Commercial contracts: Our top tips and guidance

What are warranties?

Warranties are contractual promises or assurances from one party to another regarding the existence of certain facts or conditions. In the absence of contractual warranties, the court may imply them. Unless (in the rare circumstance) you are contracting on an “as is” basis, your agreement should always include a warranty. Implied statutory warranties will always be part of an agreement unless you specifically exclude them.

To tailor your warranties, you should decide what warranty you want to give and what you want to exclude, then carefully draft the wording so that an independent person can look at it and determine exactly what it is you were going to deliver. Be careful with your choice of language and try to avoid interpretation confusion.

A warranty is a term of the agreement, so normal breach of contract remedies apply. This means if a warranty was breached you would be usually awarded damages and not recission of contract.

Limiting liability

Liability can be tricky, especially in goods or services contracts, as you often have to strike a balance between the supplier’s and the customer’s point of view. For example, the supplier will want liability limited in a sensible way to ensure that the business is not exposed, however customers will want the supplier to be ‘on the hook’ and will expect the supplier to pay all of their losses.

Many clients assume that if their contract doesn’t have a liability clause then they have no liability, when in fact the absence of a limited liability clause provides for open-ended liability. So, taking the example above, it would be important to get a clause in your agreement if you are acting for the supplier.

If you have certain types of loss that you are particularly concerned about limiting, then you should expressly draft them into the agreement. Examples include loss of profit, business or reputation.

However, it is important to always include an exclusion clause excluding those losses that cannot be limited (for example death or personal injury from negligence and fraud) to avoid your entire liability cap being struck out by the court.

What are indemnities?

Indemnities are often confused with guarantees as both are contractual obligations, however, a guarantee is a secondary obligation as it depends on a third party breaching their obligations, an indemnity isn’t dependent on any other party fulfilling any other obligation.

The benefit of an indemnity is you can cover remote losses that you wouldn’t necessarily get from a straight breach of contract. You should determine what the main risks are in your contract and draft your indemnities around that.

However, it is important to remember that the value of the indemnity is only as good as the financial stability of the indemnifier!