Don’t Be Surprised – Scrutinize those Contractual Terms and Conditions

Agreements come in a variety of shapes and sizes. Some are painstakingly negotiated over the course of months, while others consist of the fine print on the back of a scribbled-out quotation. Regardless of form, every business will, at some point, enter a contract-based relationship. Signing on the dotted line, even where the contract appears to have “standard language,” can have significant consequences. This is particularly true as it relates to your business’ rights and remedies when things go wrong.

In commercial litigation – that is, legal disputes between businesses – the specific terms and conditions governing the relationship between the parties take center stage. As commercial litigators, we routinely encounter contractual provisions that can help or hinder a client’s ability to resolve a dispute favourably. What follows are a few common contractual provisions that can affect the rights and remedies of a company, as well as the successful adjudication of its business disputes.

Limitation of Liability Clauses

Limitation of liability provisions typically limit the amount and/or types of damages that are recoverable by the parties to a contract. While such a provision can benefit your organization by limiting its liability, it can also significantly impact your organization’s right to recover all of its damages. Understanding the scope of the limitation of liability clause will not only help you assess the pros and cons of signing the contract, but also inform your actions throughout the term of the contract.

Entire Agreement Clauses

Entire agreement clauses generally state that all the agreed terms of the business deal have been set out in the written contract. Accordingly, any discussions, representations, understandings, etc., that occurred prior to signing the contract are without contractual force and effect. While such a provision can assist in ensuring that all parties are proceeding on the same basis, it can be problematic if the larger agreement is missing key information. For instance, if a contract was predicated on the basis that one party had certain intellectual property rights or licences, the agreement should clearly set out the specifics of that representation and/or warranty.

Businesses should be particularly mindful of entire agreement clauses where an agreement is orally negotiated between the parties, and the written agreement is only drafted later. It is important to include all essential elements of the agreement in the ultimate contract.

Dispute Resolution Clauses, or “Arbitration Agreements”

When drafting an agreement, the parties can agree in advance to a dispute resolution mechanism other than proceeding through the public court system. Arbitration – the most common form of alternative dispute resolution in commercial relationships – has advantages and disadvantages, and it may or may not be beneficial to include such a provision in any given contract.

In an arbitral proceeding, the parties select an arbitrator (or arbitral panel) to settle the dispute. This permits the parties to select an adjudicator who has specific expertise in the subject matter at issue. The parties, however, must be prepared to pay the arbitrator(s) and abide by the relevant arbitration rules. The process is usually more flexible and can be tailored to the specific dispute, and therefore may proceed more quickly than the regular court process. Arbitration is generally a private process, which can be of benefit to parties wishing to keep the subject matter in dispute confidential or where there is likely to be an ongoing business relationship between them.

However, even if the contracting parties are on the same page regarding the need for an alternative dispute resolution mechanism, the specific wording of the clause matters. The parties should turn their minds to the scope of the arbitration provisions, which arbitration rules will apply, as well as the arbitral “seat”, that is, where the arbitration is going to take place.

Choice of Law Clauses

Contracts can include terms selecting the law of a particular jurisdiction to “govern” them if a dispute arises. This occurs most often in interprovincial or international contracts. For example, a corporation based in Ontario and a corporation based in New York may select the law of Ontario, the law of New York state, or the law of a third jurisdiction to govern a contract between them. Given the differences that can exist between jurisdictions, such a clause can have a significant impact on your organization’s rights and obligations. It is important to understand those differences.

Many contractual relationships proceed, and conclude, without issue. Unfortunately, however, disputes do arise. When that happens, it is important to understand your organization’s rights and remedies, as well as its exposure to possible liability. Consulting an experienced commercial litigator can assist you in managing your risks both throughout the term of a given agreement, and where litigation is anticipated.