29 January 2018

Ten things to remember when drafting contracts

A contract is typically concluded for a specific purpose, for instance the delivery of a product. The parties therefore easily forget to regulate a number of other central issues, which can subsequently turn out to be problematic. If the parties have not considered a specific issue in their contract, this may cause inconvenience and not least costs. In this article, we will give you ten questions that you should always consider when drafting contracts.

In general, we strongly recommend that you only conclude written contracts (unless the contract is of a trifling value).

The list set out below is not exhaustive, and it is always a good idea to consult your advisor before concluding a contract.

1. Who are the contracting parties?

Sometimes, the parties do not always remember to state exactly who are parties to the contract. This especially causes problems if the parties are companies. Always remember to state the company’s full name, corporate form (IVS, ApS, A/S, I/S, etc.), CVR no. and address.

You thereby eliminate any risk that other persons than the companies may be considered parties to the contract, including the private individuals owning the companies.

If a company is a party to a contract, you should, as a general rule, only state the company’s data. Therefore, never state "A ApS v/Anders Andersen” etc., as it will only create doubt as to who is a party to the contract.

The question as to who is a party to the contract may have serious and incalculable consequence for the parties, especially because the parties to the contract are generally financially liable for the performance of the contract. Therefore, there is a risk that the private individuals owning the company may be subject to liability.

2. Duration and termination

If the contract does not concern a one-off service, but for instance the delivery of an object once a month or on-going advice, the duration/term of the contract should be governed.

Seeing that it is not always easy to come to an agreement after the parties find themselves in a conflict, we recommend that terms concerning duration and termination are regulated beforehand. An often-seen example of a termination clause, is that a contract can be terminated with a notice of one month to the end of a month. It is also possible that the contract is to be non-terminable for a period, for instance because the parties need the contract to be binding for an initial period.

Other issues relating to termination could be ownership/disposal of intellectual property rights and confidential information that has been disclosed. If the contract implies an exchange of valuable intellectual property rights or disclosure of information, the parties should seek legal advice in this respect.

3. Description of the object, price and delivery (time and place)

Even though it may sound trivial, the principal service of the contract is often not described as detailed as requested by the parties. The more technical the service is, the stricter the requirements are for the description thereof.

The same applies to the price. If the parties have not agreed on the price in advance, the fall-back rule is that the purchaser must pay the price demanded by the seller. This rule can only be derogated from if the purchaser can substantiate that the price is clearly unfair. This discussion is seldom very useful in a commercial context, so make sure to describe the price. (Another rule applies in connection with consumer transactions).

It may also be an advantage for the parties to describe how delivery is to take place. In a traditional contract concerning delivery of a physical object, the purchaser is generally to collect the object at the seller, unless other agreed between the parties.

4. Terms and conditions - what applies?

Often, the parties each have a set of “terms and conditions” or similar standard terms. A frequent question is which standard terms shall apply when both parties have a set of terms.

First of all, we recommend that the parties read each other's standard terms to review how they differ. The parties may then negotiate and agree on each of the differing terms.

If the parties do not review each other’s standard terms and thus conclude a contract with two different sets of standard terms, the consequence will probably be (under Danish law) that the differing standard terms will be excluded from the contract. The general rules of Danish law will then apply to any disagreements that may arise.

To create predictability and to ensure that no disadvantageous are agreed, we recommend that you have a legal advisor review the parties’ standard terms.

5. Breach

If a party does not comply with the contract, this is legally called a breach of contract. If a party materially breaches the contract, the other party may terminate the contract for breach and claim compensation from the other party. Also less material breaches of contract can have legal consequences, e.g. claims on redelivery or proportionate reduction in the price. The consequences of breach of contract thus varies which is why it is smart to agree in advance on (at least) the following:

  • When is the contract considered materially breached?
  • What is the consequence of a material breach (should it be possible for the parties to remedy the breach, should there be a financial penalty (agreed penalty), etc.)?
  • How are the parties to give notice if they believe that the other party is in breach of the contract?

6. Which laws are relevant for the contract?

Contracts are often concluded within areas governed by special legislation. This may for instance be within employment and labour law, personal data law and rent/tenancy legislation. This may include statutory provisions, which cannot be dispensed with by contract (so-called mandatory rules).

We recommend that the parties decide in advance how to relate to legislation, including how the parties will comply with legislation, and who is responsible for compliance, and whether the contract is to dispense from legislation on certain points.

7. Confidentiality

Most contracts covering valuable objects, including purchase/sale of businesses, consulting services, exchange of information, intellectual property rights, etc., typically imply that one party obtains knowledge of the other party’s business secrets or other confidential information. The question concerning confidentiality is especially relevant in connection with contracts concerning employment of staff, executive officers and consultants.

Information is, increasingly, the central issue of commercial contracts. We recommend that the parties always consider whether the contract should contain one or more provisions on confidentiality.

In this connection, it is also relevant to consider any sanctions if one of the parties does not observe a provision on confidentiality. It is not unusual to sanction breaches of confidentiality obligations with a so-called agreed penalty, i.e. a predetermined economic amount that the breaching party shall pay to the other. If the parties agree on such a penalty, this may result in other, potential problems, such as to which extent the claimant maintains its access to also claim damages under the general rules of Danish law for the financial loss exceeding the agreed penalty.

We recommend that the parties seek legal advice if the contract implies exchange or disclosure of confidential information.

8. If things go wrong – compensation/damages

Under Danish law, one can claim damages in order to remedy an economic loss. Simply put, a claimant may claim compensation under Danish law if the other party has acted in a tortious or grossly negligent manner and this has resulted in an economic loss. However, there are many modifications and exceptions.

It is normally a good idea to consider whether to include specific clauses concerning damages and compensation, including for instance concerning limitation of liability in the contract.

9. Governing law and jurisdiction

If you conclude a contract with a foreign party, you should agree on the governing law. You may agree that the contract is governed by Danish law. You should always seek advice from an attorney if you are going to conclude a contract with a foreign party, irrespective of the governing law agreed between the parties.

You should also consider how any disputes are to be settled. Basically, you can choose between settlement before the courts or an arbitration tribunal. But it is often a good idea to agree on a mediation clause or a negotiation clause, which will generally force the parties to seek any conflicts solved out of the courts before any proceedings are commenced.

There are different advantages and disadvantages when choosing between the courts or the arbitration tribunal. A typical advantage of arbitration proceedings is that the dispute will be treated as confidential, but keep in mind that an arbitration award cannot be appealed against to a higher court as opposed to an ordinary judgment.

10. Who is authorised to sign the contract?

You should always consider whether the person(s) signing the contract on behalf of the company are in fact authorised to do so.

In general, persons are entitled to sign on behalf of a company either based on the company’s signing powers or a specific power of attorney, for instance by an authority that follows from a person's job.

If the contract is signed by a person who is not authorised under the power to bind the company or a specific power of attorney, you may risk that the company is not bound by the contract and may thus go back on the contract. Thus, take precautions in this respect, for instance by checking the other party’s signing powers in the public company register and to make sure that the contract is signed by the company's authorised officer(s).

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Horten Corporate Day 2016 - Danish companies at the forefront

18 March 2016

At Horten's Corporate Day 2016 on 16 March, Danish and foreign executives and experts gave their views on the trends and opportunities of the Danish business sector. Horten will repeat the success next year with Horten Corporate Day 2017.

Summary dismissal for purchase of mobile tickets for the employer's account

17 March 2016

The Supreme Court has ruled in a case where an employee purchased train tickets for private purposes from his work phone. According to the Supreme Court, the summary dismissal was justified.

Compensation for loss of capacity for work to person close to retirement age

15 March 2016

The Supreme Court has ruled that it is without any importance to the awarding of compensation for loss of capacity for work that the person is may receive state pension within a very short time.

Public-private investments in Greenland

9 March 2016

On 26 February 2016, Horten and Nuna Law Firm hosted a conference with focus on public-private investments in Greenland.

Attorney was not covered by the salaried employess act

5 February 2016

The Eastern High Court surprisingly concluded that an attorney and partner at a law firm did not enjoy employee status and was therefore not covered by the Salaried Employees Act, the Holiday Act or the Contract of Employment Act.

Smoking police/policy - what is the employer allowed to do?

3 February 2016

Two new rulings clarify the scope of the employer's right to lay down smoking policies and impose sanctions in connection with violation of these policies.

Lifting of trade sanctions against Iran - possibilities and risks

29 January 2016

On 16 January 2016, the International Atomic Energy Agency (IAEA) stated that Iran had met the requirements for lifting of EU and US trade sanctions against the country. This opens the way for new trade possibilities with Iranian players; however, still subject to certain risks.

Amendments to the Trade Act with effect from 1 January 2016

21 January 2016

The amendments will ease the establishment of operational activities in the Greenlandic market - making the establishment of new as well as international business activity in Greenland more favourable.

Update Employment Law

3 September 2014

No age discrimination

19 December 2011