Indemnification
Indemnification addresses when one party pays for the other party’s losses or liabilities, such as losses caused by the other party’s breach of the contract. It can be a nuanced provision (i.e., does one party cover a loss caused by a subcontractor? Does one party cover an alleged loss and costs defending the same, or does the loss have to be proven and incurred?). Therefore, attention to the details in this section is critical.
Liability Limitation
This provisions typically excludes certain losses, such as loss of profits, reimbursable under the contract, and provides a cap, sometimes mutual and sometimes one-sided, on how much one party pays the other for reimbursable losses under the contract. Examples of a cap include a flat dollar amount, such as $1 million exclusive of insurance coverage, or a total amount paid by the buyer to purchase products under the contract during a preceding timeframe, such as the preceding 6 months.
Warranties (and Warranty Disclaimers)
Common warranties include compliance, sometimes in all respects and sometimes material compliance, with the terms of the contract, as well as applicable industry standards. This section also may address whether the supplying party is required to repair or replace a product if there’s a warranty issue, and the time and costs of doing such. It also generally includes a disclaimer of warranties such that only the warranties expressly listed are the warranties provided.
Force Majeure
If there is a hurricane, union labor strike or any other issues reasonably beyond one party’s control, does that forgive them from not performing under the contract? If so, does that party have to give notice to the other party of potential non-performance and what’s a reasonable timeframe to perform? A standard force majeure provision almost always does not excuse the buyer from paying.
Termination
This section is one of the most critical, yet least focused on sections in a contract. One party may want a termination for convenience right to get out of the contract at any time for any or no reason, generally with advanced notice to the other party. The timeframe for advanced notice can be key, as 10 days’ advanced notice can benefit the terminating party, and 90 days’ advanced notice can benefit the party being terminated. Other key aspects of this provision are the consequences of termination… does the buyer get one last purchase right? What costs must be paid in connection with the termination?
Intellectual Property Rights
In contracts in which one or both parties may develop or enhance a product, whether in manufacturing, software or otherwise, one should address who owns and pays for any intellectual property that may be developed, whether a patent, trade secret or trademark. The party that ultimately owns the developed product should require the other party to reasonably cooperate to obtain and protect and the intellectual property. Licensing rights of any intellectual property also may be addressed.
Confidentiality
Even if a confidentiality agreement has been signed between the parties (and one should be before starting any commercial discussions), it is prudent to include a confidentiality section in the commercial contract, frequently mutual preventing both parties from using and disclosing the other party’s confidential information.
Commercial Terms: Orders, Acceptance, Inspection, Rejection, Changes, and Forecasts
What is the timeframe for ordering a product? Is there a minimum and/or maximum order amount? How is acceptance triggered? Is there an inspection period by the end of which no notice of rejection results in acceptance? If so, how many days does the inspection period last? If the buyer or the seller wants changes to the product, are there parameters on what extent of changes are permitted and how much time must one party give the other for the changes? Does the buyer have to give the seller a forecast of predicted future purchases?