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As a supplier in the UK, you will enter into many commercial agreements. Your customers might seek changes to your standard terms or business contracts. During negotiations, customers may request particular clauses. Some clauses pose high risks to your business. This article explores high-risk provisions you may encounter during contract negotiations and why you should be wary about them.
What are Some Key High-Risk Contract Clauses?
Several contract clauses could cause risks for your business. Below are some of the riskiest clauses to approach with caution:
Limitation of Liability Clauses
Limitation of liability clauses limits financial exposure during a contract breach. Without this clause, your business faces unlimited liability. This means there would be no monetary cap on damages claimed against your company in case of a contract breach.
Customers may request that your liability to them is unlimited. They might strike out a limitation of liability clause or expressly state that your liability for certain losses is unlimited.
Including a clause with unlimited liability is risky. It exposes your business to substantial financial loss. For example, customers might want suppliers to have unlimited liability for data protection breaches. This could lead to significant financial exposure due to potential damages from UK GDPR breaches.
Unlimited liability means no upper limit to the damages your business might pay. A large customer claim could risk potential insolvency.
By limiting liability, companies can manage and predict financial risk. You can negotiate reasonable limits, such as capping liability at the total project charges or a multiple of those charges. For instance, you might agree to cap your liability at 150% of the total fees paid under the contract. This provides a transparent and predictable maximum exposure.
Indemnity Clauses
A contractual indemnity is a clause in which one party promises to compensate the other for specific losses. These losses could be caused by a breach of contract, negligence, or another trigger action.
Business customers may request indemnities to protect against potential losses. For example, a customer might require a supplier to cover financial losses directly resulting from a specific event. This often means the supplier must compensate the customer on a pound-for-pound basis.
A common indemnity request is for intellectual property claims. If a customer receives a claim due to deliverables from the supplier, the supplier may need to compensate them fully. For example, if your product infringes a third party’s intellectual property rights, the customer may demand you cover all legal costs and damages arising from a third-party claim.
You must approach indemnities with caution. Ensure you understand the risks and potential financial exposure your business could face. Ideally, you should push to limit the indemnity scope or negotiate a liability cap. For instance, you might agree to indemnify the customer only for direct losses up to a certain amount.
It is also essential to define the procedures for making indemnity claims. This can include requiring prompt notification of claims, allowing you to participate in the defence, and ensuring that settlements require your consent. These provisions help you manage and mitigate potential indemnity obligations.
Termination Rights Clauses
Customers often request generous termination rights. For instance, they might ask for the right to terminate at any time with notice or for any breach of contract.
Granting customers broad termination rights poses risks. Customers might leave contracts early, causing income loss and disrupting operations. Such rights create an unstable environment where suppliers cannot reliably predict revenue.
Download this free Supplier Contracts Checklist to ensure your contracts will meet your business’ needs.
You should seek to negotiate more balanced termination clauses. For instance, you could agree to termination only for material breaches or after the customer allows you an opportunity to remedy the breach. This approach will help protect your interests and allow you to keep customers happy. For example, you may agree that the customer can terminate the contract only after giving you 14 days to remedy a breach.
Where a customer pushes for a general termination right, you can also include early termination fees. If the customer terminates the contract without cause, they must pay a fee to compensate you for lost revenue. This could mitigate the financial impact of early termination.
How to Handle Negotiations on High-Risk Clauses
Contracts are often open to negotiation. As such, you should not agree to high-risk clauses immediately. Communicate your concerns with customers and propose balanced amendments. Accept high-risk clauses only if you are comfortable with them.
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Key Takeaways
Suppliers must be cautious of high-risk customer requests, particularly regarding limitation of liability, indemnity, and termination rights clauses. These clauses can expose your business to significant financial and operational risks. If you require assistance, engage a commercial contracts solicitor for support to help you negotiate balanced terms and protect your business interests.
If you need legal advice or help negotiating a contract, LegalVision’s experienced contract lawyers can assist. As part of our LegalVision membership, you will have unlimited access to lawyers for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.
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