This checklist outlines what should be considered when drafting or reviewing the standard elements of a commercial agreement, including term and termination, representations and warranties, indemnification, limitations on liability, and miscellaneous and boilerplate provisions. This checklist focuses on the provisions that are generally included in contracts for the supply of goods and services but are applicable to many types of commercial agreements.
- Meet with Relevant Parties to Determine Exact Deal Terms
- Ensure that all key agreed and desired deal terms have been communicated by the appropriate business executives and relevant parties
- Consider factors influencing the process of drafting and negotiating the agreement, including:
- the size and scope of the transaction, including territory and whether the arrangement is exclusive or non-exclusive;
- the length of the agreement and any anticipated further business arrangements with the counterparty;
- the degree of contract standardization for the selected transaction
- any relevant competition law considerations, such as vertical, horizontal, and price discrimination issues;
- the relative bargaining positions of the parties and the importance of the specific contract to the company’s business as a whole;
- the company’s risk tolerance and the counterparty’s creditworthiness and other risk factors;
- which party, by role or other factors, is more likely to breach the agreement; and
- the potential interplay between the agreement and other contractual arrangements, for example, compliance with loan covenants.
Identify Contract, Parties, and Effective Date
- Ensure that the title of the agreement appears at the top of the first page, generally in bold typeface for ease of identification, and reflects the type of agreement the parties are entering into.
- Provide a short description of the parties to the contract and ensure that each is properly identified by:
- naming the appropriate counterparty;
- considering whether related parties, such as subsidiaries, parent entities, or affiliates, should be included;
- using the full legal name of each party;
- if there are multiple parties, stating whether party liability will be joint or joint and several; and
- including each party’s business address and the jurisdiction of incorporation or formation of each legal entity.
- Specify the date on which the parties intend the agreement to be effective, considering whether the agreement is effective:
- on execution;
- as of a specified past or future date; or
- on satisfaction of certain conditions.
Address Specific Operational Aspects of the Agreement
- Draft or review the key operative provisions and ensure they conform to the business team’s description of the transaction. Common provisions include:
- appointment of seller, distributor, or service provider (or other similar provision addressing the parties’ agreement to buy and sell goods or services);
- terms relating to exclusivity and territory;
- description of the goods or services;
- ordering procedures;
- project management, including time frames, milestones, and project managers (names or job titles);
- shipment, delivery, acceptance, and inspection (in a supply of goods agreement) or scheduling of deliverables (in a services agreement);
- change orders; and
- non-financial obligations of the buyer or service recipient, such as requirements to comply with marketing guidelines or maintain the condition, ownership status, and security of the service provider’s equipment left in the customer’s possession.
Determine Who is Paying What to Whom, When, Why, and How
- Consider how the type of transaction may determine the pricing terms. For example, in:
- a sale goods transaction, pricing may be fixed for the duration of the contract, be based on a formula (sometimes volume-related), vary according to specified factors like quantity or frequency of purchase, or be subject to a most favoured nation provision that protects the buyer against paying higher prices than the seller’s other customers
- a contract for the provision of services, it may be appropriate for pricing to be calculated on a time and materials basis, fixed price basis, or combination of time and materials and fixed price basis.
- Determine when payment is due, including whether it is tied to a predetermined schedule or contingent events (for example, on receipt of invoice or completion of milestones or services).
- Shift and manage risk of delay or acceleration of required payments by allowing payments to be either deferred or advanced.
- Consider whether there should be any invoicing requirements and ensure that an invoice dispute resolution procedure is in place.
- Specify the method of payment (such as cheque or wire transfer) and currency.
- Address any seller or service provider protections against late or non-payment, including:
- interest charges;
- a security interest (whether a purchase money security interest (PMSI) or a more general type of security interest;
- letters of credit;
- mandatory advances;
- guarantees (from a larger more secure parent or investor ; or
- surety or performance bonds.
Draft or Review Major Risk Allocation Provisions
Use Representations and Warranties to Apportion Exposure to Potential Losses
- Include standard representations and warranties affirming:
- each party’s incorporation (or formation), valid existence and, if applicable, good standing;
- each party’s extra-provincial registration or qualification to conduct business;
- each party’s corporate authority to enter into and perform the agreement;
- each party ‘s compliance with laws;
- the enforceability and validity of the agreement.
- Negotiate additional representations and warranties that are tailored to the circumstances of the transaction and the company’s position in the agreement.
Limit the Effect When Making Representations and Warranties
- Attempt to limit of qualify the effect of representations and warranties by:
- narrowing their scope;
- disclosing exceptions and adding materiality and knowledge qualifiers;
- limiting their survival period;
- including an anti-sandbagging clause;
- making indemnification the exclusive remedy for inaccuracy; or
- including contractual limitations on liability, such as caps and baskets.
- Disclaim representations and warranties that are not expressed in the written contract and include acknowledgement of non-reliance on any extra-contractual representations and warranties.
Maximize the Effect When Receiving Representations and Warranties
- Maximize the effect of representations and warranties by:
- retaining broadly worded representations and warranties and resisting those that are overly qualified or limited; and
- negotiating a sufficient survival.
- Resist including disclaimers and acknowledgements of non-reliance.
- Preserve the right to rely on representations and warranties known to be inaccurate by resisting the inclusion of an anti-sandbagging clause and negotiating instead for the inclusion of a sandbagging provision.
Determine Agreement Length and Define Termination Triggers
- Decide whether the term of the agreement will be:
- project-based; or
- dependent on a related agreement.
- Determine whether either or both parties have the right to renew the agreement. If so:
- include any condition to renewal;
- determine if the renewal will be automatic or evergreen
- consider how renewal rights may affect renegotiation of the agreement; and
- decide whether to build in automatic price adjustment for renewal periods.
- Decide whether either or both parties have the right to terminate the agreement for:
- cause (requiring the terminating party to identify a specific breach by the other party); or
- convenience (allowing a party to terminate at any time without providing a reason to the other party).
Structure an Indemnification to Cover the Company’s Risks
- Determine whether an indemnification clause is desirable or appropriate for the agreement. For example, the benefits of having an indemnification clause may not outweigh the time and expense of negotiating it if:
- the parties are not worried about accessing deeper pockets to cover claims;
- the likelihood of claims is remote; or
- any claims are likely to be for small amounts.
- If an indemnification provision is undesirable or inappropriate, consider an alternative such as:
- relying on statutory indemnification; or
- using other risk allocation provisions to limit overall risk.
- Define the indemnification obligation and the indemnified persons, considering whether the indemnification provision should:
- be unilateral or mutual, or contain separately defined reciprocal provisions;
- include an obligation to defend or hold harmless; and
- only benefit the opposing contractual party or extend to non-parties to the agreement (for example, the opposing party’s employees, officers, directors, affiliates, representatives, and customers).
- Define the scope of recoverable losses and indemnifiable events by considering:
- which types of claims and losses the indemnification provision will cover;
- the phrase used to dictate how closely the losses must relate to the indemnifiable event such as “losses solely resulting from the indemnifiable event” or “all losses relating to the indemnifiable event; and
- how to narrow the scope of the indemnification (for example, by specifying exceptions or including contractual limitations on liability).
- Establish an indemnification procedure.
*Part two of this document will cover insurance, remedies under contract, limitation of liability, and protecting corporate assets*
Jeremy Power is a lawyer in the Toronto office of Cotney Construction Law. Cotney Construction Law is an advocate for the roofing industry and serves as General Counsel for the Canadian Roofing Contractors Association. For more information, please call 1.888.476.4066 or email email@example.com.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.