more likely to encourage business relationships to continue. HOWEVER essentially ADR is NOT binding in the same way as a JUDGMENT given at court or an AWARD (which is basically a judgment) given in arbitral proceedings (small caveat here, arbitral awards are binding so long as international treaties are in place in the relevant countries, such as the New York Convention…this is a topic for another post). This means that you CAN’T actually make the other side COMPLY with whatever you have agreed with them as a result of the ADR. For example if the other side failed to act in accordance with the settlement agreement you would have to sue them for breach of the settlement agreement. CONSEQUENTLY, if the other side is being obstructive and uncooperative in the ADR procedures take that as a warning that A BINDING judgment is required and that maybe formal legal proceedings are necessary.

So how can you incorporate these more friendly and way cheaper ADR forums into your dispute resolution clause? Well the ways are infinite and you NEED a lawyer to ensure that this clause is carefully drafted. HOWEVER, generally, dispute resolution clauses are either multi-tiered or drafted as carve out clauses.

Multi–tiered dispute resolution clauses require the parties to engage in tiers (stages) of ADR and only when a stage fails can the parties progress to the next stage with the last stage being formal court or arbitral proceedings. If the dispute is truly and obviously irreconcilable (you hate each other) it would of course be possible to waive the tiered obligations by mutual consent and skip straight to the expensive bust up. Here is an example of a tiered dispute resolution clause:

“If any dispute arises out of or in connection with this agreement or its formation, directors or other senior representatives of the parties with authority to settle the dispute will, within [ ] days of a written request from one party to the other, meet in a good faith effort to resolve the dispute. If the dispute is not wholly resolved at that meeting, the parties will attempt to settle it by mediation in accordance with the CEDR Model Mediation Procedure. Unless otherwise agreed between the parties within [ ] days of notice of the dispute, the mediator will be nominated by CEDR. To initiate the mediation a party must give notice in writing (“ADR notice”) to the other party(ies) to the dispute requesting mediation. A copy of the request should be sent to CEDR. Unless otherwise agreed, the mediation will start not later than [ ] days after the date of the ADR notice. If the dispute is not settled by mediation within [ ] days of commencement of the mediation or within such further period as the parties may agree in writing, the dispute shall be referred to and finally resolved by arbitration.”

As mentioned above, dispute resolution clauses can also be carve-out clauses. Carve out clauses allow for some disputes to be resolved through arbitration/litigation and other disputes relating to other aspects of the parties’ relationship to be referred to a form of ADR. For example a dispute relating to the quality of a product (a computer) supplied to a purchaser might be referred to an expert in that field (a computer engineer – this is called expert determination), and all other disputes relating to the contract (for example exclusivity or payment terms) might be referred to litigation or arbitration.

The point of this post is to encourage you to GIVE yourself OPTIONS when it comes to resolving the disputes under your contracts. You don’t have to go straight to court or arbitration (did I mention these forums are EXPENSIVE). You can take a breather and try to settle things amicably (and CHEAPLY) first. ALSO please do not use the example clause in this post in your contracts – it is an EXAMPLE. There are several other factors that MUST be considered when drafting dispute resolution clauses and this is why you really need a lawyer’s drafting skills here. Some dispute resolution clauses have been deemed by the English courts to be unenforceable or not part of the contract at all because of bad drafting. So never sign a contract without considering this clause and thinking about the best ways to resolve disputes for your business HOWEVER this is not A DIY clause by any means.

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Before you sign: Termination

Posted on by thelegalknow

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In continuation of the “Before you sign” series, I present the third potentially deadly clause for your review…TERMINATION. A termination clause is effectively your get out of jail FREE card in any contract so long as you DRAFT it that way. This is why you need to understand your contract so that you know a) what you want (life is good and business continues as normal) and b) what you do not want (often that the deal has soured and you need to end it). Termination clauses set out WHEN either party can LAWFULLY terminate the contract. The consequence of UNLAWFULLY (so not complying with the termination clause) terminating the contract is that you are most likely sued by the other party/parties to the contract for damages (compensation).

There are different circumstances in which you may want to terminate a contract. You may just want to try out a business relationship and give yourself the option to walk away if you don’t think there is a future in it. In this instance your termination clause should specifically enable you to end the contract on a short period of notice, for example 3 months after a fixed initial period of 6 months – this is termination for convenience or “without cause”. Either party can walk away after a set period of time simply because you have given each other the opportunity to do so. Of course it is also possible for a contract to just end naturally for example by effluxion of time (the contract runs its term), or by both parties performing their obligations under the contract. For example A contracts with B for delivery of 70 tennis balls on X date in return for A paying B a fee, once B delivers the 70 tennis balls in accordance with the contract and A pays B, the contract is over.

HOWEVER more likely than not you will want to make sure that you can terminate the contract when the other party BREACHES (messes up) the contract. Here are some examples of when that might be:

  1. The other party has committed a MATERIAL breach of the contract that CANNOT be remedied – so this is when you receive something SUBSTANTIALLY DIFFERENT from what the contract specified, for example, if the contract specifies the sale of a box of tennis balls and you as the buyer receive a box of footballs. Or you hire an artist to perform the piano at your event but they turn up with a guitar. Such a fundamental breach should entitle you to terminate the contract immediately without notice to the other party. 
  2. The other party has committed a MATERIAL/SUBSTANTIAL breach of the contract that is capable of being remedied but has failed to remedy that breach within a set period of time – so this is when the other party has breached the contract AND the breach is fixable HOWEVER the other party has  failed to fix it within the set period of time. In such circumstances you will want the right to terminate the contract. For example you order pink balloons and the other party delivers blue balloons. You still have balloons but they’re not the right colour, you will notify the other party giving them a chance to send you the correct colour balloons by a certain time in accordance with the contract (say 7 days). The other party fails to send the correct balloons by your deadline OR sends white balloons. You will want to terminate the contract and sue for damages. Please also note that even where a failing party manages to remedy its material breach within a set period of time, the innocent party could still seek damages for any loss caused by the breach. For example You have a restaurant that requires 100 burgers and 100 hot dogs but you only receive a delivery of 70 burgers and 70 hot dogs from your supplier. By the time your supplier has delivered the remaining 30 burgers and 30 hot dogs, you’ve missed out on business or you’ve had to buy more expensive burgers and hot dogs at short notice from another supplier to meet the demand of your customers. You will want to sue for the loss you suffered during this time even if you continue the contract with your original supplier.
  1. The other party persistently breaches the contract in MINOR ways which altogether have a negative impact on the performance of the contract E.G continuously delivering goods late, being late with services without a reasonable excuse, persistently making late payments (this can affect cash flow) or continuously failing to meet sales targets or sales quotas within a period of time. You will want the right to pull the plug on the contract after a while. It will be up to you to determine, in your contract, when enough is enough in respect of these minor breaches. For example you would not want to terminate the contract for one late payment but you might want to terminate it for three consecutive late payments.
  2. The other party has become insolvent or bankrupt or is in the process of becoming so – the other party has gone bust or is clearly in financial trouble. You will really want to get out of the contract in this situation so you must make sure that your contract allows you to do so.
  3. You anticipate that the other party is about to breach the contract (an anticipatory breach) – so this is where the other party has made it known that they will not be carrying out the agreed work or they effectively stop acting in accordance with the contract, leading the other party to believe that they have no intention of fulfilling their part of the agreement. For example the other party persistently fails to produce an ordered item or refuses to accept payment. You will want to end the contract and sue for damages WITHOUT WAITING for the actual breach to occur.

Termination clauses are complex and this is where you really need a lawyer’s help. If you do not expressly make provisions in your contract for the different scenarios in which you want to terminate the contract, your contract will be subject to common law (this is the case in the UK but check the consequence in your country). Common law is law developed by judges through decisions of courts and similar tribunals that decide individual cases. If you leave your contract to the mercy of common law you could end up spending heaps of money paying lawyers to work out which case law applies to your particular contract’s circumstances and then even more money when the other side says your application of the common law is wrong and takes you to court! 

Basically, ALWAYS make express provision in your contract as to when it can be terminated.

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Before you sign: Jurisdiction and Governing Law

Posted on by thelegalknow

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There are a number of things that you should check out before you sign ANY contract however what I’m about to tell you is arguably one of the most important. When your business is doing well and the profits are booming, it’s hard to think about what happens if things go wrong between you and your client or you and your supplier. Well, regardless, lawyers go straight to the back of a contract to look at WHERE the parties battle it out if a lawsuit arises and WHICH LAW governs that battle. This is captured in each of the jurisdiction (WHERE) and governing law (WHICH) clauses. This post considers a UK law perspective however, jurisdiction and governing law are universal concepts (pretty much) so please look up your country’s equivalent.

Jurisdiction determines which country’s courts will hear any claim that is brought under the contract.  Governing law is the law that will be applied by the courts to interpret each party’s rights and obligations under the contract.  The two do not have to match, so for example the English courts could hear a dispute arising from a contract and apply French law to determine the outcome of the dispute. However, whilst the English courts are experienced in applying foreign laws, the French law must be PROVEN as a fact, usually by witness evidence from a qualified French lawyer. You can see how the costs can easily wrack up, witness evidence from a lawyer! Oh the fees! This is why lawyers tend to recommend that the jurisdiction and the governing law are the SAME to avoid uncertainty and to avoid the unnecessary costs of hiring lawyers as expert witnesses on top of hiring lawyers to actually represent you at court!

The jurisdiction and governing law clauses should be considered and agreed from the outset. You do not want to get to the point of suing or being sued only to learn that despite your business being domiciled and operating in the UK, you are having to fly all the way to Singapore because the other side snuck in a jurisdiction clause that the contract would be subject to the courts of Singapore and a governing law clause that the contract would be interpreted in accordance with Singapore Law. NIGHTMARE.

It is possible to draft one joint jurisdiction and governing law clause however contracts that want to be easily understood (hint hint) set the clauses out separately.

Here is an example of a governing law clause:

This agreement and any dispute or claim arising out of or in connection with it or its subject matter or formation (including non-contractual disputes or claims) shall be governed by and construed in accordance with the law of England and Wales.

Here is an example of a jurisdiction clause:

Each party irrevocably agrees that the courts of England and Wales shall have [exclusive/non-exclusive] jurisdiction to settle any dispute or claim arising out of or in connection with this agreement or its subject matter or formation (including non-contractual disputes or claims). Note: You can choose to submit the contract to just one country’s courts (exclusive jurisdiction) OR you can choose to allow the parties to commence proceedings in another country’s courts DESPITE stating a particular country in the contract (non-exclusive jurisdiction, this is very confusing and is usually only used in special circumstances).

I must tell you that jurisdiction can either be given to a country’s national courts (as above) OR to arbitration proceedings in an arbitration clause. Arbitration is similar to court proceedings but it is less formal and the parties effectively decide the rules that govern the process. It is also confidential (good for keeping high profile disputes out of the public). If you choose to use arbitration instead of court proceedings, governing law is still required. Arbitration is definitely a topic for another post, in fact many other posts, but for now just know that the option is there. So, with this knowledge, go review your contracts and ask your lawyers questions!

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