CBN Contract Clause Drafting 2 — Questions and Answers
Question 1: Which clause type specifies the consequences if a party fails to meet a contractual deadline?
- Force majeure clause
- Time-is-of-the-essence clause (Correct answer)
- Indemnification clause
- Severability clause
Correct answer: Time-is-of-the-essence clause
A time-is-of-the-essence clause makes contractual deadlines material terms, so missing them constitutes a breach.
Question 2: In drafting a limitation of liability clause, which approach best protects both parties?
- Cap liability at a fixed dollar amount unrelated to contract value
- Exclude all liability including gross negligence
- Cap liability at the total contract value paid in the prior 12 months (Correct answer)
- Make the clause one-sided in favor of the stronger party
Correct answer: Cap liability at the total contract value paid in the prior 12 months
Capping liability at total contract value paid over 12 months is commercially reasonable and more likely to be enforceable.
Question 3: What is the primary purpose of a representations and warranties clause in a commercial contract?
- To define payment terms and schedules
- To allocate risk by having each party attest to factual statements about themselves (Correct answer)
- To specify the governing law of the contract
- To establish dispute resolution procedures
Correct answer: To allocate risk by having each party attest to factual statements about themselves
Representations and warranties allocate risk by requiring each party to confirm specific facts as true at the time of signing.
Question 4: A 'most favored nation' (MFN) clause in a supply agreement guarantees that:
- The buyer receives the same pricing as the seller's best customer (Correct answer)
- The seller can raise prices to match competitors
- The contract automatically renews at the same rate
- Disputes are resolved in the buyer's jurisdiction
Correct answer: The buyer receives the same pricing as the seller's best customer
An MFN clause ensures the buyer will not pay more than the seller's most favorable customer for comparable goods or services.
Question 5: When drafting a non-solicitation clause, which element is most critical for enforceability in the US?
- Including a perpetual duration with no geographic limit
- Defining a reasonable time period and specific categories of protected individuals (Correct answer)
- Prohibiting the employee from working in any related industry
- Requiring liquidated damages equal to one year's salary
Correct answer: Defining a reasonable time period and specific categories of protected individuals
US courts routinely invalidate overbroad non-solicitation clauses; reasonable duration and clear scope of protected persons are essential.
Question 6: Which clause allows a party to terminate a contract without cause, typically with advance notice?
- Termination for convenience clause (Correct answer)
- Termination for cause clause
- Rescission clause
- Sunset clause
Correct answer: Termination for convenience clause
A termination for convenience clause permits exit without proving the other party breached, usually requiring advance written notice.
Question 7: What is the function of a 'step-in rights' clause in a long-term services contract?
- It allows a lender or principal to take over performance if the contractor defaults (Correct answer)
- It permits the contractor to substitute a subcontractor without consent
- It requires arbitration before litigation can begin
- It sets out automatic price escalation tied to inflation
Correct answer: It allows a lender or principal to take over performance if the contractor defaults
Step-in rights allow a lender or client to assume control of contract performance to prevent disruption if the main contractor fails.
CBN Contract Clause Drafting 2
Which clause type specifies the consequences if a party fails to meet a contractual deadline?