Updated: Aug 8
We have learned the importance of contracts being reviewed for deal-breakers early in the negotiation process, before they start costing time and money (involving legal team, focusing on impossible negotiations and bad customers, etc.).
There are also countless of stories where a sales process was just to be closed when the legal team came back with their "must-change comments".
Hence, it is clear that the sooner deal-breakers are identified and acted upon, the better.
Therefore, we have made a checklist with the 10 most popular key clauses that companies like yours focus on when reviewing sales contracts. Understand and manage these as early as you can and the rest of the negotiation will be smoother and more profitable.
Save time by identifying key clauses early in the sales process
This checklist breaks down 10 key clauses when negotiating contracts to help you rapidly identify and act on pitfalls and hidden costs - even if you are a non-lawyer.
Help you identify and act on key clauses so that you can find deal-breakers faster and return to the customer in a fraction of the time.
The checklist guides you through:
10 key clauses every sales team needs to control.
Explanations why each clauses is central.
Great arguments ready to be directly send to the customer when negotiating a clause.
1. Liability cap
Ensure every liability also has a clear cap.
Not limiting your liability under the contract opens the door to massive loss which is not proportionate to the possible gain under the contract. Even the smallest product can cause millions worth of damages for which you can be held liable if not this is not properly limited.
2. Indirect liability
Never accept liability for indirect and consequential damages.
Direct damages are costs payable by the injured party due to the breach, but indirect (consequential) damages is the value missed or not realized by the injured party due to the breach. Hence, there is no correlation between the size of the agreement or the breach, and therefore even a small transaction can potentially result in enormous claims.
Download the complete checklist
10 key clauses to manage in contract negotiations
3. Remedy for defects
Ensure that you can choose appropriate remedies. (“at our own discretion”).
Which remedies that are appropriate in each individual case depends on factors such as product type, installation, customer, country etc. Therefore, ensure that you retain the possibility to choose the most efficient remedy in each case.
4. No implied warranties
Do not accept warranties that relate to how the product functions (“fit for purpose”, “merchantable, etc.).
These warranties relate to the customer’s expectations. Fit for Purpose means the product meets the customer’s intended use and merchantability is that the product shall meet the reasonable expectations of the customer. Hence, the risk of these warranties depends on the expectations of the customer and not facts about the product.
5. Liquidated damages
Do not accept liquidated damages or penalties, except in case of delayed delivery.
Extensive liquidated damages clauses are good examples of (small?) leakages that could turn into a disaster. Especially if there is no cap related to the liquidated damages. Hence, try to limit liquidated damages and always include a maximum cap.
6. Price adjustments
Do not accept fixed or firm prices for longer contract periods.
It is important that you are able to adjust the price structure to reflect changed market conditions.
7. Payment terms
Do not accept long payment periods.
Since you aim to make a profit, you cannot afford to lose money to unnecessary loopholes. You have to pay your suppliers. Too long payment terms would be the same as granting the customer credit, in which you should be compensated for.
8. IP rights
Do not allow any transfers of intellectual property rights (IPR) to the customer or grant IPR to the goods provided.
A major part of your competitive edge stems from your knowledge, inventions and production methods. You need to ensure that advantage is protected in order to stay ahead of your competitors. Therefore, it should be clearly stated that no IPR is transferred to the customer and no other rights (such as licenses) are granted.
Try to avoid indemnities. But if this clause is a deal-breaker for the the party, you should limit them to only: damage to property or personal injury, death and IPR infringements.
The purpose of indemnities is to protect one party from suffering financial loss in relation to a certain situation. In other words, a promise that you will compensate the other party if a specific event occurs. But since indemnities could potentially ruin your business, you should limit them as far as possible.
10. Governing law
Only accept the governing law of where you have offices or legal representation.
The governing law of an agreement greatly impacts how the contractual terms are interpreted. This could result in significant costs when engaging in disputes where you have no representation in that jurisdiction. Therefore, this is a central clause in terms of risk mitigation.
Please note that this document is not legal advice. Legly, and its representatives, are not responsible for the content herein or the suitability for your company’s business. We recommend you use this in conjunction with legal advice and not as a substitute.