Have you ever wondered about typical contract clauses and what they actually really mean? Here is a short introduction into clauses that you will find in most commercial agreements.
Preamble / “Whereas”-clauses
Generally, the preamble or “whereas”-clauses set the stage for the agreement. They offer background information and may define the purpose. However, there should not be anything in the preamble, that is part of the agreement between the parties, in particular any obligations. Otherwise, this may be highly confusing and sometimes contradictory or at least unclear, on whether this is background or actual agreement.
Warranty
Under Swiss law, a warranty is one party’s obligation to ensure that a product has the features agreed on in the contract. If this is not the case then the product is faulty, which can trigger several options on the purchaser’s side, such as for instance a right to price reduction. The content and extent of the warranty can be regulated in the agreement between seller and buyer. In particular, the buyer’s options can be fixed to for example a repair of the faulty product.
In international commercial agreements, however, warranty is often used in a much more general sense. Often, warranties are used to describe various obligations of the parties that are specifically agreed by the parties of the contract, followed by specific remedies that apply in case of a breach of any warranties.
Hence, the contractual use of the term warranty is not always consistent and may be combined or even mixed with other legal terms such as guarantee and representations. It is important to carefully read the agreement and to understand the distinctions and consequences for each obligation.
Liability / Exclusion of Liability
The liability determines the financial exposure of a party in case of damages, i.e. monetary losses of the other party. Most laws permit far reaching limitations on liability other than for willful or grossly negligent acts. Very often, the parties agree on an exclusion or cap (maximum amount owed in case of damages) for so called indirect damages (such as loss of profit).
In order to be in a proper position to negotiate liability clauses, one needs to understand the likelihood and potential exposure to certain damages. For instance, if I a buy a product on the performance of which my whole production of goods depends, then loss of profit is likely to be my main risk in case of a breakdown, hence I should be very careful in accepting an exclusion of or even a cap on the liability for loss of profit.
Overall, liability clauses are crucial for assessing the risks of a contract and to check whether they can and should be covered by appropriate insurance policies.
Indemnity
Indemnity is the obligation to pay for any loss or damage that has been or might be incurred by the other party based on claims of any third party. A common reason for including indemnity clauses is the potential violation of third party intellectual property rights. For instance, the buyer of your product may insist that you hold him harmless against any third party who might come after him based on the alleged infringement of intellectual property rights by the product you have sold. Hence, this clause is particularly important if you source third party components (for instance software or products in emerging fields), which you integrate into your products before selling them to your customers.
One should assess the potential exposure to third party claims when negotiating the contract and think of potential alternatives or supplements to an unlimited indemnity, such as replacement / adaptations of potentially infringing products or the taking over of the conduct and responsibilities of any legal proceedings.
Jurisdiction, Dispute Resolution, Applicable Law
Legal proceedings and costs associated with them vary greatly from country to country. If you conclude an international contract without paying attention to the dispute resolution clause, it may well be that your contract is not worth the paper it’s written on. One important item is to determine which court (or the courts of which country) shall be competent to decide the disputed under the agreement. Second, depending on the circumstances, it may be advisable to include an arbitration clause instead of a clause on which state courts shall settle the dispute.
Equally important is to agree on the law governing the agreement. Otherwise, it may well be that you agree on contractual clauses which are not valid under the law of the particular country. Or else, there may be mandatory rules of a country’s law which will apply in addition to what you have agreed in the contract.
Sumup
- Read the contract to the end
- Double-check wording or clauses that you to not understand, do not treat contracts like general terms & conditions in your private life
- Be aware of the different functions of typical clauses and have a list of clauses to identify potentially missing points
