Legal contracts are the backbone of any commercial transaction, defining the rights, obligations, and expectations of the parties involved. While every contract is unique, there are certain clauses that frequently become the subject of intense negotiation due to their significance and potential impact on the parties' interests. In this article, we will delve into the seven most negotiated clauses in commercial contracts, exploring the reasons behind their significance and providing insights into the aspects that are commonly negotiated.

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We are not covering key commercial clauses like Payment terms, Pricing, Scope of work/services as those are the bedrock of any commercial negotiation and are not technically legal clauses

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7 most negotiated clauses in a commercial contract:

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Indemnification

Indemnification clauses are designed to allocate risk between the parties by requiring one party to compensate the other for potential losses or damages arising from the contract. These clauses are heavily negotiated because they can have significant financial implications and can shift the risk burden substantially. Some of the heavily negotiated aspects in an indemnification clause are:

• Scope of indemnification: Parties may negotiate the specific types of claims or losses that are subject to indemnification, such as third-party claims, intellectual property infringement, or breach of representations and warranties.
• Limitations and caps: Parties often negotiate limitations on the indemnification obligations, such as caps on the maximum liability or exclusions for certain types of damages (e.g., consequential or punitive damages).
• Indemnification procedures: Parties may negotiate the procedures for handling indemnification claims, including notice requirements, control of defense, and settlement provisions.

Intellectual Property (IP) Rights

IP clauses are critical in contracts involving the creation, use, or transfer of intellectual property, such as patents, trademarks, copyrights, or trade secrets. These clauses are heavily negotiated because they can have long-lasting implications for each party's ability to exploit and benefit from their intellectual property assets. Examples of negotiated aspects:

• Ownership and assignment: Parties may negotiate the ownership and assignment of intellectual property rights arising from the contract, including background IP (pre-existing IP) and foreground IP (IP created during the contract).
• Licensing terms: Parties may negotiate the scope and terms of any licenses granted for the use of intellectual property, including exclusivity, sublicensing rights, and royalty payments.
• IP enforcement and protection: Parties may negotiate provisions related to the enforcement and protection of intellectual property rights, such as obligations to pursue or defend against infringement claims.

Termination Clauses

Termination clauses outline the circumstances under which a contract can be terminated by either party. These clauses are heavily negotiated because they can have significant consequences for both parties, affecting their rights, obligations, and potential liabilities. Examples of negotiated aspects:

• Termination grounds: Parties may negotiate the specific grounds for termination, such as material breach, insolvency, or change of control.
• Notice periods and cure periods: Parties may negotiate the required notice periods for termination and any grace periods or opportunities to cure a breach before termination can occur.
• Post-termination obligations: Parties may negotiate the rights and obligations that survive termination, such as confidentiality obligations, intellectual property rights, and payment obligations.

Representations and Warranties

Representations and warranties are statements of fact made by one party to the other, often relating to the party's legal status, financial condition, or other material aspects of the transaction. These clauses are negotiated because they can allocate risk and provide a basis for potential claims or remedies in the event of a breach. Examples of negotiated aspects:

• Scope and specificity: Parties may negotiate the breadth and specificity of the representations and warranties, as well as any limitations or qualifications.
• Survival periods: Parties may negotiate the duration for which the representations and warranties survive after the contract's effective date or closing, affecting the timeframe for potential claims.
• Remedies for breach: Parties may negotiate the remedies available in the event of a breach of representations and warranties, such as indemnification, termination rights, or damages.

Confidentiality and Non-Disclosure

Confidentiality and non-disclosure clauses are essential in contracts involving the exchange of sensitive or proprietary information, such as trade secrets, financial data, or business strategies. These clauses are negotiated to protect the parties' interests and prevent the unauthorized disclosure or misuse of confidential information. Examples of negotiated aspects:

• Definition of confidential information: Parties may negotiate the scope and definition of what constitutes confidential information, including any exclusions or limitations.
• Permitted disclosures: Parties may negotiate exceptions or permitted disclosures of confidential information, such as disclosures required by law or to professional advisors.
• Obligations upon termination or expiration: Parties may negotiate the obligations related to the return or destruction of confidential information upon termination or expiration of the contract.

Limitation of Liability

Limitation of liability clauses seek to cap or limit the potential damages or liabilities that one party may be subject to in the event of a breach or other contractual claim. These clauses are negotiated to manage and mitigate risk exposure for both parties. Examples of negotiated aspects:

• Types of damages excluded: Parties may negotiate the types of damages that are excluded from liability, such as consequential, indirect, or punitive damages.
• Liability caps: Parties may negotiate caps or limitations on the maximum amount of liability, either as a fixed amount or tied to certain metrics (e.g., fees paid, contract value).
• Exceptions to limitations: Parties may negotiate exceptions to the limitation of liability, such as for gross negligence, willful misconduct, or intellectual property infringement.

Governing Law and Dispute Resolution

Governing law and dispute resolution clauses establish the legal framework and procedures for resolving any disputes that may arise under the contract. These clauses are negotiated to ensure that both parties have a clear understanding of their rights and obligations, and to provide a fair and efficient mechanism for resolving disputes. Examples of negotiated aspects:

• Choice of law: Parties may negotiate the governing law that will apply to the interpretation and enforcement of the contract, which can have significant implications for the parties' rights and remedies.
• Dispute resolution mechanisms: Parties may negotiate the specific mechanisms for resolving disputes, such as litigation, arbitration, or alternative dispute resolution processes.
• Venue and jurisdiction: Parties may negotiate the venue and jurisdiction for resolving disputes, which can impact the costs, convenience, and strategic advantages for each party.

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List of negotiated clauses varies across type of contracts:

The list of the seven most negotiated clauses in commercial contracts is generally applicable to a wide range of contract types across various industries. However, certain clauses may take on greater significance or have unique negotiation points depending on the specific context and nature of the transaction. Here are some examples of how these clauses may be particularly relevant in different contract types:

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It's important to note that while these clauses are commonly negotiated, their specific terms and negotiation points will depend on the unique circumstances of each transaction, the parties involved, and the industry-specific practices and regulations.

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Conclusion

While these seven clauses are frequently the subject of intense negotiation in commercial contracts, it is important to note that every contract is unique, and the specific negotiation points will depend on the nature of the transaction, the industry, and the parties' respective interests and risk tolerances. Engaging experienced legal counsel and negotiators is crucial to ensure that the contract adequately protects the parties' interests and provides a solid foundation for a successful commercial relationship.

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Sources for more reading on this topic:

1. "Drafting and Negotiating Commercial Contracts" by Mark Anderson and Victor Warner (Aspen Publishers)
2. "The Negotiation Book" by Steve Gates (John Wiley & Sons)
3. "Negotiating Commercial Contracts: Analysis and Writing Practice" by Paul J. Zwier (Carolina Academic Press)
4. "The Harvard Negotiation Project" (Harvard Law School)
5. "The Negotiation Experts" (online resource and training platform)