Business contracts 101

Types of everyday contracts
What is an NDA?
What is an engagement letter?
What is a non-reliance letter?
What is a memorandum of understanding?

Contract law basics
What is an indemnity?
What is 'reasonable endeavour'?
How is jurisdiction different from governing law?
What about arbitration clauses?
Why is it important to include accurate contact information in the ‘Notices’ provision?
What does 'third party right' mean?

* Nothing on this website including this page shall be taken to constitute legal advice or relied upon in any way. Reach out for specific advice and/or representation for your situation. 

NDA is ‘non-disclosure agreement’ abbreviated, also known as confidentiality agreement (or 'confidentiality undertaking' in contexts such as syndication of loans). Confidentiality may also be protected under general law, but what is confidential could depend on a wide range of circumstances and cost more to figure out in court if you have no NDA in place.

If you are on the receiving end, it would be prudent to spell out who else needs to access the information (e.g., your advisers), set an expiry date and limit your obligations under a competently negotiated NDA.

At some point, professionals (e.g., valuers, brokers, auditors, consultants) will be engaged to further grow your business. Prospective investors typically lead this process in funding rounds, but the company may be asked to pay for their fees and disbursements. Competent legal review helps ensure that the scope of work is fit for purpose, fees would be incurred responsibly, and the instructing parties are regularly updated on progress, for example.

Opinions are typically issued by legal and financial advisers only for the benefit of their client (which could be the company or a specific lender, for example). Before these opinions could be passed on to prospective investors, it is common for the advisers to require a ‘non-reliance letter’ protecting themselves from any third-party claims.

While this is market standard, the drafting needs careful legal review so that it does not impose unreasonable obligations on the company.

A complex transaction can take many months to complete, so it is common to set out the broad commercial terms as a basis to facilitate further negotiations. If the parties do not wish to be bound at this stage, precise legal drafting is needed to avoid unnecessary disputes in the future.

Without getting into precise legal definitions*, the ‘standard form’ prepared by one side may require the other side to indemnify them against (i.e., pay for) third party claims and other potential liabilities.

Depending on the contract, this could be an unreasonable requirement, and a competent legal adviser would help you agree on an alternative solution that is acceptable to both parties.

* ‘Guarantee’ and ‘indemnity’ have distinct meanings under English law. Consult a lawyer if you need specific advice.

Generally, requirements under a contract are strict (i.e., no ‘ifs’ or ‘buts’ unless explicitly set out). For example, if you agree to delete the other side’s data in 30 days but did not do so for whatever reason, it could be a breach of contract. Depending on how the contract is drafted and the state of your relationship, unintended consequences may follow.

For some leeway, it makes sense in some situations to suggest that you would ‘use reasonable endeavour’ to perform an obligation. In a broad sense*, you are only promising to try to do so, and would not be held in breach if you run into obstacles out of your control, for example.

* The requirement of terms like ‘reasonable endeavour’ and ‘best endeavour’ could be technically different. Consult a lawyer if you need specific advice.

In plain language, ‘jurisdiction’ refers to where a party could sue and rely on / be sued and bound by a court’s order. Governing law refers to the law that will be applied by that court. 

Therefore, it is possible to choose the English court for any disputes related to a contract, but specify German law (for example) if this is the preference of the parties. In practice, it usually makes sense to specify the same legal system for both, but a good lawyer will know when it does not.

In cross-border business, a neutral court and set of laws may be preferable. For example, companies from country A and country B may choose the courts and laws of country C to avoid any home advantage to either side.

Even after obtaining a final court order in one jurisdiction, it can be very costly, time-consuming and generally difficult to enforce it elsewhere (e.g., where the opponent’s assets are located). In comparison, arbitral awards can be enforced virtually around the world*, and the parties have a lot more freedom to agree on who could decide their cases, where and how the arbitration should be done, etc.

In practice, a common mistake in contracts is having both a jurisdiction clause and an arbitration clause. In many cases, significant costs could be incurred just to figure out whether a dispute should be heard in court or by arbitration.

* More than 170 countries are signatories to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Generally, only the parties to a contract can rely on it (the legal term is ‘privity of contract’). This poses a problem when it is only part of a larger picture (e.g., lenders may need to rely on an auditor’s opinion issued for a company; a broker may be caught in the middle if the downstream recipient suffers losses from any inaccurate information that it passed on). If a third party needs to rely on a document (in addition to those directly involved), it is prudent to explicitly provide for this in the contract.