Key Terms & Concepts in Commercial Agreements - And How to Negotiate Them

When reviewing a commercial contract, you will often come across the same types of provisions or areas that need to be reviewed. These will potentially also need to be amended or negotiated if they don’t align either with what the parties agreed before the contract was sent over or if they don’t align with your organisation’s preferred positions.

Here are some of the key terms in an agreement that you need to make sure are appropriately reflective of your counterparty’s position in the market, the nature of the service you’re buying or selling and your organisation’s risk appetite:

Commercials

‍First thing’s first, does the contract align with what you’ve agreed commercially? Often, the person in your business who has negotiated the commercial and operational aspects of a deal will send a contract over to Legal for review without the necessary context.

Make sure you have all the input you need from them before you review the agreement and that they’ve confirmed that the fees, delivery dates, deliverables, SLAs and other commercial terms stated are correct and as agreed. A good way to front-load the effort of obtaining all the relevant information you need from your stakeholders is to create an intake form or Legal Front Door so that you have all the necessary information.

Term

‍Check how long the contract remains in force for. Often contracts will ‘auto renew’, which means that if you don’t cancel them within the initial period, they automatically renew for another period of time. Often this may lead to you being liable to pay fees for a product or service you’re not using so, if you’re not happy for the contract to keep renewing, you should ask for this provision to be changed.

Termination

‍There are usually two circumstances in which you can bring a contract to an end:

• For convenience. Which means you can terminate the contract at any time and for any reason.
• For cause. Where one of the parties does something that means the contract can be terminated - for example, by seriously breaching the contract.

Not all contracts include termination for convenience and suppliers will be reluctant to offer you a get out of jail free card. This makes sense for software providers who often have to frontload a lot of the effort to you onboarded but for services contracts, it is common to include a termination for convenience clause.

Although in most circumstances you will not want to terminate an agreement unless there is cause, having a provisions that allows you to terminate an agreement without showing cause means you can terminate the agreement with less effort (and therefore cost) on establishing and demonstrating cause which can be beneficial when you want a quick exit if a contractual relationship is not working.

Liability

‍Liability clauses are an important contractual tool that contracts include to manage overall risk by limiting a party's potential liability for damages. These clauses should be carefully reviewed and are often the most highly negotiated. Although it is tempting to try and widen the scope of the other party’s liability and limit your own as much as possible, it is important to ensure you’re creating a fair footing for both sides of the contract (regardless of your power position within the relationship).

This is because a fair balance encourages quicker negotiations, healthier dynamics between the parties and ultimately the right behaviours from the other side as they don’t feel they need to be overly cautious in their execution of their obligations in order to avoid uncomfortable liability provisions.

Indemnity

‍An indemnity clause specifies that one party will compensate the other for any losses or damages that they might incur from a particular event or circumstance, usually arising from third party claims. When a contract is breached, the parties look to its indemnity clause to determine what compensation is due to the aggrieved party by the nonperformer. Its purpose is to restore the damaged party to where they would have been if not for the nonperformance.

Negotiating an indemnity clause can involve challenges such as defining its scope and breadth, agreeing on financial limits or caps, determining exclusions particularly for negligence or misconduct, managing third-party claims, deciding the duration of indemnity obligations, and ensuring adequate insurance coverage.

Additionally, achieving a balance between parties often leads to discussions about mutuality, where each party seeks to ensure the indemnity is not disproportionately burdensome. These aspects require a delicate balance to be struck to protect the interests of all parties involved and ensure that the risk / reward ratio of the overall agreement is not skewed as a result. ‍

Confidentiality

‍A confidentiality clause in an agreement requires the parties involved to keep certain information under wraps. This information is usually sensitive or proprietary. The clause outlines what is considered confidential, who is bound by this obligation, and the duration of the confidentiality. It often includes consequences for breaches to ensure that sensitive information isn't disclosed to unauthorised parties.

When negotiating a confidentiality clause, common issues include defining the scope of what constitutes confidential information, deciding the duration of the confidentiality obligation, and specifying permissible disclosures. Additionally, parties often grapple with determining how confidential information should be handled post-agreement, such as requirements for its return or destruction. Defining what information is confidential, the duration of confidentiality, and the consequences of breaches can be challenging.

Lastly, carving out exclusions for information that is publicly known or independently obtained can be a point of contention, as parties strive to balance the protection of sensitive information with practical enforceability.

Data Protection

‍Negotiating a data protection clause typically involves ensuring compliance with relevant laws like GDPR, clearly defining the scope of data covered, and setting out permissible uses and limitations. Key points of discussion often include establishing robust data security measures, specifying protocols for data breach notifications, and outlining terms for sub-processing and third-party data sharing.

Additionally, the contract must address cross-border data transfer issues, data retention and deletion policies, and assign liability and indemnification for breaches or non-compliance.

Finally, the right to conduct audits for compliance verification can be a significant aspect of these negotiations, balancing legal obligations with practical business considerations.

Data Protection provisions may be included in the contract itself or in a dedicated Data Processing Addendum (DPA). If there is a DPA, it's important to ensure that the commercial terms do not contradict it and that there is a clear hierarchy between the agreements in the event of a conflict between the two.

Intellectual Property

‍Negotiating an intellectual property (IP) clause in a commercial contract typically revolves around key issues such as determining ownership of existing and newly developed IP, outlining the scope and limitations of IP use, and setting terms for licensing, including exclusivity and sub-licensing rights. Protecting and enforcing IP rights, handling infringement claims, and agreeing on warranties regarding the IP's originality and non-infringement are also crucial.

Additionally, the parties need to agree on the treatment of improvements and modifications to the IP, ensure confidentiality, and define the duration and termination conditions of IP rights.

The Importance of Reviewing Key terms and Concepts

In conclusion, effectively reviewing and negotiating a commercial contract involves a careful examination of various key provisions to ensure they align with your organisation's needs, market position, and risk appetite.

This includes verifying the alignment of commercial terms with pre-agreement discussions, assessing the contract's term and termination rights, scrutinising liability clauses for a fair balance of risk, and carefully negotiating indemnity, confidentiality, data protection, and intellectual property clauses.

Each of these areas requires a nuanced approach to safeguard your organisation's interests while fostering a cooperative and productive relationship with the counterparty. It's essential to consider the broader commercial context, legal compliance, and practical implications of these clauses to achieve a contract that not only meets immediate requirements but also supports long-term business objectives and relationships.