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Structuring Performance Clauses for Commercial and Employment Contacts

Wednesday, 24 April 2013

Performance clauses are increasingly common in both employment and commercial contracts, particularly in the current financial climate. It goes without saying that carefully structured clauses are essential to properly set out the parties’ mutual obligations and liabilities.

Ensuring that performance clauses are well drafted is always important to avoid misunderstandings as they can be particularly problematic if they do not reflect the true intentions of the parties. Structuring a performance incentive may seem simple in the context of a discussion but converting an intangible mechanism into writing should only be done with the help of an experienced solicitor who understands the specific details of your arrangement.

Advantages of Performance Clauses

Including performance clauses in either commercial contracts or contracts of employment is advantageous for a number of reasons. They can provide benefits such as: increased efficiency, quicker turnaround of work and be used as a measure of success or failure over time.

Considerations for Performance Clauses

Structuring performance clauses in legal term can be a complex task even when the mechanism is relatively simple. However, the complexity of performance clauses themselves can vary considerably so it is worth taking time to think about what you are really trying to achieve before committing it to writing. Issues that should be considered include:

  • Will there be a cap on performance?
  • Who decides upon whether or not the performance target has been met and should the other party be informed of this?
  • Are the performance targets realistic?
  • Should there exist penalties for non-performance as well as mere incentives for performance?
  • What happens if performance is impacted by an external factor?
  • Is there a specific time frame for the performance?
  • Will breach of the contract affect the performance clause?

The most difficult aspect of performance clauses is establishing the exact performance that is required. Both parties must also consider the individual issues which may arise from such a contractual agreement. For example, you may want to consider claw-back provisions where a period of out-performance is followed by a period of under-performance.

Alternatives to Performance Clauses

It is also important to look at alternatives. Businesses may find that a discretionary, non-contractual bonus is be better suited to their business and employees than a contractual performance clause based on a fixed commission or bonus structure. This may be simpler to implement, particularly for smaller businesses that might face additional administrative burdens. However, it is unlikely to be suitable in commercial arrangements with third parties.

If you need assistance structuring or drafting performance clauses, please contact us on 0207 611 4848.

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