Perspectives

Minimize Risk with Smart Contracting

News WFJ Law Firm

Strong contracts are the foundation of every successful business relationship. Without proper protections, businesses can face significant financial risk, disputes, and the possibility of non-payment. To minimize these risks, it’s essential to include specific provisions in every contract. Here are the key clauses that should be present in your contracts:

Payment Terms

What: Defines payment schedules, methods, penalties and consequences for late payment.

Why: 

  • Ensures Cash Flow
  • Reduces Financial Risk Against Late or Missed Payments
  • Sets Clear Expectations

Key Elements:

  • Payment Terms
  • Late Payment Penalties
  • Security Interests
  • Dispute Resolution

 

Limitation of Liability

What:

  • A contract provision that caps the amount and types of damages one party can recover from the other.
  • Protects businesses from excessive claims and financial exposure in the event of disputes or equipment failure.
  • Sets a maximum financial responsibility for the business.

Why: 

  • Avoid exposure to excessive damages from customer claims.
  • Help dealers estimate and manage their potential liability in worst-case scenarios.
  • Protects businesses from liability from unseen circumstances.

Examples:

  • Monetary Cap
  • Exclusion of Certain Damages
  • Time-based Limits

 

Indemnity Clauses

What: Contract provision where one party agrees to compensate the other for certain damages or losses.

Why:

  • Mitigates Financial Risks
  • Avoids Liability from Damages Caused by Misuse
  • Coverage for 3rd Party Claims

Key Elements:

  • Scope of Indemnity
  • Types of Claims
  • Geographical & Temporal Limits

 

 

Insurance

What: Contract provision requiring one or both parties to maintain specified insurance coverage.

Why:

  • Transfers Risk from the dealer to an Insurance Company
  • Ensures Financial Protection for Both Parties in Case of Loss or Liability

Key Types: 

  • General Liability
  • Property
  • Product Liability
  • Worker’s Compensation

 

 

Price

What: Cost for goods/services-protects against misunderstandings, unauthorized discounts and potential financial losses.

Why:

  • Avoids Disputes
  • Adjustment Clauses (Price Adjustment Mechanisms for Raw Material Price Changes or Fuel Surcharges.)
  • Escalation Clauses (Allows for Gradual Price Increases.)

Key Components:

  • Fixed vs Variable Pricing
  • Payment Terms
  • Currency & Exchange Rates

 

Performance Dates

What: Deadlines for:

  • Delivery of Equipment
  • Completion of Service
  • Payment Milestones

Why:

  • Establishes clear timelines to avoid misunderstandings
  • Holds parties responsible for meeting their contractual obligations
  • Prevents delays that can lead to operational disruptions or financial losses

Key Protections:

  • Delay Clauses
  • Extension Provisions
  • Force Majeure

 

Security Agreement & Repossession

What: Legal document that grants a lender a security interest in the equipment sold, ensuring the right to repossess the equipment if the buyer defaults.

Why:

  • Reduce risk if buyers fail to meet obligations
  • Provides strong negotiation power if a customer defaults or requests an extension
  • Outlines precise legal remedies available to the dealer, ensuring smoother enforcement

Key Components:

  • Collateral Identification
  • Obligations of the Buyer
  • Default Conditions
  • Right to Repossession

 

Warranty

What: 

  • Contractual promise by the seller regarding the condition, performance, or lifespan of the equipment sold
  • Express Warranties: Assurances made about the product
  • Implied Warranties: Automatically applied under the law

Why:

  • Limits Disputes

Strategies:

  • Define Terms Clearly-specify duration, coverage limits, and conditions for repair
  • Exclude Certain Warranties-use disclaimers to avoid unintended implied warranties
  • Set reasonable limitations

 

Force Majeure

What: 

  • Contract provision that frees parties from liability or obligation for events beyond their control
  • Natural disasters
  • Government actions or regulations
  • Labor strikes or civil unrest
  • Pandemics or public health emergencies

Why:

  • Mitigates risk
  • Provides contract flexibility
  • Avoids breach of contract

In Practice:

  • Supply chain disruptions
  • Service interruption

By including these key provisions in every contract, your business can reduce financial risk, avoid disputes, and protect itself from non-payment. Ensuring that contracts are thorough and well-structured is essential for long-term business success. If you need assistance drafting or reviewing contracts, working with experienced legal counsel is a proactive way to safeguard your business interests.

If you have questions about contract provisions or need legal support, contact WFJ today. Our team of experienced attorneys can help you create robust contracts that help protect your business from risk and ensure your financial stability.

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