Key clauses every commercial contract should include

A good commercial contract does two things. It records the deal clearly, and it sets out what happens when something goes wrong. Most disputes we see come down to a clause that was missing, vague, or never read. This guide covers the clauses that carry the most weight.

Start with the commercial basics

Before the legal machinery, the contract has to capture the deal itself. Who are the parties, exactly. What is being supplied, in what quantity and to what standard. What is the price, and what does it include. When does performance happen. These sound obvious, but a surprising number of disputes start because the scope of what was promised was never pinned down.

Our practical tip is to write the scope as if a stranger will have to read it in two years and work out who was right. If it is clear to that reader, it is clear enough.

Payment terms

The payment clause should state the amount, the timing, how invoices are issued, and what happens if payment is late. Include a right to charge interest on overdue amounts and, where appropriate, to suspend work or recover costs of recovery.

This is the clause that protects your cash flow, and it is the one we most often see left thin. A vague payment term is the first thing that bites when a customer slows down.

Term and termination

The contract should say how long it runs, how it renews, and how each party can bring it to an end. Cover termination for convenience if you want the flexibility to walk away on notice, and termination for cause if the other side breaches or becomes insolvent. Spell out what happens on termination, such as final payment, return of property, and which obligations survive.

A clause people forget is what survives termination. Confidentiality, limitation of liability, and dispute resolution should usually continue after the contract ends.

Limitation of liability and indemnities

This is where real money is won or lost. A limitation of liability clause caps or excludes certain losses. An indemnity shifts a defined risk from one party to the other. These clauses can be the difference between a manageable problem and a business-ending one.

In our experience this is the clause most often signed without being understood. A broad indemnity can expose you to losses far beyond the value of the contract. Read these clauses closely, and push back on an indemnity that is wider than the deal justifies.

Confidentiality and intellectual property

If the parties will share sensitive information, include a confidentiality clause. If the work creates intellectual property, such as designs, software, or content, say clearly who owns it and who can use it. Disputes over who owns the IP created under a contract are common and entirely avoidable with a clear clause.

Dispute resolution

A dispute resolution clause sets out how disagreements are handled, often requiring negotiation or mediation before court. It should also state the governing law and jurisdiction, which for most of our clients should be New South Wales. A sensible dispute clause can keep a disagreement out of court and resolve it faster and more cheaply.

Watch the unfair contract terms rules

If you use standard form contracts with consumers or small businesses, the unfair contract terms regime applies, and it now has teeth. Since 9 November 2023, including an unfair term in a standard form contract is not just void, it can attract significant penalties, with maximums for a business reaching into the tens of millions of dollars. A small business contract is broadly caught where a party employs fewer than 100 people or has turnover under $10 million.

This is a real shift. Terms that businesses used for years, such as broad unilateral variation rights or lopsided termination rights, can now cost far more than the contract is worth. If you rely on standard form contracts, they should be reviewed against these rules. There is a separate article in this series on the unfair contract terms changes.

How we approach a contract review

When we review a commercial contract, we read it for the deal first and the risk second. Does it say what you think you agreed, and what happens on the day it goes wrong. The clauses above are where we focus, because they are where the money and the risk sit. A short review before you sign is far cheaper than a dispute after.

Frequently asked questions

What is the most important clause in a contract? There is no single answer, but the payment, termination, and limitation of liability clauses carry the most risk for most businesses.

Do I need a lawyer to review every contract? Not every one, but any contract that is high in value, long in term, or uses someone else's standard terms is worth a review before you sign.

What are unfair contract terms? Terms in a standard form consumer or small business contract that create a significant imbalance, are not reasonably necessary to protect a party, and would cause detriment if relied on. They are now unlawful and can attract penalties.

Which law should govern my contract? For most NSW businesses, New South Wales law and jurisdiction. The governing law clause should say so clearly.

Keep reading

• Corporate and commercial law
• Unfair contract term changes: what they mean for small business
• Why your start-up needs a shareholders agreement

This article contains general information only and is not legal advice. For advice about your situation, please contact us. Liability limited by a scheme approved under Professional Standards Legislation.