Rawlison Butler

A Brief
Guide to
10 key
commercial
contract
issues
 “Be clear about what is included and
what is not, and about what each
party expects to gain/get out of the
Introduction contract”

Whether you are a customer or a
supplier, ensuring that your contracts
with third parties protect your business
and knowing what minimum
protections there should be can
sometimes be an unnerving task. This
can be even more daunting when the
other party produces contract terms
that run into 30, 40 and sometimes
over 100 pages.
The aim of this brief guide is to
highlight 10 key commercial contract
issues that you should try to ensure
are included in your B2B contracts.
This should help reduce the risk of you
losing sight of what is important to you
and what is not.
So, where do you start? Clearly, each
side will have different priorities and
principles that they want to protect.
What is important to a customer may
not be important to a supplier, and
vice versa. Is it possible to reach a
consensus where both sides actually
get what they want? It rather depends
on how each side behaves at the
negotiation table and where the
balance of bargaining power rests!
Without the right advice, contract
negotiations can end up delving into
all possible risks, without assessing
the likelihood that such outcomes will,
in fact, occur. It is therefore important
to ensure that both sides have a clear
understanding of the differences
between probabilities and
consequences, and that they identify,
focus on and address key issues and
risks.
Good legal advice at an early stage can
help ensure your position is protected
and the key elements and principles
are concluded appropriately. Although
these top 10 are based on our extensive
experience of drafting and negotiating
a variety of different types of
commercial contracts for clients in
all sectors, we recognise that each
company will have their own priorities
and negotiation style.
We can also help you to ensure that
your priorities and negotiation style
are focused correctly so that you can
approach the negotiation table with:
• clear and precise objectives
• an appreciation and
understanding of how the other
party is likely to react to your
priorities and
• a strategy to get you what you
want while at the same time
making the other party feel
like you’ve taken on board
their concerns and offered a
compromise – which is always
a good start to any contractual
relationship!
The Top 10
1. Getting the scope and
requirements right: Be clear about
what is included and what is not,
and about what each party expects
to gain/get out of the contract.
Ensure that each requirement has
a relevant measure, and ensure any
constraints, dependencies and
assumptions are clearly identified.
Accept that you probably aren’t
going to be able to capture
everything (and not just in relation
to scope and requirements)
– things are never black and white
in the world of contracts – all you
can do is ensure that there is a clear
mechanism for dealing with change
– and pricing it.
Suppliers are undoubtedly more
clued up on scope and requirements
pitfalls and know, from experience,
where and when scope creep is
likely to arise. As well as ensuring
the contract has a clear change
process, customers can also protect
themselves by engaging a third
party familiar with what is being
procured to help agree the scope
and requirements, so that any scope
(ie, price) creep is eradicated, or at
the very least minimised.

Rawlison Butler A Brief Guide to 10 key commercial contract issues

 2: Be clear about responsibilities:
Ensure each party understands
their responsibilities, when they
need to be performed and what
will happen if they are not met
(including the remedies available to
the other party). Wherever possible,
responsibilities should be linked
to requirements and include any
constraints, dependencies and
assumptions.
If you fail to fulfil one of your
responsibilities, it is likely to have
a knock-on effect to your other
responsibilities as well as the
responsibilities of the other party.
Although termination might be the
ultimate remedy if things aren’t
resolved, it should not be your first
option. Instead, include a realistic
and structured process for remedying
a responsibility failure.
This should include an extension
of time equivalent to the length of
the delay for the other party, plus a
right for the non-defaulting party
to be reimbursed any direct costs it
can demonstrate were incurred as
a direct result of the other party’s
responsibility failure.
It is not uncommon for customers
to insist on a ‘catch-all’ provision
that requires the supplier to do all
things necessary to ensure that the
requirements are met. However,
this only helps if the requirements
themselves are clear – otherwise
the scope provisions might curtail
this catch-all. Also, upon seeing this
catch-all, the supplier may not only
price any associated risks upfront but
also play the scope creep card at the
relevant time – so you end up paying
twice for it!
3. How to manage changes: Given
what we have said so far about
change, it wouldn’t be wise for us not
to include a mechanism to formally
introduce and approve changes in our
top 10 list!
For low value and low risk contracts,
you might include a simple clause
which states (i) who can agree a
change; (ii) how and on what basis
any additional costs would be
calculated; and (iii) that for a change
to be legally binding it has to be in
writing and signed by authorised
persons. On the other hand, for
high value and high risk contracts,
Rawlison Butler A Brief Guide to 10 key commercial contract issues
a more detailed process may be
required which would also include
these principles plus standard
form documents to be used to
request and approve changes, and
different people to approve changes
depending on their subject matter,
complexity and value.
There is no point in having a change
management process specified in
the contract if you don’t have the
internal resources to do it or if those
resources don’t understand what
they are doing or what the contract
says. Having a complex process, or
too many stages, might mean that
changes never actually get agreed.
4. What you pay and when:
Ensure that you are clear about
what is payable and when, and how
prices can be changed. As a supplier,
you are going to want to ensure
that your prices not only remain
competitive, but can be adjusted
to take into account external
factors outside your control, such
as increases in raw material prices
and/or shipping costs. You’ll want to
make sure you are clear about when
payment is due and the consequences
of failure to pay. As a customer, getting
the best price with no price increases
and sufficient time to pay is your best
possible outcome, but an unrealistic
one. Forcing a supplier to accept your
terms is not only going to drive the
wrong supplier behaviours but could
force a supplier you depend on out
of business. Conversely, a supplier
expecting the right to hike prices when,
and by how much, it likes and suspend
performance if the customer is late in
paying is also unrealistic.
To address both sides’ concerns, there
should be clear and transparent
provisions setting out (i) what is
payable and when; (ii) what is included
and excluded from the price; (iii) when
price increases will occur (eg, once a
year or if certain triggers are hit) and
the process for mutually agreeing
such; and (iv) the process for disputing
invoices and part paying undisputed
amounts – with the customer being
given a further and final opportunity
to pay anything outstanding (including
any late payment interest) before
the supplier can suspend service or
terminate.
“If a warranty is breached it only entitles the
non-defaulting party to claim for damages
for any loss suffered – there is no right to
terminate”
5. Measuring performance: This
principle relates to mechanisms in the
contract to ensure that performance has
taken place as the contract prescribes.
These will be more important to the
customer as they are mechanisms to
ensure that it gets the services or goods
that it wants when it wants – and if it
doesn’t what ‘penalties’ kick in.
Measurement might be around
delivery, acceptance and testing,
implementation and/or live service
provision. Also, be clear about what
remedies you want (eg, liquidated
damages for failure to meet key
milestones and service credits for
failure to meet certain service levels)
but above all you want to ensure that
the supplier is incentivised to perform.
Financial penalties are unlikely to
incentivise a supplier sufficiently
enough to get them to perform
because they will (i) have already
included any financial risk into their
prices at the start of the contract;
and (ii) argue that they have been
prevented or delayed from performing
because of something you have or
haven’t done, or factors outside their
reasonable control.
Don’t forget that you will need to have
sufficient information to enable you
to measure performance. This might
include management information
from the supplier or internal reports
your contract management team
collate on a weekly basis. Suppliers
don’t tend to like giving customers
information on their performance
and they might limit the information
they give you, so ensure that you
understand what information you will
get, how it will be set out and, more
importantly, that you can understand
it and request clarification where you
don’t understand or have questions.
6. What you should warrant: Most
contracts will contain statements or
assurances about factual matters that
are true or will happen – these are
commonly referred to as ‘warranties’.
If a warranty is breached it only
entitles the non-defaulting party to
claim for damages for any loss suffered
– there is no right to terminate.
Depending on the subject matter of
the contract, there will usually be
limited warranties from the customer
compared to the supplier. As a
minimum, both parties will want an
Rawlison Butler A Brief Guide to 10 key commercial contract issues
assurance from the other that it has
a right to enter into the contract. The
customer will want assurances from
the supplier around the quality of the
goods and/or services being provided,
that it has/will obtain any necessary
licences and consents, that it does/
will not infringement any third party
IPR and where the subject matter of
the contract is software, warranties
around fitness for purpose,
conformity with specifications, and
free from viruses etc. Other than the
right to enter into the contract, the
supplier should not need any further
warranties from the customer.
7. How to limit your financial
exposure: Each side is going to
want to ensure that not only is its
liability limited, but also that any
limit of liability placed on the other
party is adequate. There are statutory
and common law restraints on the
ability of parties to limit or restrict
their liability, so some areas, such as
liability for death or personal injury,
cannot be excluded or limited under
any circumstances.
However, liability for breach
of contract can be excluded or
limited only if the terms satisfy the
‘reasonableness test’ – that is, to the
extent it is reasonable to do so taking
into account all relevant factors.
Both parties need to accept that the
other is also going to want to exclude
liability to the extent it can and to
place a financial cap where it can’t.
Try not to focus on the amount(s)
in the first instance but, instead, on
the types of liability that are likely
to arise if the other party fails to
comply with its obligations under the
contract.
For example, if a supplier doesn’t
deliver your goods on time what
financial exposure will you incur
internally within your company
and externally to your customers
or other suppliers? You might incur
internal administration costs and
liquidated damages/late delivery
charges. In other words, what ‘direct’
losses would a reasonable person
consider to be the ‘usual course of
things’ or ‘ordinary circumstances’
of something not happening as the
contract requires it to happen?
 “Just as your IP is likely to be one
of your most valuable assets, so
this will be true for the other
party”

Even if it is shown that the supplier’s
breach caused those losses, if those
losses were sufficiently unusual or
unlikely then you would not be able to
recover them from the supplier unless
the supplier was aware of those losses
when it entered into the contract (ie,
they were expressly included in the
contract).
Also, both sides should bear in mind
that insurance may cover a degree
of liability greater than might be
expected.
8. Protecting your IP: Just as your
IP is likely to be one of your most
valuable assets, this will be true for
the other party too. Most commercial
contracts involve some use of the other
party’s IP – whether it is confidential
information or software – and it is
therefore important to ensure that
obligations and restrictions on its use
are included. In addition, IP may be
created as a result of performance of
the contract and the contract will need
to make it clear who owns what.
Agreeing on who owns IP created or
developed under a contract is usually
the most contentious part. The
customer has paid for something to
be developed and therefore wants to
retain all rights, including the right to
commercially exploit or, conversely,
restrict others from using so that it
retains a competitive edge.
On the other hand, the supplier may
have developed something that
enhances, or can only be used in
combination with, its proprietary IP
and which it therefore wants to control
and commercially exploit. If you can’t
get, or aren’t prepared to transfer,
ownership of the IP, appropriate
licensing (eg, perpetual licence to use
and modify) and financial incentives
(eg, royalties, reduced development
costs) are the best solution.
9. Putting in place remedial
plan process: Termination should
not be your first or only port of
call when things go wrong. Most
of the time, when there is an issue
both sides want to resolve it and
continue with the contract. Only in
extreme circumstances, or where the
relationship has irretrievably broken
down, would (or should) you look to
terminate.
Your first option should be to give the
other party sufficient time to remedy
their breach – the length of time will
clearly depend on the seriousness of
the breach, and whether this is the
first or a persistent breach. Although
a remediable breach termination
clause will have a period to remedy
before termination can occur, the
clause is usually about material
breaches and so it could not be used
to get the other party to remedy a
more minor or trivial breach. Contract
drafters and negotiators often don’t
appreciate this and so contracts
frequently omit to include a process
for remedying such breaches.
In most breach scenarios, there is
likely to be a dispute as to whether
a breach has in fact occurred and so
it is sensible to include an internal
dispute resolution process in the
contract. However, as with change
management there is no point in
having an internal dispute resolution
process if (i) you don’t have the
internal or right resources to do it;
or (ii) it is too complex or has too
many stages, because the dispute will
never get resolved and could end up
becoming litigious.
10. Withdrawing service and
termination: There will likely
come a point in time where you
want to apply greater pressure
to the defaulting party. If the
defaulting party hasn’t remedied
its failure in accordance with the
alternate remedy provisions of the
contract (see point 9 above), your
next option will be to consider
exercising the harsher remedies
in the contract. Let’s ignore the
termination triggers for insolvency,
bankruptcy etc., as they are a given
and shouldn’t be contentious for
either side.
In terms of service withdrawal,
this will only be available to the
supplier to exercise. Clearly, a
supplier cannot be expected to
continue to perform if the customer
is in breach of its payment
obligations (assuming payment
isn’t disputed, of course). There
may be other customer breaches
which the supplier will want to rely
on to trigger a service withdrawal
but these should be limited to
events which actually affect the
supplier’s ability to perform its
obligations, as opposed to being
used to force the customer to
remedy an unrelated issue.

Rawlison Butler A Brief Guide to 10 key commercial contract issues


The customer will want to ensure that any suspension is clearly notified to it
as a possible option when the supplier exercises any of its alternative remedy
provisions and that the suspension is lifted immediately after the customer stops
being in breach, or if the matter is disputed, that the supplier continues to provide
the services pending resolution of the dispute.
Before exercising a right to terminate for cause (as opposed to for convenience), it
is important to ensure that the event(s) giving rise to the right to terminate have
in fact arisen. All too often, termination rights are exercised without sufficient
consideration being given and result in the party giving notice to terminate being
in breach of contract itself.
Consider the following termination rights for each party:
• immediate termination for irremediable breach
• termination for remediable material breaches that aren’t remedied in, say, 21
days and
• termination for persistent breaches over a specified period of time.
How RB can help
Our experienced commercial lawyers can advise you on what minimum legal
and commercial protections you should include in your commercial contracts.
Although these top 10 are based on our extensive experience of drafting and
negotiating a variety of different types of commercial contracts for clients in
all sectors, we recognise that each company will have their own priorities and
negotiation style.
We can also help you to ensure that your priorities and negotiation style are
focused correctly so that you can approach the negotiation table with:
• clear and precise objectives
• an appreciation and understanding of how the other party is likely to react to
your priorities and
• a strategy to get you what you want while at the same time making the other
party feel like you’ve taken on board their concerns and offered a compromise –
which is always a good start to any contractual relationship!
For more information, please contact:
Lisa Downs Mark O’Shea
Partner, Commercial Partner, Commercial
E ldowns@rawlisonbutler.com E moshea@rawlisonbutler.com
T +44 (0)1293 558593 T +44 (0)1293 558523
Disclaimer: This document is provided for information purposes only and does not constitute legal advice. Professional legal
advice should be obtained before taking, or refraining from taking, any action as a result of the contents of this document.
Rawlison Butler LLP is a Limited Liability Partnership registered in England (number OC318343) and is authorised and
regulated by the Solicitors Regulation Authority. 10/15