ACP Contract Drafting & Redlining 3 — Questions and Answers
Question 1: A 'most favored nation' (MFN) clause in a commercial contract typically means:
- The contract is governed by international trade law
- One party is entitled to terms at least as favorable as those given to any third party (Correct answer)
- The agreement has diplomatic immunity
- Performance must match industry best standards
Correct answer: One party is entitled to terms at least as favorable as those given to any third party
An MFN clause ensures one party receives pricing or terms no less favorable than the best terms granted to any other customer or counterparty.
Question 2: Which of the following best describes a 'covenant not to compete' in an employment contract?
- A promise by the employer not to hire competitors
- An employee's agreement to restrict post-employment work in a competing business (Correct answer)
- A mutual pledge not to solicit each other's clients
- A warranty that work product will not infringe competitors' patents
Correct answer: An employee's agreement to restrict post-employment work in a competing business
A non-compete covenant restricts an employee from working for competitors or starting a competing business for a specified time and geographic area after employment ends.
Question 3: In drafting a liquidated damages clause, what must be established for it to be enforceable?
- The amount must exceed actual damages to serve as a deterrent
- Actual damages must be difficult to calculate and the amount must be a reasonable estimate (Correct answer)
- The clause must be approved by a court prior to execution
- The defaulting party must consent at time of breach
Correct answer: Actual damages must be difficult to calculate and the amount must be a reasonable estimate
Courts enforce liquidated damages clauses when actual damages are uncertain or hard to calculate and the stipulated amount represents a reasonable pre-estimate of likely harm.
Question 4: What is the purpose of a 'survival clause' in a contract?
- It ensures the agreement remains effective during force majeure events
- It specifies which provisions remain binding after the contract terminates or expires (Correct answer)
- It allows the contract to be renewed automatically
- It protects the parties if one becomes insolvent
Correct answer: It specifies which provisions remain binding after the contract terminates or expires
A survival clause identifies obligations—such as confidentiality, indemnification, and representations—that continue to bind parties after the contract ends.
Question 5: When drafting a service agreement, an 'acceptance testing' provision primarily addresses:
- The process for a client to approve delivered services or deliverables before final payment (Correct answer)
- Background checks required for service personnel
- Testing of software for security vulnerabilities
- Government regulatory approval of the services
Correct answer: The process for a client to approve delivered services or deliverables before final payment
Acceptance testing provisions set out the criteria and process by which a client reviews and formally approves deliverables before the provider's payment obligation is triggered.
Question 6: In contract redlining, adding a 'fallaway' or 'sunset' provision means:
- The contract automatically renews unless notice is given
- A term or obligation expires or becomes void after a specified date or event (Correct answer)
- Confidentiality obligations are waived after litigation
- The indemnity cap resets each calendar year
Correct answer: A term or obligation expires or becomes void after a specified date or event
A fallaway or sunset provision causes a specific contractual right or restriction to lapse automatically upon the occurrence of a trigger event or passage of time.
Question 7: The 'ejusdem generis' canon of construction is relevant in contract drafting because it means:
- All ambiguous terms are construed against the drafter
- General words following specific terms are limited to items of the same kind (Correct answer)
- The contract is interpreted as a whole and no provision is read in isolation
- Later provisions supersede conflicting earlier provisions
Correct answer: General words following specific terms are limited to items of the same kind
Under ejusdem generis, a catchall phrase following a list of specific items is construed to cover only items similar in nature to those specifically listed.
ACP Contract Drafting & Redlining 3
A 'most favored nation' (MFN) clause in a commercial contract typically means: