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How to read contracts if youre not a lawyer Part 1

Match the paragraphs below with the correct headings.

a.

You might be comfortable indemnifying for direct business costs incurred by the other party due to
your actions, but would you want to pay for the family holiday his CTO had to cancel? An
exaggerated example, but you get the idea.
These are implied terms contained in separate legislation. Just to make things even trickier for nonlegal eagles, there are terms applicable to contracts by law regardless of whether you specifically
include them.
The worst-case scenario if they are not authorized, is that the contract is not worth the paper its
printed on. There are some arguments you can present to counter this, but it's easier to make sure at
the outset.
This is generally the best position for both sides as it means clarity, but make sure you arent
planning to rely on emails or other details you think are agreed that didnt make the final draft.

b.
c.
d.

1. Termination

The first check I always make is to the termination provisions to make sure there is no lengthy notice
period or cost penalties to terminate. Or, of course, you might want to make sure both of these are
imposed on the other party if there is a big initial resource outlay from your side.
2. Indemnities

An indemnity is where one party makes a promise to be responsible for losses suffered by the
other, usually arising from a breach of contract or warranty. They are widely misunderstood.
You should ensure that the indemnity is not framed too broadly. I generally would not be happy to
accept indemnities that include all indirect or consequential losses or loss of profits.

Indemnities are likely to be capped and when negotiating or accepting a cap, be sure it represents the
key areas of interest or risk in the contract (e.g. to cover the cost of bespoke work for them, value of
goods leased to them). Note as well, however, that this cap is only a cap under the indemnity
provision. The other party might claim additional damages under a different warranty or contract term
over and above the indemnity. To avoid this, additional drafting is needed.
A final point is to check your business insurance. You might think you have indemnity insurance but
often insurers include a cap of their own; make sure it is aligned with the cap in the contract.
3. Entire agreement clause

An entire agreement clause means the contract is the whole agreement between the parties. Any
prior emails or conversations will not be included.

4. Interest

If the contract does not specify a rate of interest for late payments then unfortunately, this doesnt
mean that no interest is payable. Interest will be payable at 8% above the Bank of England base rate,
which is currently 0.5%. This is usually higher than a rate the parties agree between themselves. In
addition, fixed penalties can be added to the bill for late payment.

5. Whos signing the contract?

Make sure the person signing the contract is authorised to do so. In the case of a company, the
signer must be authorised by the company. If Im unsure, I ask for confirmation by email and push for
a reply by email, and, I generally include a warranty to the same effect.

How to read contracts if youre not a lawyer Part 2


1. ..best endeavours vs reasonable endeavours vs all reasonable
endeavours
Commonly used but the differences are rarely understood when used in respect of obligations.
Reasonable endeavours a party should take one reasonable course of action in order to achieve the
result, bearing in mind its own commercial interests and the likelihood of success.
All reasonable endeavours a party should explore, to a reasonable extent, all avenues reasonably
available to it, but it doesnt have to disregard its own commercial interests or continue trying to comply, if
it is clear that all further efforts would not result in success.
Best endeavours a party should take steps which a prudent, determined and reasonable party,
acting in its own interests and desiring to achieve that result, would take. This does not include actions
that would lead to its financial ruin, undermine its commercial standing or goodwill, or have no chance of
being successful.
The general position is that each side will push for inclusion of best endeavours whilst simultaneously not
accepting it. In most circumstances, Im happy with reasonable endeavours. Where possible, set out what
steps are actually required in key situations rather than relying on tricky terminology.
2. Intellectual Property
Intellectual property rights can exist in code, logos, branding, designs, copy, etc. If the contract relates to the
creation of a logo, for example, you should take care if its being created by someone other than an
employee.
A freelancer, contractor or third party company will automatically own the IP rights to the logo unless the
contract includes an assignment it makes no difference if you paid them for it.
You might not fully understand an assignment clause, but at a minimum, make sure its there. If theres no
assignment, although it may well be implied that you can use the logo, you wont own all the rights to it.
Quite often, the creator company will reserve the right to charge an additional fee at a later stage for the
purchase of the intellectual property rights in the logo. If you have to deal with this after you have grown
your start-up into a successful company, you are at their mercy regarding the price. If they arent willing to
assign the rights to you within the quote for the initial work (and you are happy to accept that), make sure
you agree what it will cost if you wish to acquire them later.
3. Insurance
Consider whether the service provider should have professional insurance in place. This depends on the
nature of services being provided, the potential implications if the services arent adequate and the resources
available to the service provider to rectify an issue (i.e. consider a freelancer versus a large organisation). If
they have an obligation to get an insurance policy, make sure you have the right to view it and that the level
of cover is sufficient.
4. Key man provision
Where you are contracting with a company, it might be really important to you that a certain person performs
the obligations (probably the person that hooked you in the first place). If this is the case, consider whether
it is necessary to specify this in the contract.
5. time is of the essence
This is a phrase to watch out for, unless its in your favour, in which case it is very useful. It basically means
that in respect of the obligation in question, time is of the utmost importance.
For example, if a contract included a date for delivery of an obligation and that date was missed, there would
be a breach of contract, but not one that would mean the contract could be terminated or that damages could
be recovered.
However, if time was of the essence for that obligation, its a different story. The contract could be
terminated immediately without notice and damages recovered.
A great one to include if there is a date so vital to the whole purpose of the contract that if it wasnt met,
there was no point entering into the contract in the first place.