L4M3- Chapter 3- Key clauses in formal contracts Flashcards
What is an implied term?
Contractual terms that exit in legislation or are common practice and therefore not written within the actual contract documentation
What is an express term?
Contractual terms which are specifically stated in the contract
Express terms in a contract will normally override the implied term unless the implied term is a legal requirement in the legislation
What is a contract term?
A contract is made up of many provisions or terms that give the contracting parties rights and responsibilities. They create an obligation on one or all of the parties, when you do not comply with the term there is a breach of contract
Each term gives rise to a legal obligation to do something or refrain from doing something
note- the term of the contract means something different- this would be the length of time a contract is agreed for or ran for
What is a statute?
a written law passed by a legislative body
Normally an express term overrides an implied term, but when is this not the case?
When there is an implied statute in place
A statute is a common way nowadays for terms to be implied into contracts
Effectively a government enacts a law and makes a decision on whether express terms can override the implied ones
What are some of the reasons you need express terms in a contract?
Set out the obligations of the purchaser/supplier
Set out the rights of the purchaser/supplier
State how the parties will deal with circumstances outside of their control
Where possible, confirm or override any implied terms (confirming is best practice because it reinforces that both parties are aware of the implication)
What is the difference between a contract clause and a contract term?
The clause is the precise wording in the main document of the contract
The term is the totality of that part of the agreement and so includes the clause and any schedules/ further information attached to it
Why might it be hard to identify the express terms in a contract?
May not be a written contract
The written contract may be based on oral negotiations
Purchaser may not be aware of the conditions of a written contract at the point of contract- example is where you buy a bus ticket which refers to terms elsewhere and that the terms are not considered ‘unusual’ (if they are unusual then effort must be made to bring to your attention)
What are standard terms and conditions?
Many organisations have their own standard terms of business which cover all of their business transactions except for those that are subject to a specific overriding contract
Often organisations are both suppliers and buyers, and the terms will be different to reflect that (e.g. payment terms)
Often short and very generic and provide a basic level of contractual protection
Often non negotiable, imposed by the purchaser without being negotiated
When should standard terms be used?
Repetitive transactions
Low value
Low risk
Need to state that they do not override any formal written contract between the parties
Only provide basic level of legal protection
what are the ADV and DISADV of using standard terms?
ADV
Time saved in negotiating individually with many purchasers/suppliers
Reduced admin costs
Consistent approach
DISADV
Risk they do not become effectively incorporated into the contract
Do not alow for specific nuances/risks
Can become out of date
Can be conflicting if the standard terms are automatically sent with an order that falls under a term contract
What areas should be included under standard terms?
Key areas must be covered in all cases, no matter how short the document is
Definitions
Express terms to override other standard terms (trying to avoid battle of the forms by prohibiting the substitution of terms by the other party)
Formation of the contract (which documents will be considered contractual e.g. order form)
Order of precedence- sets out what happens if there are conflicting documents
Price (e.g. inclusion/exclusion of VAT)
Invoice and payment
Spec (or cross reference to where the spec can be found if not quoted in the order)
Obligation to comply with the law
Delivery and risk (e.g. rights to reject the supply at point of delivery and how defects are managed)
Warranties and liability
IP rights
Termination
Confidentiality and use of data
ESG
Kaw and jurisdiction
What is a ‘time is of the essence’ clause?
An express condition of a contract used to underline the importance of timely delivery
An explicit statement of when goods should be delivered
It is used when failure to supply goods within accordance of the contract will have a significant impact on the ability of the purchaser to perform its normal functions
What are the key features of standard terms?
Concise
Generic
Usually attached to a PO
User friendly
Non negotiable
Low value, low risk, repetitive transactions
Basic and used for common circumstances
Avoids creating new contracts for repeat business
Not to be used for specific circumstances
Can create a battle of the forms
Need to be used carefully alongside call off contracts
What is a model form contract?
Standardised contracts used in certain industries to create stable and consistent contracts which are affordable and broadly equitable
They contain the core clauses that are standard but they are templates designed to be used with supporting documentation that s project specific
What is a precedent?
A court judgement which is binding on future legal decisions
Part of a case law system
When the judge makes their decision they will explain their justification and this is called the ratio decidendi
What is the difference between ratio decidendi and obiter dicta?
In case law the ratio is the justification of how a judge came to a decision and created a fixed precedent
Obiter is any other remarks that are not binding but can influence other cases
Both ratio and obiter are linked to precise wording which is often used in contracts subsequently
What is legal certainty?
The ability to predict how a court will decide a matter of dispute because you know what the law says, what it means and therefore how it will be applied
It can help avoid disputes
Why are contracts so complex?
The language used is often specific to the ratio and the obiter. Simplifying the language and punctuation might remove some of the protection intended to be afforded by the wording.
Never do any changes without taking legal advice
When are standard terms useful?
Low value, low risk, repetitive purchases
Not appropriate for any purchase which warrants a full bespoke spec and tender
Model form contract will have specificity for certain sectors, but some principles apply across all standard forms, what are they?
Contract specific details- parties to the contract, subject matter, dates
Standard common clauses- confidentiality, termination, definitions etc (standard terms)
Schedules- covering pricing, spec
What are some examples of model form contracts?
NEC- New engineering contract (construction)
JCT- Joint contracts tribunal (construction)
AS- Australian standards contract
FIDIC- International federation of consulting engineers (most widely used forms internationally)
IMechE/IET- Institution of mechanical engineers/institution of engineering technology (joint institution agreed model forms for electrical, electronic and mechanical plants
CIPS- For IT functions
ITC- International trade center (designed for small companies doing international business)
Who creates model form contracts?
Traditionally it would have been professional institutions
More recently governments, third parties and standards organisations have started to create contracts that are more balanced representing the interests of both suppliers and purchasers
Often working groups in either scenario come together to review how well current contracts are working and look at possible improvements
When would model contracts need to be changed/improved?
Changes in international or national law
Legal disputes have highlighted weakness in the contract
Technological change has created a new problem, risk or opportunity
What are the ADV and DISADV of model form contract?
ADV
Saves time and resource vs bespoke contracts
Suppliers and buyers familiar and comfortable with the main terms
Specific to sector/purchase type
A measure of certainty in how courts will react to disputes
Lower cost to produce and approve
Can be easier to solve disputes
DISADV
Poorly trained staff may use contracts incorrectly
Amendments can have ambiguity
Become out of date if not reviewed regularly
May be biased
What is a liability?
Being legally responsible for something
Will be legally responsible for paying compensation, for example, if there was an injury, loss or damage that occurred
What is a strict liability?
A standard of liability in which a person is legally responsible for the consequences of an activity, even in the absence of fault or criminal intent of that person
What is an indemnity?
A security or protection against loss, usually by way of financial recompense
What is liquidated damages?
An agreed sum of money which is payable by one party to another in the event that they breach a term in the contract
Liquidated damages are an estimate of intangible or hard-to-define losses to one of the parties in a contract.
These damages are to be paid out in the case of a breach of contract and are estimated and spelled out in advance in the contract.
Liability and indemnity clauses are found in contracts (can also be called ‘injury, damage and insurance’). What are things to consider in such a clause?
Liquidated damages
Exclusion of liability e.g. force majeure
Negligence of the other party
Indemnity
Financial limit of indemnity
Limiting scope of liability- e.g. indirect losses may be excluded (like the impact of goodwill as its hard to put a £ figure on)
Transfer of liability/ transfer of risk- When does ownership move between parties
What is insurance?
A fee paid to one party so that it will accept the risk and meet any costs that would normally fall to the person who has the legal liability for the item
Effectively transferring risk from the person with legal liability to the insurer
NOTE- the legal liability does not transfer, just the costs (normally up to an agreed limit)
What are the usual forms of insurance cover referenced in contracts? EPPGW
Employers liability- requirement for any company that employs staff e.g. for compensation for injury suffered
Public/products liability- AKA third party cover, covers anything that comes as a result of actions of a companies personnel
Professional indemnity- losses that occur as a result of poor/negligent advice e.g. legal, accountancy etc
Goods in transit cover- damage caused during delivery
Works/building- cover for partially completed building works
What should be considered in respect to insurance clauses
Type of insurance (employers, public/product, professional, goods in transit, works
Level of cover required (minimum cover needed, impacted by the cap you want to unlock, cost benefit analysis required)
Aggregate clauses AKA ‘each and every claim’- total number of claims on a policy in a given period which cannot be exceeded
Scope of cover- what do you need covered- may not want to go to too much detail
Auditability- having the right access to the cover
What is the difference between aggregate insurance clauses and each and every clause?
Aggregate- total claims under that policy over a given time period cannot be exceeded
Each and every claim- means a financial limit applies to each claim no matter how often claims are made
Why do you need insurance?
To make certain that the offending party can meet the financial costs of its liability in the event of a claim
Contract terms should also require that subcontractors are appropriately covered
What is subcontracting?
A contract that sits below but is directly linked or governed by a higher contract. The lower contract will be to deliver part of the requirement of the higher contract
Layers to a contract are often called tiers, so you have a direct contract with a tier 1 and then the tier 1 has a direct relationship with tier 2
