Whenever they’re close to sealing a deal and about to cross the finish line, sales teams get understandably excited. However, such excitement can result in being careless and making mistakes.
Some mistakes can be quickly recovered from. But if it’s in a contract? That’s going to be hard. If the counterparty isn’t understanding and reasonable, it’s possible that certain mistakes could get quite costly–if not extremely damaging.
By signing a contract, one promises to uphold everything that the contract states. On the surface, it sounds reasonable. But below the surface, there could be something lurking. And if you don’t know what that something is, it could cost your company dearly.
By signing a contract, one promises to uphold everything that the contract states.
Signing contracts without understanding everything that’s written is extremely risky. To avoid this risk, sales teams need to ask for the help of a lawyer, but it may take some time to get a reply. This can slow down the sales cycle and distract legal from more complex tasks. Or, if Sales is feeling impatient, it could open the company up to unnecessary risk.
To simplify the lives of sales teams and lawyers alike, we prepared this list of essential terms and clauses. They frequently (if not always) appear in contracts, so knowing what they mean and require will prevent you from commiting an egregious error. You’ll also have better control over documents and greater protection from contract-related risks. In addition, it will help you deal with contracts with minimal legal involvement, thus speeding up sales cycles.
Essential Clauses That Often Confuse Sales Teams
At first, sales teams might wonder why it’s important for them to know certain legal terms and clauses. Sales is sales and Legal is legal. Two different teams, two different spheres, two different “languages”.
Knowledge of essential legal clauses becomes all the more critical when you realize that 65% of non-legal employees knowingly (and willingly) bypass the Legal department. They cite reasons like “Legal is too bureaucratic” and “Legal is unapproachable”. However, bypassing Legal puts the company at risk in countless ways (if you want to do it, do it the secure way).
Much of Legal’s time gets spent fielding simple questions and dealing with routine matters. By knowing key terms, this will not only cut down on the number of requests sent to Legal, thereby shortening the contracting process, but it will also allow Sales to speak the same language and get on the same wavelength. On top of that, such specialized knowledge will enable Sales to ask the right question to begin with.
Identification of parties
The first clause that needs to be mentioned is the identification of parties and signees. It includes their full names and contact information. A contract party is responsible for all of the obligations they’ve been assigned in the contract. If some obligations are broken, the associated party will bear responsibility.
With international transactions and contracts commonplace, it may not always be clear which country’s law regulates a contract. That’s why it’s important to specify the state or country that has jurisdiction over the contract. This will clarify which laws apply to the agreement.
Unlike the producer, customers probably don’t know all the details about a product. However, clients do have some expectations, and if they’re not met, issues may occur when they start using this product or service. The product description provides information about the product or service’s characteristics that they can review prior to signing the contract.
Warranties and remedies
Warranties describe how your product or service should work, what it should do, and its quality. It also stipulates what your SLA (Service Level Agreement) covers.
Remedies address the need for compensation if something doesn’t follow the warranty. It may be a refund, the replacement of low-quality goods, or the provision of additional services for free.
If customers are unsatisfied with the services rendered or products used, you could suffer losses. Clearly defining warranties and remedies is crucial as it decreases the risk of customers suing you if something does not work as expected.
This clause describes the terms of delivery for your product or service. It should outline delivery costs, timeframes, and whether you’re responsible for the delivery or if a customer should take care of it.
Also, it’s pretty common for a sales agreement to state that you are not liable for any damages once you hand products over for delivery, or if products can’t be delivered due to natural disasters, war, or other situations outside one’s control. This is referred to as “Force Majeure”.
Limitations of liability
There are many things outside your control that can cause issues when delivering goods or services. That’s why limitations of liability exist. They state that you cannot be held responsible for damages caused by such events, and that you don’t have to replace products or services even if it’s financially feasible for you. Companies usually try to be clear about circumstances and situations so that they don’t have to take responsibility. It saves them a lot of time and money in the future.
Billing and payment
Another important clause stipulated in contracts is the customer’s payment obligations. Without it, some disagreements may arise, which could lead to breaches and litigation. By indicating sums, payment dates, and possible payment methods, such issues can be avoided.
Here are some common payment obligations:
- Cash in advance: The payment is made before the ownership of the good or service is transferred.
- Letters of Credit: On behalf of the buyer, a bank commits to making a payment to the provider so long as the terms and conditions in the LC have been met.
- Documentary Collection: The provider entrusts the collection of the payment to the bank. The bank issues payment documents to the customer, at which point the payment is made.
- Open account: An arrangement is made between a business and a customer where the customer pays the business at a later date.
- Consignment: The supplier is paid only after the reseller has sold the goods to the end customer.
These are just a few possible payment conditions. There are many others, such as the customer needs to pay a portion before delivery and the rest after, payments are made in installments, and many more.
Depending on the product, you can provide an amount of time for a customer to inspect their goods. If a customer isn’t satisfied, they are able to ask for a replacement or refund. Terms like this allow your customers to ensure that the items bought meet the description in the agreement. This also strengthens trust in your organization.
Your way of doing business may be unique, and you most likely have some commercial secrets. However, when working with customers, companies may disclose some confidential information, approaches, or know-how that distinguish them from competitors. This clause is put in contracts to ensure this information will be kept confidential.
Dispute resolution or arbitration
Litigation is time-consuming and expensive. This clause prevents both parties from filing lawsuits and limits dispute resolution to arbitration or mediation. Parties have to go to a neutral third-party arbitrator to resolve their disagreements. This alternative is less costly and time-intensive than going to court.
Parties sign contracts because they want to work together. Nevertheless, certain circumstances in the future can give them reasons to terminate the deal. For example, your client wants to change providers, or cooperation with you is not as profitable as expected.
This clause allows the terms for termination to be defined for both sides. On top of that, you can determine the conditions and timeframes that allow a customer to terminate the deal. Thus you ensure payment for your time and effort.
In simple words, it’s an estimate of the costs of damages in case of a customer’s breach. This way, organizations insure themselves from a potential violation of contract terms. The sum a client should pay in case they violate the contract should compensate for the damages a company suffered. But if the amount isn’t reasonable, it’s unlikely that the court upholds this clause.
This is an insurance policy for your client in case they are sued for actions related to the usage of your product. Also, it determines your responsibility if your product mishandles private data or infringes on another’s intellectual property.
Entitlements specify what exactly a customer gets. For a business, it means you can later sell additional or new features to the customer. For example, when a client buys the basic version of some software, they can later upgrade to the premium version.
Modern companies often gather clients’ data to use for building sales strategies. But frequently customers don’t want their data to be gathered because of privacy concerns. If the data policy is clearly outlined in the contract, clients don’t need to worry about how their data is used.
Assignment or delegation
Unexpected situations may occur anytime, and you may not be able to personally fulfill a customer’s order. If there’s a possibility of such a situation, companies include this clause in a contract. It allows them to assign their responsibilities to another service provider or seller. Thus customers know that their order will be fulfilled in any case.
Commercial contracts usually contain standard terms. For non-legal units that deal with contracts, it’s important to understand the meaning of words that are frequently used in contracts. By not knowing them, there’s a risk that something will be interpreted incorrectly, which can cause disputes.
Literally meaning “greater force”, force majeure refers to catastrophes, earthquakes, meteorites, revolutions, terrorist attacks, and other events that are typically out of one’s control. Force majeure typically allows the obligations of a contract to be temporarily left unfulfilled until a later date when the situation stabilizes.
Unless it’s specifically stated, it’s not possible to terminate a contract just because you want to. Most contracts include certain conditions that explicitly state when one or both parties can terminate the agreement.
In simple words, an indemnity is a promise to provide compensation for a loss. If the actions of one party cause losses for another party, it must reimburse those losses as indicated in the contract.
A guarantee is the assurance that terms and conditions stipulated will be respected, and that the product or service will meet the declared quality. Breaking the guarantee is a breach of contract and some amount of compensation is needed.
Alternative dispute resolution
This provides the possibility to settle disputes without resorting to litigation. Avoiding litigation saves a lot of time and money for both sides. Forms of alternative dispute resolution include arbitration, negotiation, and mediation.
Some clauses are commonly used in almost all sales contracts. Still, each business is unique, and its specifics determine which clauses need to be added. Not only is it useful to know them, it also helps protect your business.
However, there’s no need to keep it stored inside your memory. With AXDRAFT’s clause library, you’ll no longer have to worry that you missed a critical clause or that you inserted it in the wrong place. Thanks to the library’s collection of standardized clause templates, you can rely on them to draft contracts that need no additional legal review. Book a demo with us and we’ll show you how it works.