Giving contracts "the legal once-over" - Part one

The phone rings... And after the usual pleasantries, we get down to the purpose of the call.

“Can you just have a quick look at this agreement we are about to sign - I have sorted the commercial points but I would like you just to give it the legal once-over”.

Over the years, I have received numerous briefing calls or emails from clients along these sorts of lines, and in my experience, there can be a perception that “legal” points sit separately from “commercial” ones. In fact, this is rarely the case since “legal” points often go right to the heart of risk allocation which of course involves a commercial consideration of risk/reward.

But anyway, the approach I take to a "legal once-over" always needs to be proportionate to the value and complexity of the transaction. Available time and client budget will not allow me to take issue with every single point in the contract which I don’t like - in other words, don’t sweat the small stuff, just look for the show stoppers - i.e. the stuff that actually could lead to either to the client not receiving the full benefit of the contract or could lead to expensive disputes.

In this blog, I will try to provide an insight into the methodology I adopt when conducting a contract review. I will introduce some topics and issues that I will examine in more detail in future posts.

1. The fundamentals

One of the first things I will do is go straight to the end of the contract - this is usually where I will find the provision which deals with the governing law of the contract. If this is anything other than English law then I will need to have a conversation with the client about (a) the likelihood of the other party agreeing to change this to English; and (b) if unlikely, then I need to make the client aware of the limitations of the advice I can give, since I am only qualified to advise on English law.

Then, the starting point for a contract review, regardless of whether the client is a purchaser or supplier of goods or services is trying to ascertain:

WHO is doing WHAT to/for WHOM by WHEN and for HOW MUCH?

Any contract should be able to properly address these fundamental points in a way which is clear and certain. This is not always the case, as unfortunately lawyers often have a habit of drafting contracts where it is difficult to see the wood for the trees. However, if you use the WHO/WHAT/WHEN/HOW MUCH approach, then you should be able to distill the contract down to its essential and allow you to concentrate on the fundamentals.

After that, the approach may differ depending on whether the client is a purchaser or provider/supplier.

2. Purchaser contracts

Where acting of purchaser of technology, I want to make sure that the client is getting what he expects to get and what he has paid for. Assuming the client has done his due diligence, from a contractual point of view, this really means checking that there are sufficient warranties around compliance with specifications, fitness for purpose etc.

Then if it doesn’t happen, what remedies does the purchaser have for non-conformance? Where you are doing your on-line grocery shop, this is easy - you can normally get a refund or replacement, and as a consumer you will have the benefit of a raft of consumer protection law which gives you certain safeguards. However, these safeguards do not exist for B2B contracts which are the contracts that I most often look at. It is very much a case of “buyer beware”. So my review will look to make sure that the client has adequate remedies in the event of non-conformance or late delivery. This will be very important especially where the client is looking to use the item being purchased, for example a new back-office system, to service its own downstream clients. Late delivery or a glitchy system might have catastrophic financial or reputational consequences.

Depending on what is being purchased, remedies to mitigate this risk might include testing and acceptance regimes, warranties, indemnities and service level agreements or liquidated damages for late or incorrect performance. In connection with that, I would also take a careful look at any limitations/exclusions or disclaimers of liability - to make sure the provider is not promising the earth with one hand but then saying you have no rights if it fails to deliver with the other. After all, if your business can't fulfil a contract because a supplier has let you down, you may well want to look to the supplier to compensate you for your losses. In such cases, these limitations/exclusions may become crucial.

Summary

Generally, when I am asked by a client to review a contract where they are buying something, it is more likely than not that that contract will have been tabled by the supplier. Where this is the case, the value of the “legal once-over” comes more from identifying what is missing, since supplier-drafted terms and conditions will inevitably aim to keep supplier obligations and liabilities to a minimum.

In part 2, I will look more closely at where the client is a supplier of goods or services.