Contract terms

What are contract terms?

Contract terms are the different provisions within a contract that outline the responsibilities, rights, and obligations of each party. They provide clarity, legal reassurance and protection. The terms within any contract, must be agreed by all parties.

What are the types of contract terms?

Contract terms can be conditions or warranties, and express or implied.

• An express term is one that is explicitly written and clearly worded within the contract.
• An implied term is not explicitly stated in the contract but is assumed to be part of it, usually because it is already incorporated into wider law and legislation.
• A condition is a critical aspect of the contract that, if breached, allows for termination.
• Warranties are lesser terms that do not allow for termination but can result in damages if breached.

How are contract terms presented in a contract?

A typical contract usually opens by outlining the different parties within the contract and providing definitions of any key terms that are used. It should also include details on the responsibilities, tasks, and activities of each party within the contract.

Some information may be included via an additional document, known as a schedule to the contract, such as a scope of work (outlining who is responsible for what), specification (outlining product or service requirements), key performance indicators or KPIs (outlining performance requirements) or payment (outlining any agreed cost incentives or mechanisms).

What are examples of typical contract terms?

Indemnity clauses.

This is a provision in a contract that requires one party to compensate the other in the event of a trigger event. A trigger event is a specified event that allows a party to claim indemnity under the terms of the contract. Both parties need to agree on what constitutes a trigger event. An example could be a breach of contract. An indemnity clause provides financial protection to one party against any loss caused by the action (or inaction) of another.

Liability clauses

These clauses are designed to outline each party’s responsibilities and liabilities within the contract. Liabilities are their legal responsibilities rather than professional or commercial requirements. Clear liability clauses are essential in ensuring that both parties know who is responsible for what in the event of any claims. Liability is typically covered through the use of insurance. Common insurance liability types include employer’s liability, public liability, private liability, product liability and professional indemnity.

Insurance clauses

Most standard terms and conditions include provisions outlining the relevant insurance contracting parties need to hold to protect against commercial risks. The type of insurance necessary will vary depending on the type and scope of the contract, and the industry and/or sector in which the business operates. Insurance clauses exist to ensure financial protection in the event of risk or loss.

Warranty

A warranty is a clause within a contract that promises to repair or replace something within a defined period of time if necessary. For example, you may buy a new laptop with a 2-year warranty, meaning that if it breaks in that time, it will be replaced or repaired free of charge. There are usually restrictions as to what applies under warranty. For example, spilling water on your laptop would not be covered, but a general mechanical fault through normal use would.

Guarantee

A guarantee within a contract provides formal written assurance that specific quality requirements will be met and a commitment to rectify any deficiencies. A guarantee within a contract can also be a promise made by one party to another, where the first party agrees to fulfil any liabilities or debts owned by a third party to the other party within the contract. The party agreeing to fulfil financial obligations on behalf of another is known as a guarantor. For example, a parent or guardian agreeing to act as a guarantor in a rental contract between a landlord and a tenant.

Force majeure

This is a type of contract clause that seeks to exclude or limit liability in the event of circumstances beyond either party's control. Force majeure events need to be genuinely unforeseen and unpreventable, and refer to things like earthquakes, eruptions or tsunamis. Force majeure events need to be explicitly outlined within the contract.

Termination and dispute resolution clauses

These clauses set out the circumstances in which the contract can be terminated and the process that must be followed in the event of disagreements.

Intellectual property clauses

These clauses refer to the protection of assets created through human intellect, such as designs, symbols, inventions, images and music.

Confidentiality clause

These clauses protect either party from potentially releasing commerciality sensitive or proprietary information to competitors.

Sub-contracting clauses

These clauses outline what activities may or may not be sub-contracted under the contract, any necessary provisions for contractors (such as standards requirements, payment terms and insurance), and the process for sub-contracting, including whether approval needs to be sought from the buyer.

Liquidated damages and penalty clauses

The purpose of these clauses is to outline the financial remedies available to either party in the event of a contract breach. It is worth noting that in some countries, courts will only award damages if they are considered to be a genuine compensation of loss, rather than a penalty.

ESG clauses

These clauses state any environmental, social and governance criteria required under the contract, such as carbon emissions, social value or adherence to relevant standards (ISO, BSI, etc.).

Payment terms

These clauses are incorporated to show how and when payment for goods or services will be made, i.e. upfront, on completion, in cash, credit terms, bank transfer, etc. Some contracts may also include clauses relating to price, outlining the provisions under which the price can change within the contract. This may be in line with certain indexes, such as the consumer price index (CPI), retail price index (RPI), commodity indexes, or price fluctuations.

How do you know what contract terms to use?

The example terms provided above are typically used in most procurement and supply contracts. However, additional clauses or terms may be required depending on the nature of the goods or services you are buying, and the industry in which you work. For example, if the contract is for services, you will likely need to include provisions for a service level agreement (SLA) within the contract. If you work in the electronics industry, you may need to include clauses relating to contract minerals and ensuring their absence from the supply chain. Some industries, such as the construction industry, have created model form contracts, which can be used as a standard template when creating contracts with suppliers. Examples include the NEC (New Engineering Contract) and JCT (Join Contracts Tribunal). Many procurement professionals will work closely with suppliers to develop contractual terms that are mutually acceptable and beneficial to both parties. Suppliers may be able to advise provisions they have with other customers that could be incorporated into your contracts. However, it is worth noting that suppliers will want to limit their liability in many circumstances, so it is important not to be overly reliant on their suggestions. Procurement professionals should not develop contractual terms in isolation. You may need to work closely with other functions, such as legal or engineering departments, to ensure that any contracts developed are fit for purpose and offer sufficient legal protection. Regular market monitoring and analysis can help you to identify potential existing and emerging risks in your industry. This knowledge can help you to create relevant provisions within your supply chain contracts that minimise both your exposure to and the impact of these risks.

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