7 tips on how to avoid common risk allocation pitfalls in a contract

Hi there,
Risk allocation or how you balance the risks each party is willing to assume under a given commercial contract. That's complex stuff! 

Well, it depends but hopefully these few pointers will help you and your client better determine how to draft some material clauses and maybe serve you as a checklist:

1- Draft Clear and Comprehensive Termination Provision 
   •       Ensure that the conditions to termination are adequate and balanced

•       Clearly define the termination procedures (for example, by including notice requirements).

•       Set out the effects of termination, for example, those relating to:

•       tangible and intangible property disposition (for example, confidential information);

•       transition to a new supplier; or

•       any termination fees (for convenience-based termination).

•       Make all termination provisions in the agreement consistent.

2- Include Meaningful Indemnification Procedures

•       Who can initiate the claim.

•       Timing of the claim. How much time a party has to present or make a claim to other party.

•       The defence and settlement of third-party claims.

3- Carefully Consider Applicable Statutes of Limitation

•      Ensure that the applicable statutes of limitation are appropriate considering the party’s liabilities. Check out which laws govern your contract. The nature of the contract may trigger unwanted effects in terms of statutes of limitations.

4- Carefully Draft the Consequential Damages Waiver

•    Ensure that the waiver covers only damages that the waiving party expects by considering whether these damages are included:

•       damages caused by the wrongdoer’s bad acts; or

•       direct damages if the waiver includes lost profits, lost revenues and diminution in value, which can be direct damages.

•       Consider whether the waiver should be reciprocal.

•       Consider whether specific damages should be excluded from the waiver, such as damages relating to:

•       indemnification;

•       a party’s gross negligence, recklessness or intentional wrongdoing;

•       lost profits, lost revenues and diminution in value;

•       intellectual property breaches and violations; or

•       breaches of confidentiality obligations.

5- Tailor the Warranties and Conditions to the Transaction 
   •       Ensure that the scope of the warranties is appropriate, considering:

•       the nature, type, quality and condition of the goods, assets or services central to the agreement; and

•       the market’s expectation.

•      Consider including a condition disclaimer (for example, excluding the implied conditions of merchantability and fitness for a particular purpose).

•       The warranty or condition maker should:

•       consider including a warranty or condition-related remedies provision that sets out the recipient’s limited and exclusive remedies; and

•       carve out any sole and exclusive remedies from the cumulative remedies provision.

•   The warranty and conditions recipients should try to include warranty and condition breaches under the indemnification and defence provision so that the recipients are likely to obtain lawyer’s fees in the event of breach.

6- Address Pricing and Payment Risk - As we say: Cash is king! 
The parties should consider:

•       Adjusting the price periodically during the term to reflect changes in the seller’s costs, such as transportation or raw materials.

•       Varying the price based on different factors, such as quantity or frequency of purchase.

•       Fixing the price for the duration of the contract.

•       Including one or more clauses requiring the costs or price to be competitive, such as a most favoured nation (MFN) clause. Parties should be careful when drafting MFN clauses to ensure that they do not implicate Canadian competition laws.

•       Including favourable payment terms (for example, 30 or 60 days after invoice).

•       Including credit-related covenants or termination rights (for example, giving the seller the right to terminate if the buyer’s creditworthiness deteriorates).

7-Consider Dispute Resolution - Sometimes arbitration is not magic!

•     Ensure that the dispute resolution provision is broadly worded to encompass all possible disputes and claims (including tort and other non-contractual claims) so that all disputes are resolved in only one jurisdiction or by one tribunal.

•      Allow for the immediate use of emergency litigation procedures (for example, temporary restraining orders and preliminary injunctions) for disputes that need timely relief.

•       Include favourable choice of forum and governing law provisions. 

AND OF COURSE, IF YOU'RE NOT SURE, CONSULT WITH A COLLEAGUE OR SOMEONE WITH MORE EXPERIENCE THAN YOU.

Happy drafting!