Contract clauses, one at a time

A logo on someone else's shopfront, packaging or website says the owner stands behind what is sold there. The licence clause decides how far that promise reaches and what the owner can do when the licensee lets the standard slip.

The phrase appears in contracts all over the world and has legal effect in only one of them. Used outside the United States it is decoration, and used inside it without a fallback it fails more often than it works.

The word consequential has no settled meaning in Australian contract law, and that is the whole problem with the clause. Two parties can sign it believing different things were excluded.

The capitalised disclaimer copied from an American licence does very little in Australia and can make things worse. What survives here is a narrower clause that says what it is doing.

The clause is only as wide as its own list, and the event that stops a business is usually the one the drafter never imagined. What saves a contract is the structure around the list, not the list itself.

The phrase turns up most often in American drafting, where defend, indemnify and hold harmless run together as one formula. Read in Australia it usually adds little that an indemnity and a release do not already do, which is why it pays to know what the words carry.

An indemnity is the one clause in a commercial contract with no natural ceiling. Reading it properly means reading the trigger, because everything after the trigger is arithmetic.

An indemnity from a business with no cover is a promise, not a remedy. The insurance clause turns the risk section of a contract into something collectible.

Two contracts can both cap liability at twelve months of fees and produce figures ten times apart, because of which twelve months they count. The formula is the clause, not the phrase.

A liability clause is read backwards in a dispute, starting at the carve outs. A cap with four exceptions is not really a cap, and a cap with none is rarely enforceable.

A delay claim without this clause turns into an argument about lost trading, months after the job has finished and the evidence has gone cold. A rate agreed at signing replaces that argument with arithmetic, as long as the rate can survive the penalty test.

Symmetry is not fairness by itself. Two parties with very different exposures can sign identical wording and end up with a clause that only ever runs one way.

Two consultants make the same mistake on one project and one of them has gone under. Whether the survivor pays half or all of it is decided by a clause most people skip.

A release is the only clause in most settlements that actually ends anything. Everything else is administration around the two questions of who is released and from what.

Two parties agree who carries a risk, one of them insures it, and then the insurer pays out and sues the other party anyway. This clause closes that loop, which is why it turns up in almost every lease and equipment hire agreement.

A warranty is worth what its remedy is worth. A twelve month promise whose only answer is a repair the supplier controls is a very different bargain from one that gives money back.

An index linked increase looks mechanical and still produces disputes, almost always because the clause names the index loosely. The fix is to name the series, the quarters and the arithmetic.

A cross border invoice can be paid in full and still arrive short. The clause decides whose problem that is before the first transfer rather than after it.

A deposit does two jobs at once, funding the early cost of a job and proving the customer is serious. The clause only works if it says which of those jobs it is doing.

Nobody argues about the fee on the first invoice. They argue about the flight, the parking and the stock photography licence, because nothing in the contract said who was paying for those.

A price written without a tax position is a price that is ten per cent wrong to somebody. The clause exists to put the argument before the first invoice instead of after it.

A payment term is only as good as the invoice that triggers it. Most late payments that look like bad behaviour start as an invoice missing something the customer's system insists on.

Interest on an overdue invoice is rarely collected in full, and that is not the point of the clause. Its value is that it gives a small supplier something concrete to write in the second reminder.

Milestones sound like a scheduling device and behave like a credit control device. The stage that is worth arguing about is never the first one, it is the last one, where most of the margin usually sits.