A sales contract is a combination of legal, financial, and sales clauses that are intertwined to act as a governing document. It helps to establish a relationship, ensure facilitation of work, and manage risk in a standard way. Reading and reviewing such extensive documents with clauses written in cryptic language might be challenging!

But is there a need to read the entire contract in detail to find the gotchas? In order to make this process less strenuous, you should know the contract structure and understand the clauses with their associated risk.

Understanding Clauses and Managing Risk

Clauses in a contract define the rights, privileges, and duties of the parties involved and touch upon a certain part of the overall subject of a contract. They dictate the terms and conditions that need to be adhered to during the term of the contract. Upon reviewing contracts, you may find clauses worded up in a different manner in each document but the underlying meaning is the same.

“Let alone contracts, even Santa comes with a Claus(e)!”

Every review should ascertain the What, Who, Why, When, Where, and Hows of any clause. This helps you understand the scope of risk and evaluate if it exceeds the organization’s risk tolerance. You can simplify the task of risk management for the entire company through better management and simply, a contract management platform.

The 5 Ws and an H – Breaking it Down!

Spreadsheet problems - contract

Let’s take one Clause to say Termination for example and break it down for you. This will ensure clear communication and help you ask the right questions.

  • What does it mean to Terminate a Contract?

Terminating is to end a contract before the completion of the project. In other words, prior to the parties performing all of their respective obligations required by the contract, their duty to perform these obligations will cease to exist.

  • Who has the right to terminate a contract?

A party’s right to terminate a contract may originate from the general principles of contract law or from the terms of the contract itself. Termination of a contract can be done in 2 ways:

Termination for Cause – Contract is terminated for ‘Cause’ when one of the parties to the contract fails to comply with the terms and conditions as agreed upon and the other side is ending the relationship as a result. This can be initiated by either of the parties be it the Customer ‘ Client’ or the Company ‘ Service Provider’.

Termination for Convenience – Allowing a party to terminate a contract without any cause can be done through termination for convenience. In order to avoid costly disputes the terminating party usually goes with – it’s not you, it’s me attitude.

  • Why is it crucial to have a termination clause in your contract?

This clause keeps the parties to the contract on their toes. Terminating a contract can be a costly affair and once invoked can get you entangled in a long legal process. Thus it is crucial that the conditions of termination are set out in the contract without any ambiguity and clearly defines the role of both the parties in any situation.

  • When will a termination clause come into play?

There is no specific time when the termination clause can be brought into action. The applicability of it varies on a contract to contract basis.

For example – there are a few companies that get into agreements with condition that contract cannot be terminated in the very first month of its duration whereas there might be some contracts where there is no such specification, the contract can be terminated on the very first day of the project.

You just have to read your contracts very carefully!!

  • Where are the termination clauses mentioned in an agreement?

Termination clauses are defined in the Master Service Agreement (MSA) when the two parties agree to get into an agreement to do a project. The MSA is the umbrella document and can be referred to in case of any differences. It is also possible that a particular Statement of Work (SoW) will have its own termination terms defined specific to that scope of work and you need not refer the MSA for it.

  • How will terminating a contract affect the parties involved in it?

Terminating a contract affects both the parties involved in it irrespective of who terminated it. It is understandable why parties sometimes act in haste when terminating sales contracts, for example, the counterparty becomes insolvent or has stopped performing their obligations under the contract. However, by failing to consider the above issues, a party may find that they are unable to recover damages that they would otherwise have been entitled to, or may even find that they have wrongfully terminated the contract, which could have adverse financial consequences.

But there are a few things such as the prescribed method of communicating the termination to the other party which should be followed exactly otherwise the termination may not be effective. It is also important to check that the applicable termination rights under both contractual and common law are not lost before being exercised.

It is crucial that the termination clause include clear and unambiguous language that sets out both how the clause is to be applied and what damages are to be paid to the other party when it is invoked.

Businesses function in a complex environment. This means that effective communication, especially in contracts, is a necessity. There is a need to deep-dive and discern the implications of the clauses and suggest alternative approaches if required. This often translates into the hiring of expensive resources (lawyers and legal departments). The blogs that will follow shall be a detailed analysis of different clauses that are difficult to manage but yet crucial for the process.

What challenges do you face when reviewing contracts? Which clauses worry you the most? Do you think that available contract management tools are enough? Talk to us here.