23 Contract Clauses You Shouldn’t Ignore in Procurement

Learn Contracts if you want to fast track your Procurement Career

Contracts are the backbone of business transactions, and procurement professionals play an essential role in drafting and reviewing them.

Yes - I’m being serious to any of you doubters there.

A well-drafted contract can help to protect a company's interests, minimise risks, and avoid disputes.

And yes, I know you aren’t in legal, but where I come from, that doesn’t matter.

See, at 10x Banking, I headed up the Contract Management team there, which was me, and my Alternative Legal Services Provider. I reported to the Director of Supplier Management with a dotted line into the GC (the best I’ve had the privilege of working with).

Before that, I spent 6 months at a Defence Consultancy sorting out their Subcontracts team, which didn’t exist, to lead it and build the initial policies and processes that the new members would follow prior to iterating them.

And the years before, I’ve been part of large-scale defence programmes as a team member or leading them from the sourcing and contract management sides.

So I feel like I’ve got some skin in the game to talk to you about this.

This article will discuss the top contract clauses that every procurement professional should know.

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1 - Term

The term clause is valuable because it clarifies the length of time the contract will be in effect, which is important for planning and budgeting purposes.

This clause can be fixed, or it can be a rolling term that renews automatically unless either party chooses to terminate the contract.

I see auto-renewal clauses get hate all the time but I find them incredibly useful with software. Imagine you couldn’t negotiate a new contract with your major SaaS solution that kept your business running and you had a blackout of services as you went beyond the end date.

That sucks.

People who complain about auto-renewal aren’t setting their contracts up correctly.

You can tie down the price increases at the start so you know that your auto-rewewal, let’s say in a year’s time, might only cost you 3% more. Or it might be linked to an index (I’m not a fan of this especially when you enjoy a low inflationary period as most of us know…it’s only going up).

Tie this together with a vendor and contract lifecycle management solution like Gatekeeper (yes, blatant shout out as I head up Community there and brought them into 10x Banking) to track these dates and automate your renewal process.

It makes it easy.

Don’t be afraid of auto-renewal.

Remember that it is important to include a clear start and end date in this clause, as well as any provisions for extensions or renewals, and you’ll be just fine.

2 - Choice of Law

The choice of law clause specifies which laws will govern the contract, which helps to ensure consistency and predictability in the event of a dispute.

This clause can be particularly important in international contracts, where different countries may have different legal systems.

Let’s break this down even further.

You don’t want to draft in English Law, considering the Laws of England and Wales to then find that you need to deal with German Law and you have ZERO idea what that entails.

Be bullish on Choice of Law.

I’ve had to use ALSP in the past to help draft state law for New York (similar to English Law), Delaware, and various European jurisdictions (including Sweden).

3 - Jurisdiction

The jurisdiction clause determines which court or legal system will have authority over the contract. This can be particularly important in international contracts, where different legal systems may exist in different countries.

What I wrote for Choice of Law kinda applies here.

You don’t want to have your Choice of Law, let’s call it English Law, interpreted by a Russian Court and Legal System.

4 - Dispute Resolution

The dispute resolution clause outlines the process for resolving disputes that arise between the parties, which can help to minimise legal costs and maintain good business relationships. This clause can include negotiation, mediation, or arbitration processes.

It’s likely your General Counsel will have a preferred method here so become good friends with them and get this locked down in a contracts playbook.

Heck, all of this should be in your contracts playbook.

5 - Termination

The termination clause specifies the conditions under which the contract can be terminated. This clause can include provisions for termination by either party, termination for cause, or termination for convenience.

It is essential to include a clear understanding of the rights and obligations of each party in the event of a breach of contract or other legal claims.

This clause should also specify any consequences of termination, such as payment of damages or return of goods.

Genuinely - this is such a vital clause and it can screw you over if you don’t get this right.

Really focus in on what gives rise to termination (your big ticket items that must not happen) and the consequences of it - especially if you’ve shared Intellectual Property with them.

6 - Limit of Liability

The limit of liability clause specifies the maximum amount of damages that one party can recover from the other party in the event of a breach of contract or other legal claim.

This clause helps to define the parties' respective risks and liabilities.

Remember, you’ll likely need to carve out different Limits of Liability.

You might have a, what I call “General Liability“ that covers all breaches of contracts except for the carved-out ones.

Then you might have a super cap on Data Privacy breaches of £5 Million (amounts are arbitrary here).

You might try and get an uncapped/unlimited liability for cyber attacks that have caused you a direct loss.

7 - Indemnification

The indemnification clause requires one party to compensate the other party for losses incurred as a result of the contract.

Indemnification is a legal term that refers to the act of compensating someone for a loss or damage they have suffered.

In the context of contracts, an indemnification clause is often included to provide protection against potential losses or damages that one party may suffer as a result of the contract's execution.

This clause helps to allocate risk and protect against unexpected losses.

How?

The party that provides indemnification (the "indemnifier") promises to reimburse the other party (the "indemnitee") for any loss or damage they may incur that is related to the contract. The specifics of this arrangement, including what constitutes a loss and the extent of the indemnification, are usually outlined in the contract's indemnification clause.

It is important to include a clear understanding of the scope of indemnification and any limitations or exclusions. Get this wrong and your “indemnification event” probably won’t be covered.

This can be useful for Breach of Intellectual Property, among many other “events”.

This clause should also specify the process for making a claim for indemnification and any consequences of a failure to indemnify. This could be when someone brings a claim against you for breach of Intellectual Property but the IP actually sits with the vendor. So they protect you by covering the costs and taking on the legal action - not you.

8 - Service Level Agreements

The service level agreement clause defines the level of service that the contracting parties will provide. This clause can include provisions for response times, availability, or quality of service.

It is important to include clear metrics for measuring service levels and any consequences of a failure to meet those metrics.

This clause should also specify any rights of the customer to terminate the contract or receive compensation in the event of a failure to meet service levels.

9 - Service Credits

The service credit clause provides a financial incentive for the service provider to meet the service level agreements.

This clause can include provisions for monetary compensation or discounts on future services.

It’s directly linked to the SLA point above.

This clause should also specify any process for claiming service credits, and any limitations or exclusions.

Don’t overdo it here - most jurisdictions don’t permit clauses in contracts that penalise a party.

10 - Delivery Location

The delivery location clause specifies where the goods or services will be delivered.

This clause helps to ensure that both parties understand their obligations and that the goods or services are delivered to the correct location.

It is essential to include a clear understanding of the responsibilities of each party for delivery, as well as any consequences of a failure to deliver to the correct location.

I’ve dealt with countless contracts and Purchase Orders that have the delivery address as the legal registered address when the actual delivery address is somewhere completely different. The drafter of the contract or the details of the PO from the vendor’s side can often not be aware of this, so stay on top of it.

11 - Intellectual Property

The intellectual property clause specifies the ownership and rights to use intellectual property, such as patents, trademarks, and copyrights.

This clause helps to protect the parties' valuable intellectual property rights.

It also informs you of how much you can do with each party’s IP.

For example, for the duration of the contract, you may provide access to your software platform as the consultancy you’ve hired to code a part of it cannot do so without it. You’d likely ensure that their deliverables belong to you, and that they have ZERO rights to use that code or your existing code anywhere else.

12 - Payment Terms

The payment terms clause specifies the terms and conditions of payment for goods or services provided under the contract.

This clause helps ensure that both parties understand their obligations and that payment is made promptly.

It is important to include a clear understanding of the payment schedule and any consequences of a failure to make payment.

This clause should also specify any process for resolving payment disputes.

I pay (get it), particular attention to this clause as a lot of my previous CFOs want payment in arrears and 30 days after we’ve received the invoice.

Keep on top of this to keep your finance friends happy.

13 - Precedence Clause

The precedence clause specifies which provisions of the contract take precedence over others in the event of a conflict.

This clause helps to ensure that the parties understand the hierarchy of the provisions and that the contract is applied consistently.

It is important to include a clear understanding of which provisions take precedence and any limitations or exclusions.

Super important when there are additional documents that are linked to the contract such as a statement of work, data processing agreement, or any hyperlinked policies that become part of the contract.

14 - Audit

The audit clause gives the right to audit the other party's records, site, premises or just about anything that is agreeable to verify compliance with the terms of the contract.

This clause helps ensure that both parties meet their obligations and that the contract is being adhered to.

You’ll find this particularly useful for understanding if your vendors are compliant to any ESG standards or anything else they’ve highlighted in their vendor onboarding response.

It is essential to include a clear understanding of the audit process, as well as any limitations or exclusions.

Keep in mind, the vendor might want to audit you - especially on software contracts to determine the usage.

15 - Renewal

The renewal clause specifies the conditions under which the contract can be renewed.

This clause helps to ensure that both parties understand their rights and obligations.

Renewal may include auto-renewal which gets a lot of hate from procurement on LinkedIn. I don’t necessarily share this view.

I’d much rather have auto-renewal clauses planned out in advance in play.

What does this mean?

When I negotiate the contract, especially if it’s an annual term, we’ll lock in prices for year two, usually capped to a percentage and not an index (more on that later). If it’s software, we can build in flexibility on licenses depending on the SaaS (or whatever variation of XaaS) to ensure we enable scalability.

A couple of other points here - we need good data around Start Date, End Date, and Notice Period Date.

16 - Extension

The extension clause specifies the conditions under which the contract can be extended.

This clause helps to ensure that both parties understand their rights and obligations.

It is important to include a clear understanding of the process for extending the contract, as well as any limitations or exclusions.

The above point I’ve made on auto-renewal applies here about locking in pricing and flexibility.

In the Defence space, we call these Contract Options, and we may well have scoped out an entirely new Statement of Works that wouldn’t start for 5 years if the rest of the research project was successful.

17 - Fees

The fees clause specifies the fees charged for goods or services provided under the contract.

Additionally, you want to ensure that the fees match the bid you’ve received from your vendor.

Also - vendors can be cheeky.

They may sneak in additional costs for in-scope work. Get rid of this immediately.

Beyond that, they may have a built-in rate card or fee card showing their work pricing that goes beyond the scope.

18 - Warranties and Disclaimers

The warranties and disclaimers clause outlines what the vendor will cover if things go wrong.

You’ll likely be familiar with a lot of SaaS providers saying that software comes “as is” and that if things go wrong…tough poop.

I hate this approach.

You need your vendors to stand by their products.

19 - Statement of Work

The statement of work clause provides a detailed description of the work to be performed under the contract.

This clause helps to ensure that both parties understand their obligations and that the work meets the customer's needs.

It is important to include a clear understanding of the scope of work and any limitations or exclusions.

Consider the precedence clause here and ensure that it doesn’t overrule any positive changes you’ve made if the Statement of Work takes precedence.

The best practice method of reviewing would be to review this at the same time of your main agreement.

20 - Price Increase Language

The price increase language clause permits the increase of the price of the goods or services provided under the contract.

This clause helps to ensure that the service provider is compensated fairly and that the customer is aware of potential price increases.

This is needed for long-term contracts or contracts that can be extended beyond their original term.

If you link to an index, say the CPI, be careful of doing this in low inflationary times. As soon as inflation spikes, as it has done in the last year, you’re going to pay way more than if you secure a fixed percentage increase.

21 - Hold Harmless Language

The hold harmless language clause protects one party from legal liability for the other party's actions. This clause helps to allocate risk and protect against unexpected losses.

One party agrees to take on the risk of loss or damage and shield the other from liability.

I don't like this language. It means compensation can be paid out with no proof, only "harm" or loss.

Insurers and investors hate it too.

22 - Hyperlinks

The hyperlinks clause provides links to additional resources or information related to the contract.

This clause helps to ensure that both parties have access to all relevant information.

You need to ensure you've seen the entire agreement and hyperlinked parts can be used to sneak caveats in or deal with something vital like data protection.

It is important to ensure that any hyperlinks are accurate and up-to-date, and that any limitations or exclusions to the use of hyperlinks are clearly specified.

23 - Clarity of Language

The clarity of language clause ensures that the language in the contract is clear and concise, which helps to ensure that both parties understand their obligations and that the contract is applied consistently.

It is important to ensure that the language used in the contract is easily understandable and free of any ambiguity or vagueness.

If this goes to litigation and no one has a clue what the clause means, you’re reliant on the interpretation of a judge...not a fun position to be in.

Final Thoughts

Procurement legends, there are a bunch more contract clauses that could be noted here.

I’ve come at this from an angle of what do I see as the most common clauses across industries and contract types.

If you can get on top of these you’ll set yourself up nicely and widen your impact as a procurement pro.

What would you add to this list?