This Halloween, beware of more than ghosts and ghouls. Hidden in the small print of a contract, certain clauses can leave businesses facing unexpected costs, unwanted obligations and disputes that come back to haunt them.
Contracts are a fundamental part of doing business. Whether you are entering into a supply agreement, appointing a service provider, negotiating a distribution arrangement or agreeing terms with a new customer, the wording of your contract can have a significant impact on your position.
However, not every contractual clause is as innocent as it first appears. What looks like standard wording could conceal significant risks, leaving your business with more tricks than treats.
We take a look at some key clauses that could leave your business with nightmares:
1. No escape from the haunted contract
Some contracts are easier to enter into than they are to escape. What begins as a useful commercial arrangement can quickly become a contractual nightmare if your business is locked into an agreement it no longer needs, wants or can afford.
Automatic renewal clauses can cause a contract to renew for a further fixed period unless notice is given within a specified window. Miss that deadline, and your business could find itself committed for another six or twelve months, or potentially longer, despite having intended to walk away.
But the real horror story may lie in the termination provisions themselves. Some contracts allow termination only in limited circumstances, such as a serious breach that remains unremedied after a specified period. Others impose lengthy notice periods, early termination fees or minimum spending commitments that make exiting commercially unattractive.
For example, imagine your business has entered into a contract with a supplier whose service levels have deteriorated. You find a better alternative, only to discover that your contract has automatically renewed and you cannot terminate it early without incurring significant costs. Suddenly, switching providers becomes far more complicated and expensive than anticipated.
What should you look out for?
· How long is the renewal period?
· How much notice must be given to prevent renewal?
· Does notice have to be served in a particular way or on a particular person?
· Can the contract be terminated during the renewal period, or only at its end?
· Can either party terminate for convenience, or only following a breach?
· Are there exit fees, minimum commitments or post-termination obligations?
The trick: Before signing, check both how the contract renews and how it can be terminated. Negotiate renewal periods and notice windows that are manageable, and consider whether you need a right to terminate for convenience or where service standards consistently fall short. Calendar all key dates and build in reminders well before notice deadlines expire.
2. The liability black hole
A commercial relationship can turn into a nightmare when something goes wrong and the contract does not provide the protection a business expected.
Limitation of liability clauses determine the extent to which a party may be liable for losses arising from a breach of contract or other specified events. They may cap liability at a fixed sum, limit it to the fees paid under the contract or exclude certain categories of loss altogether.
For example, a supplier might agree to provide a critical service but cap its liability at the fees paid during the previous three months. If the supplier’s failure causes substantial losses to the customer, the customer may discover that its contractual recovery is significantly restricted.
On the other hand, a business supplying goods or services may face potentially disproportionate exposure if it agrees to uncapped liability for a wide range of claims.
What should you look out for?
· Is the liability cap proportionate to the value and risk of the contract?
· Are certain losses excluded, such as loss of profits, revenue or business opportunities?
· Are any liabilities excluded from the cap altogether?
· Does the clause distinguish between different types of claims and risks?
The trick: Assess liability provisions against the actual risks of the transaction, rather than accepting them as standard wording. Consider whether separate caps are appropriate for particular risks and ensure the exclusions and exceptions are clearly drafted.
3. The Contractual Shape Shifter
Imagine agreeing a contract on one set of terms, only to discover that the other party can change the rules halfway through.
Unilateral variation clauses may permit one party to change prices, service specifications, policies or other contractual terms without obtaining the other party’s agreement each time.
Some variation mechanisms are commercially necessary, particularly where services evolve or costs fluctuate. However, broadly drafted provisions can create considerable uncertainty and leave a business exposed to changes it did not anticipate when entering into the agreement.
What should you look out for?
· Can the other party change prices or fees without your consent?
· Are there clear limits on what can be changed?
· Must changes be notified in advance?
· Do you have the right to object or terminate if a change is unacceptable?
The trick: Seek clearly defined variation procedures, appropriate notice periods and safeguards against material adverse changes. Where possible, significant changes should require mutual written agreement.
4. The hidden horrors lurking in the small print
Sometimes the most troubling contractual terms are not in the document you are actually signing.
A contract may incorporate other documents by reference, such as standard terms, supplier policies, online terms of service, technical specifications or separate service schedules.
If those documents are not reviewed, your business may inadvertently accept obligations that are difficult to identify from the main agreement alone. There may also be uncertainty about which document takes precedence if the terms conflict.
What should you look out for?
· Are all referenced documents available and clearly identified?
· Are external terms incorporated into the contract, and if so, which version applies?
· Can the other party amend those documents unilaterally?
· Is there a clear order of precedence if the documents conflict?
The trick: Obtain and review all incorporated documents before signing. Identify the applicable versions and agree which terms prevail in the event of inconsistency.
Don’t let the small print haunt your business
The clauses discussed above are not inherently bad. In many cases, they serve legitimate commercial purposes and provide essential certainty for the parties. The real risk lies in accepting contractual provisions without understanding their practical and financial consequences.
Before signing a commercial agreement, businesses should take the time to:
· Read the whole contract. Do not focus solely on the headline price or commercial deal.
· Identify the key risks. Consider the potential financial, operational and legal consequences if things go wrong.
· Check how the clauses interact. A limitation of liability clause, indemnity and insurance provision should be considered together.
· Negotiate where necessary. Standard terms are not always appropriate for every transaction, and there may be scope to agree more balanced provisions.
· Keep records and monitor deadlines. Contract management does not end when the agreement is signed.
Most importantly, do not assume that a clause is harmless simply because it appears in a standard form agreement or has been used in previous transactions. Its suitability will depend on the wording, the nature of the contract and the circumstances of your business.
Read carefully, negotiate wisely, and don’t let a bad contract become the ghost of business decisions past.
Need help reviewing your commercial contracts?
A carefully drafted contract can help protect your business, clarify responsibilities and reduce the risk of costly disputes. Identifying problematic provisions before signing is often much easier than trying to resolve their consequences later.
If your business is entering into a new commercial agreement or reviewing existing contractual arrangements, our commercial team can help you understand the risks, negotiate appropriate protections and ensure your contracts reflect your commercial objectives. Get in touch with our team: commercial@berrysmith.com or 02920 345511