Important Clauses in a Contract
Important Clauses to Pay Attention to in a Contract
A contract is a legal document that binds all parties outlining their specific rights and obligations. If there is any discrepancy in a product or service offered, the contract is typically one of the first documents referenced. That is why it’s important to thoroughly review contracts and pay extra attention to certain clauses. This could save you a lot of time and money down the road. Check out our “10 Things to do Before Signing a Contract” blog for some additional tips. This blog will highlight specific clauses to pay attention to in a contract.
Insurance
An insurance clause is crucial in a contract. Insurance terms outline the financial resources that will be available should a loss result from a claim or action. Insurance clauses should be clear, fair, and assess the risk to exposure appropriately. A good insurance clause should also highlight any limits to coverage availability. As a party to a contract, you also want to identify who is actually covered under an insurer and to what extent. Many insurance clauses will reference whether the coverage is per occurrence or per accident, if a certificate of insurance is needed to show proof of the effective insurance, the availability of errors and omission insurance, and whether a waiver of subrogation is included.
There are also different types of insurance available like General Liability Coverage, Professional Liability Coverage, or Products Liability Coverage. It is also important to pay attention to verbiage related to “named insureds” vs “additional insureds”. A named insured to a policy is considered to be the owner of a policy and they manage the coverages, pay the premiums, have rights to the policy, and have access to confidential information. An additional insured is not entitled to the same rights, and they are not automatically covered like a named insured would be. Additional insureds only have coverage in relation to specific services or work in discussion.
You also want to ensure the insurance coverage will span for the duration of the service/agreement so keep this in mind when reviewing this section. You should be given at least 30 days’ notice of cancellation prior to the other party cancelling or making material changes to their insurance coverage. Depending on the service, insurance may also be required to be maintained for the duration of the contract, like in construction projects. Failure to do this would constitute a breach of contract.
Indemnification
Indemnification clauses outline the party that will be responsible for damages, losses, legal costs, and any other fees typically associated with a negligent party’s actions. You have probably come across wording that sounds similar to “you agree to indemnify and hold harmless the other party and its employees, agents, and officers against all liabilities stemming from omissions, damages, judgments, fines…”. These clauses can be tricky because if you aren’t careful, you could be exposing yourself to thousands of dollars in damages that may not even involve you.
If you choose to keep an indemnity clause in a contract, you will want to make sure that you are only responsible for the damages caused by your negligent actions. This will ensure that the other party will have to prove your negligence before being entitled to damages. Another note to pay attention to is exposure to liquidated damages and penalties. Many business/service contracts will mention these. Liquidated damages are damages that have been determined from a pre-estimate of probable loss that the other party believes they will suffer due to a delay or late completion of a contract.
Since these damages are intangible and usually hard to define, you could wind up paying a large ‘estimated’ amount in damages that isn’t even accurate. Penalties are amounts that are to be paid to a party if the other party does not adhere to the terms laid out in a contract. As things can change relatively quickly in business, you want to be weary in agreeing to penalties of any kind.
Termination, Early Termination, and Cancellation
Termination clauses do not just identify when a contract agreement will come to an end. They may also outline when a party can end a contract without penalty, why a party may choose to end a contract, and even how a party can go about doing so. As unexpected things can happen during business, knowing what rights you have to end an agreement early is important information to be made aware of. You will also want to pay close attention to any penalties that may be associated with ending a contract early.
This section is also beneficial to pay attention to because it will allow you to plan ahead when it comes to upcoming dates. If you are choosing not to continue a service with the other party, you may want to prepare to acquire the services of another business. If there are termination clauses present, you may also want to note if a notice period is required. Some contracts will stipulate that you must provide at least 30 or 60 days’ notice of cancellation to avoid penalties. Being aware of these requirements can save you a lot of money and avoid discord with the other party.
Renewals
Renewal terms are commonly joined in with termination clauses so if you don’t see it in its own section, check there as well. Renewal terms will outline if there is an automatic renewal at the end of a contract term or what is required of you to initiate the renewal. If you are not interested in an automatic renewal of service, try to identify if there is an opt-out window so that you don’t get stuck in a new contract.
Even if you are okay with the contract renewing, you will still want to confirm whether the terms of the original contract will remain in effect or if they will change. Otherwise, you may find yourself agreeing to a new set of conditions you were not made aware of. If you do not see any reference to a renewal noted, be sure to still mention it to the other party. If they any terms or conditions related to a renewal, request that it be put in writing.
Warranties
Warranty clauses are often common in service and product contracts. A warranty typically assures the buyer of a product or service that their item will be free from any defects or malfunctions. If there is a breach, you could claim damages from the other party. Warranties can either promise to fix the defect within a prescribed amount of time or they can agree reimburse you financially should that situation occur.
It is important to carefully review this section because you want to make sure that you will have access to remediation should something go wrong. Some contracts will state that you will only be entitled to the warranty if certain conditions are met. You will want to review these conditions carefully before agreeing or you could be signing away your right to a fair remedy.
Dispute Resolution/Arbitration
Even when contracts have been thoroughly reviewed and potential problems have been addressed, disputes can still arise. This is why it’s important to take a look at clauses that reference access to dispute resolution and/or arbitration. This type of clause will outline the type of dispute resolution that is available and what conditions will be required for it to be triggered. Some dispute resolution processes will allow each party to have a representative to discuss the disagreement on their behalf, or there may just be one appointed representative to assess the situation and decide.
Some will even say that the decision of the representative will be binding. A dispute resolution clause may also reference access to arbitration. Check out our arbitration blog if you would like more information on what arbitration is and how it works. Many arbitration clauses will require parties to engage in arbitration before seeking any other type of remedy (like going to court) so be sure to outline what is required of you. On the plus side, arbitration and other alternate dispute resolution processes tend to be faster and cheaper than engaging in the court process.
Force Majeure / Covid-19
Force Majeure refers to unforeseeable circumstances that prevent one or both parties from fulfilling their obligations in a contract. Circumstances like war, an act of God, natural disaster, fire, riots, strikes, or the inability to obtain certain materials can all fall under the umbrella of force majeure. With the onset of the Covid-19 pandemic, many contracts have started to include wording to address delays or cancellations attributed to this. It is important to have a force majeure clause in a contract because there could always be something that is out of your hands or the hands of the other party.
You want to make sure this is addressed to avoid disagreements, penalties, and the absence of a reasonable alternative. Many contracts alter these clauses to include or exclude certain circumstances so consider what service/product you are agreeing to and review the contract from that lens. Without a force majeure clause, any deviation or disruption from the agreement could be considered a breach of contract – which will be hard to argue after the fact!
Jurisdiction
With accessibility of services and products surging due to technology and online vendors, jurisdiction has increasingly become an important clause to pay attention to. Jurisdiction refers to the extent a power will have to make legal decisions over the matter. These clauses will also stipulate which province or territory’s laws will govern a contract. If you are from Ontario and sign a contract with someone in New York for example, you will want to confirm whether the laws of New York or Ontario govern your contract.
Also keep an eye out for where the matter will be resolved, as you could have a dispute that is only allowed to be resolved in New York with applicable New York laws. Jurisdiction clauses should be one of the first things you look at because this will determine whether other clauses are applicable and legally enforceable. Jurisdiction may also dictate how long resolution for your matter may take so don’t simply skim this area!
Confidentiality
A confidentiality clause in a contract is directly related to the parties involved and the sensitive information that may be passed between them. Confidentiality or non-disclosure agreements protect sensitive information and provide legal remedies if that confidential information is ever released illegally. These clauses are important to review because you want to make sure your information is protected.
Sensitive information does not have to just pertain to specific service or product details, it can also refer to a party’s financial or business practices which could be harmful if it were to land in the wrong hands. These clauses typically bar either side from divulging specific information for the duration of the contract or for whatever agreed upon time after the contract. This type of clause becomes even more important when dealing with intellectual property.
Parties
This may seem obvious but when signing a contract, be sure to confirm who are parties to a contract. You may think it is just between you and another individual, but the contract may outline other officers, partners, businesses, or subsidiaries that will be privy to the same rights and obligations as the party you are signing with. Identifying the parties to a contract will also clearly indicate who has access to legal recourse.
You don’t want to end up in a situation where a party’s partner or subsidiary is suing you and you weren’t even aware that they were a party to the contract! Most contracts will clearly state who is involved in the contract and also outline what name will be used to reference them but if you see that this is missing, be sure to bring it up to the other party and have something drafted in writing.
Non-Competition/Non-Solicitation
A non-compete clause involves a party agreeing not to enter into or start a similar trade, service, or profession that directly competes with the other party. These clauses are also commonly referred to as “restrictive covenants”. A party may deem a non-compete clause necessary to prevent employees or partners that leave from taking confidential information with them or using trade secrets belonging to the other party for their benefit. Non-compete clauses outline a specific period of time during and after an agreement where the departing party cannot engage in competitive behaviour.
However, effective October 25, 2021, Ontario deemed it illegal for employers to enter into employment contracts or other agreements with other employees that included a non-compete clause. Like with most laws, there are exceptions so be sure to consider the parties involved and what their roles are. It is also important to note that non-compete agreements that were enacted before October 25, 2021, are not considered illegal. Similarly, you may come across a non-solicitation clause in a contract. They usually go hand in hand with non-compete clauses.
Signing a non-solicit agreement means you are agreeing not to solicit or actively pursue clients, customers, or other business partners during or after the duration of an agreement. This agreement typically applies for a specific amount time. Non-solicit agreements are still allowed so be sure to pay attention to the wording in a clause to confirm whether it truly deals with non-solicitation or non-competition conditions.
Signing a contract is a common practice that holds a lot of responsibility. You need to ensure you are aware of and protecting yourself from any loopholes or clauses that could be harmful. Always review the entire contract before signing. This blog has outlined clauses that you should pay extra attention to. You are always encouraged to seek independent legal advice if you have questions regarding your specific contract before signing.
If you need your contract reviewed contact Oduraa Legal Services today!
