It is not really possible to use one template for all contracts you will have in an organization. The clauses of an IT contract will defer vastly from a catering contract and will have very little in common with your vehicle lease contract.
Nonetheless, here are some points you should think about when drafting any contract. Use this as a quick reminder in order not to forget anything that may bite back one day.
Here I am referring to the worst possible cases that I can think of if something is missed out. Of course, many of those instances will never happen. Still, it is our job to mitigate the risk whenever possible.
Full company details
There are many companies with very similar names. Or one Company having multiple branches. Make sure you have the right details. Take their Trade licence or VAT certificate and copy/paste it. I have seen strange names that make no sense to me, so mistyping happens easily.
The right Authorized signatory
A contract not signed by the Authorised signatory is not legally valid. Yes, you can claim fraud and that it was done with intention. But, if things go wrong, the last thing you need is a headache around the signature.
Price in words, the right Currency
It happened to me more than once. The Executive did a number permutation (swapping of places) and I did not notice and approved it. Or a EUR contract wrongly presented as USD-based.
Invoicing and payment
Is the payment 60 days from the invoice issue date, invoice receipt or approval? How shall the invoice be submitted? Where, especially if the head office and place of delivery are not in the same place or Country.
My recommendation is always to write exact dates, not clauses like: ”60 days from date of signature.” And then your supplier forgets to put the date. And you have in fact no idea when exactly is the contract about to expire. In the Middle East, for example, we struggle often with the date format. Depending on their origin or education, some write dd/mm, and some mm/dd. Make sure the date is somewhere written either in words or at least in dd/mmm – mmm/dd format.
Contract extension and renewal
If you have no intention to extend the contract beyond its expiration, make it clear. So many times it happens that vendors avoid this clause and insist on auto-renewal unless terminated. This way, they are transferring the responsibility to take care of contract closure. All they need to do is to keep quiet.
Milestones both for work and payments
In the rush to finalize the deal and get on with work, often We forget a very important variable: time. Make sure everyone understands when:
- Advance payments will be given
- Items should be delivered
- Work must start
- Phases of work will be delivered
Every one of these milestones must be
- Quantified (how much, how many tons, hours etc)
- With defined documents: invoice, work order sign-off, inspection report etc.
A clear segregation of responsibilities
Recently I had an IT contract with:
- Software developer
- Licensing Company
Understanding who is doing what was a bit of a challenge. But figuring out who is responsible for what required the involvement of procurement, IT and legal. They made the contract draft in such a way that we had no clue.
Also, make sure the responsibilities of your internal teams are clear. The last thing we need is to be blamed for the delay caused by us.
The scope of the delivery or service
Miscommunication is a very common reason for disputes in any business. What you interpreted during the negotiation is not always what the other party tried to convey.
Therefore, be as precise and detailed as possible. Nowadays you can link meeting recording links, Teams meeting whiteboards and other digital sources. In this area, you simply cannot have too much data.
“Assumption is the mother of all mess-ups!”
Applicable international, local or companies standards
Those who trade in commodities are very well aware of the importance of this clause. It is quite a difference whether the pipe is DIN 1.430 or AISI 316I even for the same size. Make sure you provide your standard requirement. Also, advise how are you going to test against the standard during quality control. And don’t forget to specify all units of measure.
Contacts of stakeholders that will execute the contract
Once the contract is signed it gets executed. And more often than not this is done by a different team. Make sure you have the contacts of persons who will work on the execution of the contract. If there is a breakdown on a Saturday evening the salesperson of the Supplier will not be able to help much.
If something goes wrong, whom will you call? And if the person is not reachable, who is next in line? The escalation matrix is especially important in contracts dealing with life, safety or security. You do not want to get stuck with a fire alarm ringing all night because your contact went on holiday.
Confidentiality and Intellectual property
During the contract execution, it is sometimes difficult not to share confidential data. Imagine in the automotive industry developing a part that will be connected to several others. If the sample is not perfect, you will have to bring the vendor in to show him what is the issue.
Make sure you define that no information with regard to contract execution can be shared with third party. Make sure you define what can be shared with their suppliers, subcontractors or management. The less people know, the less the risk. And it is easier to find the leak. Also, make sure about the storage of digital information and access rights. Even if your supplier has no bad intentions, their servers or emails could be hacked.
Liability of each party
We have two basic liabilities in business:
Contractual liability defines the moment when the responsibility for a good or service changes from the seller to the buyer. So, the buyer is delivering a machine. Once he hands over the documentation and the container with the machine to the seller, he is no longer liable. If something happens on the way to the plan, it is the seller’s responsibility
Limitation of liability considers cases where the seller has damages or losses due to negligence of the seller. For example, BI Constructions is the main contractor of a building. Their supplier, Z Cements, provides the concrete. If the concrete supplied was done with low-quality cement, the slab may crack. The end user may file a case, requesting the complete slab to be demolished and re-build. In our case, BI Constructions put a clause that Z Cements is liable for all direct (demolition, new concrete and installation) and indirect (loss of profit, as BI Constructions could meanwhile finish one more project) costs. Sometimes there will be a cap (limitation), usually for a % of the total contract value. So it can not happen that Z Cements has to pay more than the revenue they were about to receive from this project.
Warranty and Guarantee
While searching for a good comparison of the terms of Warranty and Guarantee, I stumbled upon this table. The source is at the end of the article.
What is it?
It is a written assurance that the information provided about the product is true and accurate.
It is a promise the manufacturer makes to the customers regarding the product.
What happens if there is an issue with the product?
The manufacturer will repair or replace the product.
The product will be repaired, or replaced, or the amount will be refunded.
Do you get a refund?
Products and services
Always given in a written form?
Do you always get a card or something like that to prove it?
Yes (Warranty card)
The warranty is offered at no cost. However, the additional warranty can only be obtained by paying additional fees.
The guarantee is offered at no cost and is subject to certain terms and conditions.
A manufacturer may replace the entire product
When is it given?
If there are manufacturer defects in the product.
If the product has manufacturing defects or the error was caused due to some human fault.
Can be extended
Condition of sale
Subsidiary condition of sale, which may be expressed or implied.
It may or may not be a condition of the sale
Defined product quality or Service level agreement
One more clause with the simple aim of avoiding all misunderstandings.
Product quality is very subjective. Is a shirt of good quality because it feels nice when you wear it? Or it needs to maintain shape and colour after 40 washes? Or do you define good quality as 60% cotton and 40% polyester?
Define quality in such a way that it is:
- Easy to check, even by someone that has no training
- Measurable, so you can easily prove to the supplier that the product is not of the required quality
- Objective and related to the use of the good
When it comes to Service Level Agreements, it gets even more trickier.
I work in Facilities Management, and often see the clause:
“Premises have to be clean at all times”
What does this actually mean? Do we have to have a cleaner at every corner, running to pick up every piece of garbage as soon as it hits the floor? Or it is fine to have someone every 30 minutes to make sure the area is clean? Is it clean if he uses only a mop, or do you want it mopped with water and disinfectant? And so on…
State your expectation precisely, if possible in a way that is objective and measurable.
This is your main contract clause. Sit with the team and think:
What should the supplier do so that we say: ”Great job!”
It can be many things:
- Speed of delivery
- Consistent quality
- Response times
- Quick resolution of the issue
- Reporting, feedback and root-cause reports
In my Article “Sustainable procurement – setting up procedures” https://abcofprocurement.com/sustainable-procurement-setting-up-procedures/
I have discussed in detail the ESG goals your Company made set. Now, in order to bring them to life they need to be pushed down to your vendors. They can be, for example:
- Clauses about disclosing and limiting the use of harmful chemicals
- Labor standards (work hours, accommodation, workplace standards, safety)
- Usage of recycled materials
- Return and reuse of packaging
Continuous improvement, best practice and innovation
The fact that the contract is signed does not set it in stone. A part of your contract can be to meet every three months and discuss opportunities to reduce the overall costs. Or improve the output quality. Or re-design the product. You can even set KPIs related to innovation, thus forcing the supplier to improve.
So here we have the definition of Force majeure from Thomson Reuters:
“Force majeure events are usually defined as certain acts, events or circumstances beyond the control of the parties, for example, natural disasters or the outbreak of hostilities”.
Under Force Majeure, the company is not able to do business due to reasons that are beyond its control. It is usually referred to as natural disasters, wars, riots or similar events.
There is no uniform definition of what is covered in Force Majeure, hence I would recommend that you define in the contract what is covered under this clause, with the “Includes, but is not limited to…”
Suspension and termination
Life was good back in 2020. Then COVID hit. And businesses were confused: If this Force Majeure? Suppliers pushed back: no, it is not. You can still work, just your customers are locked in their homes and are not able or in need of your product or service. We learned our lesson. Now we have a suspension clause that allows us to temporarily put the contract “on hold” if there is an event that is significantly impacting the operation.
The opposite of suspension, where you just delay the execution of the contract, termination means putting an end to the contract prior to the expiration date. Many contracts have the termination “for convenience” clause with a notice period embedded. In simple words, you can terminate the contract at any time without the need to explain why. In some cases there is a penalty, in some cases, you have to provide sufficient notice (at least 30 days) to the supplier. This clause protects you from continuing with the contract if circumstances change and you do not need the product or service anymore.
Applicable laws and dispute procedure
This is a very standard clause, defining the jurisdiction of the Court in the case of a dispute. Go through it, sometimes you will find that the Company put the Court in another continent as the one that will be used in the case of a dispute. Which is not really possible considering the value of the contract.
This is not all, and it does not apply to every scope. If I missed out something, please add it in the comments.
Contracts can be a hassle. If you use this article as a quick reminder, you can be quite sure that you have covered it all.
Happy Contract drafting 🙂
DISCLAIMER: This is just a recommendation based on my experience while working with contracts over the past 15 years. I take no responsibility for any loss incurred, and this article is not legal advice. Whenever drafting a contract, seek legal advice from your legal department or a professional.