When drafting a contract, aim to avoid court but prepare as if litigation is inevitable. In commercial transactions and disputes, the crux of a case often hinges on the details of the agreements. The following are common contractual conundrums and practice tips for addressing them. We hope this article will help you in understanding the common key provisions of a contract, and achieving comprehensive and favourable agreements, including releases and settlement agreements in your subrogation recovery matters. While these tips are from a Canadian lawyer’s perspective, they generally hold true internationally. For more specifics, consult local counsel as laws may vary by jurisdiction.
I. Ambiguity Clauses
Ambiguity in a contract is generally held against the drafter.[1] Courts tend to interpret unclear language against the party that wrote the contract. Language barriers can compound this problem on the international level.
Practice tip: To mitigate risk, include an ambiguity clause that expressly states that any ambiguity will not be construed unequally against any party, including the drafter.
II. Jurisdiction and Governing Law Clauses
Though similar, these clauses have distinct functions:
- Jurisdiction clauses also known as forum selection clauses, specify the method of dispute resolution, such as courts, arbitration, or expert determination. They may also outline the procedural elements or rules to be followed within these contexts.
- Governing law clauses specify the legal framework governing the contract and any disputes arising therefrom. For example, English law, Australian law, laws of the State of Washington, etc.
Both clauses are crucial in determining how and where disputes will be resolved. Consider the type of contract, the nature of potential disputes, and the parties involved when drafting such clauses. Different jurisdictions can favour plaintiffs or complicate asset seizures. When deciding the best rules and locations for resolving potential disputes between the parties reflect on the laws of the site of your current operations, expanding operations, the other party’s operations, the location of goods or assets, or a neutral location.
III. Limitation of Liability, Indemnity and Warranty Clauses
- Limitation of liability clauses allocate risks between parties, often waiving liability for certain disputes.
Practice tip: Use precise language, as courts require express language to limit legal recourse.[2]
- Indemnity clauses relate to indemnification and liability allocation with respect to third parties. For example: “party A will indemnify and hold harmless B for any and all losses suffered by third parties due to its performance of the obligations under this contract.” Though generally understood to be synonymous, indemnity clauses are sometimes stated to affect only “losses” and not “liabilities” and relate only to losses incurred, whereas hold harmless language seems to, internationally, be considered to relate to liabilities and losses, both incurred and in the future.[3]
Practice tip: Clearly define the scope, timeline, and coverage of an indemnity clause to avoid confusion with limitation of liability clauses. These clauses ought to be specific as to not overwrite or complicate limitation of liability clauses. If an indemnity provision is worded as “party A will indemnify party B for all losses” – then this, on its face, would not relate to third parties, and may operate as a guarantee of coverage for all future losses, however caused, which is a broad guarantee.
- Warranty clauses guarantee that certain conditions or qualities will be met.
Practice tip: Whether as the guarantor or the recipient of the warranty, specify the quality guaranteed, services or products warranted, and the duration of the warranty term.
IV. Insurance Clauses
Insurance policies may confer unintended benefits to another party, which can bar future claims and increase premiums of the aggrieved party rather than that of the at-fault party.
Practice tips: When drafting insurance clauses, consider:
- What type of insurance each party should obtain;
- What should be insured;
- Who should be covered under each policy;
- How much coverage is needed based on the value of items or services and potential disputes;
- Who will be named and unnamed insureds; and
- Will there be any waivers of subrogation? In the subrogation practice, of course the preference for insurance carriers is that such waivers be omitted.
V. Dispute Resolution Clauses
Dispute resolution clauses cover methods such as negotiation, mediation, and arbitration:
- Negotiation: Discussions between the parties to resolve disputes.
- Mediation: A non-binding, negotiation facilitated by a third party neutral, which can result in a binding agreement if parties agree to contract into said result.
- Arbitration: A binding process where disputes are submitted to a third-party adjudicator, resulting in a binding and enforceable award, similar to a court order.
Practice tip: These clauses are significant, especially in an international context, as arbitral awards are more easily enforced globally, compared to foreign court judgments which can include significant hurdles to enforcement and asset recovery. Consult with counsel when considering such clauses.
Final Considerations
Be “precise, but inclusive”: Clearly outline contractual “wants”, but be careful of over-specifying, rather than over-generalizing. For instance, consider using “all claims against X contractor are barred”, rather than general language with multiple examples such as “all claims against X contractor are barred, including negligence and breach of contract.” This can create confusion and give the courts pause as to why only certain liabilities are expressly being carved out.
That said, always consult with counsel when dealing with such clauses because some jurisdictions require specific carve-outs (e.g., “gross negligence” under the Civil Code of Quebec).
Draft with proportionality: Consider how a court would view the equity of a clause. Avoid punitive damage or accrued interest clauses that are onerous as they may be ruled unconscionable and set aside. Reasonable clauses that are proportional to the commercial bargain entered into are more likely to be accepted and enforceable.
Contractual considerations are vital in drafting agreements that protect your interests and withstand legal scrutiny. Always consult with counsel when adding or dealing with such clauses to ensure they are tailored to your specific needs and jurisdictions.
If you have any questions, please feel free to reach out to the authors of this article.
This blog was written with the assistance of Julie Choi, a 2024 Summer Associate in the firm’s Toronto office.
[1] Tercon Contractors Ltd. v British Columbia (Minister of Transportation & Highways), 2010 SCC 4 at paras 62, 79.
[2] Sattva Capital Corp v Creston Moly Corp., 2014 SCC 53.
[3] Ruetz v Metro Canada Inc. et al., 2021 ONSC 20.
