The 5 most negotiated contract terms
Before a contract is signed, both sides have a mixture of emotions. The seller is excited about the potential sale, while the buyer is cautious and wants to protect their interests. A survey by World Commerce & Contracting in 2022 found that the following five contract terms are negotiated the most often.
These include:
- Limitation of liability – It limits the seller’s responsibility for any damages that may occur as a result of the contract.
- Price / charge changes – The term outlines the cost of the goods or services being sold and any potential changes to the price.
- Indemnities – The term holds the seller responsible for any losses or damages incurred by the buyer due to the seller.
- Scope and goals / specification – The term outlines the specific goals and requirements of the contract and the scope of the goods or services being sold.
- Termination – The term outlines the conditions under which either party can terminate the contract.
1. Limitation of liability
A liability clause, also known as a limitation of liability, outlines the damages one party must provide to the other in case of a breach of contract, negligence, misrepresentation, or infringement of intellectual property rights.
Without this clause, a company may face financial losses if the other party seeks damages. Thus, including a liability clause in contracts is essential to limit financial exposure in the event of a lawsuit.
However, courts may not enforce a liability clause if it is not freely negotiated or goes against public policy or law. A company might try to use ‘exclusion clauses’ to avoid liability in case of breach of contract. In this context, the Unfair Contract Terms Act 1977 limits the extent to which you can use exclusion clauses to avoid liability.
You can adopt three best practices to avoid this issue.
- Give it a separate section in the contract and make it bold/capitalized
- Utilize the services of a legal counsel to draft the clause
- Make it clear and concise
Example
In Goodlife Foods Ltd. -v- Hall Fire Protection Ltd. (2017, TCC), the court stopped the invocation of defendant Hall’s limitation of liability clause. “The judge decided that the words ‘damage caused to your persons’ went too far in excluding liability and breached Section 2(1) of UCTA.” Source: Hill Dickinson | International Commercial Law Firm.
In another instance, “the Massachusetts Supreme Judicial Court (SJC) ruled that a limitation-of-liability provision does not protect defendants who willfully or knowingly engage in unfair or deceptive conduct.” Source: JD Supra
Regarding the Limitation of Liability clause in a contract, it’s important to note that sometimes it may not be enforceable, or one party may try to use it to avoid paying damages. That is why it’s crucial to draft this clause correctly. It’s a balancing act between protecting both parties’ interests and should be done carefully.
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2. Price change
The Charge/Price Change terms in a contract allow the supplier to adjust product prices in response to changes in the costs of manufacturing or supplying the goods or services. As the COVID-19 pandemic has shown, it’s essential to have a well-written price change clause, as unforeseen events can significantly affect prices.
According to Harrison Clark Rickerbys Solicitors, one way to mitigate the risk of unsustainable price increases is to include an index-linked price increase clause. It ensures that prices will increase annually in line with an agreed index, such as the Consumer Price Index (CPI) or Producer Price Index (PPI). Some companies may also include a ‘price de-escalation’ clause, which allows the client to benefit from a decrease in the cost of materials. Ultimately, price escalation and de-escalation clauses should be fair and serve the interests of both parties.
Example
Despite not having a price-escalation clause in the contract, an Indian court in “Tarapore and Company vs. Cochin Shipyard Ltd., Cochin, and Ors., AIR 1984” decided that “in case of a price rise, a contractor’s claim for relief cannot be turned down, by the absence of the mentioning of the same in the contract in question.” Source: Lexology.com
3. Indemnities
Indemnity means providing security or protection against loss or another financial penalty. The clause hedges the risk of the seller and the buyer.
For instance, it compensates one party for harm or loss that may arise from the other party’s action or failure to act. From a risk management perspective, the indemnity clause allows the other party to customize the amount of risk it is willing to undertake. Broadly, there are three indemnification levels – limited, intermediate, and broad form.
Example
“DDD ENERGY, INC., Appellant V. VERITAS DGC LAND, INC., Appellee” In 2001, a Texas-based company called DDD Energy brought an indemnity suit against Veritas in Harris County seeking a declaratory judgment that Veritas is obligated to defend and indemnify DDD. The court gave a “summary judgment for Veritas on the ground it is not required to defend and indemnify DDD against third-party claims based on DDD’s negligence.” Source: Casetext.com
4. Scope and goals / specification
The contract term ‘Scope and Goals/Specification,’ also known as ‘Scope of Work and Technical Specifications,’ is a common source of disagreement in contracts, making it one of the top five most negotiated terms in the World Commerce & Contracting (WCC) survey.
This term outlines the specific product, service, or work agreed upon in the contract and it’s crucial to make it as detailed as possible to prevent confusion between the parties. Each industry and function within an organization approaches it differently, for example, construction projects have detailed scope and goals/specification documents.
Notably, the Scope and Goals/Specification clause is the most renegotiated or changed term in the Business Services industry contracts. Sometimes, the client (buyer) causes scoping issues in a project.
Example
The Project Director vs. M/S.Rns Infrastructure Ltd- Feb 2017 In this case, the Madras court in India absolved the defendant from the non-performance of the contract. The court held that “consequential upon the delay of 14 to 18 months, the first respondent was prevented from executing the original scope of work affecting the productivity and due to change in scope of work, the first respondent had to execute the changed scope of work by increasing the resources”. Source: Indiankanoon.org
5. Termination
According to the survey by World Commerce & Contracting (WCC), Warranty and Termination are often considered “powers-reserved” to the legal team, and as a result, they tend to be among the most negotiated terms in a contract.
The term defines the conditions under which the agreement can be terminated, such as the expiration of the contract duration, completion of the contract’s purpose, or breach of contract by either party.
Notably, contract termination is the most frequently renegotiated term in banking and financial services, business services, legal, and telecom industries. In unilateral termination cases, it is critical to have a valid reason; otherwise, the defendant can file a lawsuit for unpaid fees or other charges.
Example
Five-star Hotel in Geneva (the Hotel) vs. IT company (the IT Company)- 2011 “The Federal Supreme Court of Switzerland “denied the existence of good cause and held that the Hotel must pay the “Early Termination Fee” provided for in the contract (i.e., a fixed sum multiplied by the number of months remaining until the expiry of the initial term of the contract).” Source: Swisscontract.law
Wrap-up
The results of the latest survey indicate that the most frequently negotiated terms in the contracting process are: (1) Limitation of Liability, (2) Price/Charge/Price Changes, (3) Indemnities, (4) Scope and Goals/Specification, and (5) Termination. These terms are crucial during the contract negotiation process as they are commonly disputed in court.
The top five negotiated terms we have shared align with the priorities of all parties involved in the contract, including the buyer, seller, and legal team. Access the research study for a deep dive here.
