Expressions of time (months, years, etc.): the way in which the term ‘month’, ‘year’, etc. should be interpreted.

Parties: the names to be used in referring to the parties in the contract (e.g. expressions such as ‘Employer’ and ‘Employee’, or ‘Company’ and ‘Distributor’ may be used in place of the parties’ full names.

Price: the payment terms and interest rates applicable.

Sub-contracting: the identification and role of particular sub-contractors that will carry out aspects of the work agreed between the parties in the main contract.

Territory: definition of the territory to which the contract applies.

11.3 MAIN COMMERCIAL PROVISIONS

11.3.1 Acknowledgements

This clause indicates the existence of a legal relationship or that a person has not relied on certain statements or facts. Here is an example:

Vocabulary: to ‘assign’ means to transfer, and ‘R&D means ‘research and development’.

11.3.2 Appointment

In this clause, one party appoints another party to carry out specified tasks or fulfil a specified role. It is important to ensure that the clause is clear about who is being appointed, what they are being appointed to do, whether and how much they will be paid for doing it and how long the appointment is to last.

Here is an example, in which one party appoints another to provide certain services.

Vocabulary: ‘haulage’ means transportation, usually by lorry. The ‘Territory’ refers to a specific geographical area defined elsewhere in the contact, and the nature of the ‘Payments’ will also be defined elsewhere in the contract.

This type of clause is needed where payments under the contract are calculated by reference to a variable factors (e.g. extent of work done or sales received) and provides a right of audit – i.e. a right to carry out an official inspection of financial records – to the party that will receive such payments. The clause should deal with such questions as what records may be examined, whether copies may be made of them, how long the right to inspect will continue for, who bears the costs of the audit, etc.

The example clause below empowers the authorised representatives of each party to inspect certain records:

Vocabulary: the ‘subject matter’ of the contract means the deal the contract is designed to put into effect, and ‘in advance of’ means before.

11.3.4 Best endeavours

This provision is generally contained within another clause, and it creates a qualified obligation whereby a party must demonstrate a high level of commitment and effort towards achieving a certain result, but is not absolutely obliged to achieve it (e.g. ‘A shall use its best endeavours to sell the Products as specified in Appendix II’). Generally speaking, this kind of formulation should be avoided if it is possible to indicate specific and absolute obligations.

Here is an example of a best endeavours clause relating to dispute resolution.

Vocabulary: ‘material’ in this context means significant, and ‘adverse’ means harmful. The word ‘expeditious’ is frequently used in legal contexts to mean quick.

11.3.5 Commencement

This provision is generally contained within another clause and indicates when performance of the obligation contained in that clause is to start. Particular care should be taken in drafting where the commencement date is different from the date of the contract or where different parts of the contract commence on different dates.

The example clause below stipulates the commencement date in a fixed term contract.

11.3.6 Completion

This provision is generally contained within another clause to indicate when certain defined activities are to take place. Care should be taken to ensure that the meaning of the word ‘completion’ is clear and unambiguous in the contexts in which it is used.

This example clause provides a definition for the term ‘Completion Date’.

Vocabulary: the word ‘construed’ means interpreted. ‘To construe’ is to interpret.

11.3.7 Conditions precedent and subsequent

This provision is generally contained within another clause (see 8.1.4 above).

Here is an example of a condition precedent in relation to the grant of a patent.

Vocabulary: the phrase ‘come into effect’ means to become legally valid.

11.3.8 Consent

This provision is generally contained within another clause and has a variety of meanings: (1) that a contracting party is responsible for obtaining various consents necessary for the contract to proceed; (2) that a party is warranting that the necessary consents have been obtained; and (3) that a party may not take certain steps unless the consent of the other party has been obtained. The main issue to be considered when drafting such a provision is whether the requirement for consent should be made subject to a provision that it cannot be reasonably withheld.

Here is an example of a clause prohibiting assignment of the contract by either party in the absence of written consent from the other party.

Vocabulary: the phrase ‘prior written consent’ means agreement given in writing before assignment of the contract occurs.

This clause generally takes the form of a stipulation that one party must consult with another party before taking certain actions (note that this does not amount to an obligation to obtain the other party’s consent, but is more onerous than a mere obligation to inform the other party). The drafting of this kind of clause should take into account the question of what actually qualifies as proper consultation, how much time should be allowed for this process to take place, in what form the advice should be given, etc.

The clause set out below stipulates a general duty to consult and consider recommendations made by the other party.

Vocabulary: the phrase ‘good faith consideration’ means genuine consideration. In other words, Party A must give genuine thought to recommendations made by Party B.

11.3.10 Currency

This clause stipulates the currency in which payments are to be made under the contract, and is often contained in a payments clause. The clause should also specify whether payment can only be made in that currency, how and when the currency is to be converted, and who bears the risk of the currency exchange rate changing between the date of the agreement and the date on which payment is in fact made.

Here is a simple clause specifying the currency and manner of payment.

11.3.11 Deposits and part payments

This clause stipulates when, under what circumstances, and in what amounts deposits or part payments are to be made in respect of purchases handled under the contract.

The example clause given below provides that one party must pay a non-returnable deposit to the other party.

11.3.12 Exclusive, non-exclusive and sole

See note above. This provision may be contained within a main commercial clause (see above), or may also be a stand-alone clause.

Here is a clause granting an exclusive licence to sell certain products.

Vocabulary: an exclusive licence is one granted to only one party (as opposed to a non-exclusive licence). Therefore, under this clause Party B is the only one able to manufacture, use and sell the Licensed Products in the specified territory.

11.3.13 Indexation

This provision gives a means by which the parties can adjust prices for goods and services or salaries or wages in order to take account of the effects of inflation. It should stipulate the method of calculation, the index used, whether notice should be given in case of increases, etc. Such a provision is often contained within a payment clause.

The example clause given below is taken from a UK contract and provides a means of increasing a salary automatically by reference to the Retail Prices Index (which is the primary consumer price index used in the UK).

Vocabulary: ‘preceding’ means previous.

11.3.14 Interest

This provision specifies whether interest should be charged on late payments of contractual debts, at what rate it should be charged and whether any other rights are obtained by the party receiving payment. It is often contained in a payments clause.

The clause set out below simply provides for the payment of interest at a specified rate on invoiced amounts paid late.

11.3.15 Net sales value

This provision is usually contained within a payments clause, where payments are calculated by reference to the amount of a party’s sales of goods (e.g. in agency and sales agreements). The word net indicates that certain items (VAT, insurance, etc.) may be deducted from the amount actually charged to the customer.

The example given below shows how the net sales value definition can be applied in a payments clause.

Vocabulary: the word ‘royalty’ means a payment made to an author or patent holder in respect of the use or sale of published work or products.

11.3.16 Options

An ‘option’ is a contractual right for one party (the ‘option holder’) to elect to bring into force a certain term of a contract. Options often relate to the purchase of land or shares or to take a licence (e.g. in relation to intellectual property). They generally continue for a specified term and are exercisable on pre-agreed terms.

An option clause should include a clear statement of what the option holder receives on exercising the option. It should also cover the questions of whether the option is exclusive or not, whether a lock-out agreement (an agreement not to negotiate with a third-party during the period of the negotiations) is being created, what payment is to be made for the option, and how the option may be exercised, etc.

The provision set out below is taken from an option clause in a franchise agreement, and provides the franchisee with a right of first refusal where the franchisor indicates its aim to grant a franchise to a third party in respect of a further retail outlet.