“IT’S A DEAL BREAKER” – BUT IS IT THOUGH, REALLY? NAVIGATING RED LINES IN COMMERCIAL CONTRACTS

Is there such a thing as a “walk away” clause? A clause that is an absolute deal breaker, a red line which we cannot accept? This was the question posed by a client recently in connection with a customer contract which it was being asked to sign. Whilst my initial reaction was “of course, absolutely” with some further thought the answer, as often in life, is rather more nuanced.

Context is key – clauses that on the face of it look like a complete “no-no’” may actually never pose a realistic problem in practice due to the nature of the service being offered. Here at ClaydenLaw, we help clients to see the wood for the trees and focus on those issues that really matter, getting our clients to an agreed deal and revenue earning stage more quickly.

To bring some method to this, I think it is useful to look at “commercial” red lines (for example, those which may make a contract unprofitable) and “legal” redlines (those clauses that lawyers get very excited about but perhaps don’t generate quite the same objections for non-lawyers).

Commercial red lines

Good lawyers will help clients with issues that are not strictly “legal” – in other words spotting clauses which may not on the face of it cause alarm but may actually have serious implications for the client. These may include:

  • Lack of commitments from the customer to carry out their side of the bargain (for example, ensuring they have minimum systems requirements in place).
  • Unilateral right for the customer to change the scope of the service without a change in pricing from the vendor.
  • Long term tie in for vendor with minimal ability to increase charges
  • A headline “long term” deal (on the order form) but the customer actually has the right to terminate early on x months’ notice therefore not delivering the revenue or return on investment expected by the vendor.

They might be difficult to spot because they are simply not there – ie. we focus on the words on the page but what is actually missing? It will rarely be “one thing” that tips the balance but rather a combination of issues that point towards this contract being seen as “risky”.

Legal red lines

These are those clauses that lawyers take issue with when acting for the vendor/supplier. These may include:

  • Clauses (or lack of appropriate clauses) which leave the vendor exposed, such as no caps on liability, liquidated damages (payments triggered on certain events/failures), widely drafted indemnities with no controls which mean that the supplier is at risk of paying out to the customer and losing money on the contract.
  • Payment clauses, for example payment milestones where the milestone definition is within the customer’s control or not objective (such as non-acceptance) which means that the vendor is not able to identify the date to be able to trigger the invoice.
  • Intellectual property clauses which mean that the vendor will not have freedom to re-use IP that it may have developed with that particular customer or licensing terms which allow the customer very wide rights to use and exploit the vendor’s background IP (including allowing access to third parties) both of which affect the value of that IP.
  • Data protection clauses which oblige the vendor to act as a processor not controller of personal data – this might not be how the vendor operates and therefore there is a risk of breach of contract (and non-compliance with data protection law leaving it open to claims from individuals).
  • Exclusivity clauses that prevent the vendor from providing services to its customer’s competitors.

Context

So these may appear on the face of it to be non-negotiable redlines for the vendor. But this is where context comes in. For example, the vendor may be able to mitigate some of these measures by:

  • ensuring that its scope of work or proposal is absolutely crystal clear with assumptions and client dependencies built in;
  • allowing early termination so the vendor can walk away from the contract if it becomes unprofitable
  • taking comfort that a technical breach might not necessarily have financial consequences for the vendor in that the customer might not actually suffer any real damage and therefore be unable to claim for its losses
  • taking comfort that some of the more onerous clauses may not be enforceable under the law anyway.

Perspective

So if you are faced with a potentially valuable client contract which they are saying is non-negotiable, let us help you to see the wood for the trees and work out whether there are actually any “walk away” clauses in there such that you can’t take it any further. Or is the reality actually that you can probably mitigate your risks such that the clauses are never in practice used against you.

Call Piers Clayden now on 01865 953541 or email piers@claydenlaw.co.uk for a complimentary 30-minute Liability Assessment Consultation. This consultation will help you to identify the risk areas in your proposed contractual arrangement and work out the best way to proceed for your business.

Please be aware that this paper has been compiled for general guidance only and should not be considered as specific legal advice.


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