Selected contractual clauses – what provisions should we focus on while signing a contract?

This article answers the following questions:

• What are contractual clauses and what can they define?
• What provisions should we focus on while signing a contract?
• Are contractual clauses worth using?

Contracts functioning in today's commerce have become increasingly more expanded, with a higher number of provisions. This is usually positive as it shows that entrepreneurs have greater legal awareness and are willing to secure their interests by including clauses which enable them to pursue their claims or improve the safety of business information. Before signing a contract, it is advisable to take a good look at it and consider the factual meaning of its provisions, especially due to the fact that, in practice, even those clauses which are basic and standard by all appearances may cause plenty of unexpected trouble. Therefore, what should we pay attention to? Let us go through some examples of contractual clauses which may cause problems.

What are contractual clauses and what can they define?

Contractual clauses are fragments of a contract which appear in its separate part and regulate specific rights and obligations of the parties to the particular contract.

There are standard contractual clauses which contain terms that are routinely included in commercial contracts. They may impose a non-competition ban, formulate principles of confidentiality which the parties must follow, or stipulate liquidated damages.  

What provisions of standard contractual clauses are worth analysing before entering into a contract?

Which clauses are worth taking a closer look at? Every lawyer will say that the right answer to this question is: all of them :) . However, in this article, we will mention a few clauses which are often an object of serious negotiations, or, vice versa, they contain standard contractual provisions, but are so important that we should always pay close attention to them.

Liquidated damages

Liquidated damages clauses are definitely among the most common ones appearing in commercial contracts. 

What are liquidated damages? Also known as a contractual penalty, liquidated damages are a form of monetary compensation which one party has to pay to the other in the event of non-performance or improper performance of its obligations under the contract.

In addition to securing the primary subject-matter of the contract, liquidated damages may refer to its individual provisions. Nonetheless, parties may only secure non-cash obligations this way (e.g. the obligation of timely completion of works, submitting specific documents, etc.). In addition, in principle, liquidated damages are only due when the breaching party is liable for the breach or for circumstances that have led to the breach and only when damage has actually been caused as a result of this breach, unless it is stipulated otherwise in the contract.

If included in the contract, liquidated damages must be specified as a fixed amount or determined in a way allowing for precise calculation of the amount. Also, the events which give rise to payment of liquidated damages must be included. We also have to remember that liquidated damages may not be grossly excessive – i.e. must be adequate to the obligation it secures. Finally, we also have to consider if we would like to include a provision stating that the party which has sustained damage may claim compensation in the amount exceeding the stipulated liquidated damages. 

Summing up, liquidated damages are generally an effective and popular tool incentivising the parties to comply with the terms of the contract.

Guarantee penalty

Another important contractual clause (which should be distinguished from liquidated damages) is guarantee penalty, also referred to as guarantee performance. A guarantee performance is also a common method to secure parties' interests and is frequently an alternative to liquidated damages. 

A guarantee performance consists in a party to the contract paying a sum of money in case of liability risk occurrence. Such risk may be non-performance (or improper performance) of an obligation caused by circumstances for which the party who is to perform the obligation is not liable. The provisions of the Civil Code on liquidated damages are not applicable to a guarantee performance specified in such a way.

The guarantee penalty provisions are deemed stricter than those on liquidated damages. It stems from the fact that a guarantee penalty is imposed also in the event a party is not liable for the events which have caused damage. In the case of liquidated damages, such liability should not arise (unless it is stipulated otherwise). Furthermore, liquidated damages are regulated by the provisions of the Civil Code (concerning mitigation), while a guarantee performance is not. 

Therefore, it is not possible to claim that a guarantee performance is grossly excessive within the meaning of the provisions on liquidated damages.

Clauses modifying liability

A standard practice, followed by professional entities which enterprises are, is to include clauses modifying the liability of each of the parties in the event of non-performance (or improper performance) of the contract.

By default, a debtor is liable for failure to exercise due care, which, for enterprises, is assessed taking into account the professional nature of their activity (the measure of care is heightened to the level of expectations which one might have of a professional). However, the debtor may release himself or herself from liability by proving that the damage has occurred for reasons not attributable to the debtor. As an alternative, the debtor may be liable on a risk basis (i.e. irrespectively of exercising due care), e.g. when the works are subcontracted. 

A crucial fact regarding this clause is the possibility of expanding or limiting contractual liability to a large extent. The upper limit is liability for wilful misconduct (i.e. causing damage deliberately). In other cases, parties have considerable freedom in determining the scope of liability.

The most common provision modifying liability is limitation of liability to a specific amount of indemnity. It is important that parties limit the extent of liability in a rational manner. In extreme cases, a clause with a very low limitation of liability could be deemed invalid.

The manner of formulating this provision varies as well, a clause modifying liability may simply determine the liability amount or specify the maximum liability as multiplication of the contractual payment or its percentage. This clause may also modify the degree of liability, e.g. exclude liability for unintentional misconduct, stipulate liability only for wilful misconduct, or exclude lost profits from indemnity. 

Miscellaneous clauses

Other clauses which are typically included in contracts are the so-called miscellaneous clauses. These provisions usually appear at the end of a contract, giving it the final touch in matters not directly relating to the subject-matter of the performance.

While there are plenty of miscellaneous clauses, we have decided to select those few which are gaining significance in relations between enterprises from different countries.

Jurisdiction clause

Contracts are frequently made between entrepreneurs from different countries, and that makes it problematic to choose, in the event of a dispute between the parties, the proper court where the dispute must be filed. This problem is solved by specifying in the contract the court which has jurisdiction over the matter.

In this clause, the court (and country) where the dispute will be determined is named. By including such provisions, a lot of time and money can be saved in case a dispute arises. In addition, a jurisdiction clause may be another great tool incentivising entrepreneurs to properly perform their obligations under the contract. The vision of travelling to another country and facing a lengthy court trial (and channelling money into it!) may effectively discourage parties from breaching the contract.

Governing law clause

This clause is used to determine the law which applies in the event of a dispute arising out of a contract. The inclusion of a governing law clause in the contract clearly indicates the country whose law will apply to interpret the provisions of the given contract.

This provision facilitates cooperation between the parties and is important if there is necessity to resolve a dispute between them, and is a commonly adopted solution, usually included along with a jurisdiction clause.

Prevailing language clause

In the era of globalisation and foreign investments, it is not surprising that contracts are often drawn up in two (or even more) language versions. However, without proper provisions, it will not be known which language should be used to clear up any potential doubts or misunderstandings as to the wording of the contract.

Such a problem is relatively easy to avoid as it is enough to indicate the language version which is valid for the interpretation of the contract or which prevails. Such a solution is a standard practice and should not be avoided. 

Are contractual clauses worth using?

So, should we use contractual clauses? The answer to this question is: Yes, we even must :) . Well-thought contractual clauses are a great way to secure the interests of the parties and to make it easier to pursue potential claims. The purpose of these provisions is to establish a sound and solid basis for further cooperation, and they should not be treated marginally. Furthermore, by knowing the substance of the contractual clauses and using them on a regular basis when drawing up contracts, managing a business may be smoother, with limited risk of failure of commercial ventures.  

One must remember, however, that drawing up a good contract (or supplementing it with particular provisions) requires relevant knowledge and experience. If you have any doubts as to the contractual provisions presented by your business partner, or if you would like to draw up a contract which will secure your interests in an appropriate manner, feel free to contact our team of experts.