1. Components which are unique to the body of each agreement
Drafting should be sufficiently detailed to crystallize the commercial intent and understanding of the parties, elaborate the roles of the parties with clarity and explain how money will flow.
Detailed description of obligations – In a marketing agreement, it may be wise to specify which media will be used for marketing, and in which territory the marketer will market the products.
Detailed Payment Mechanics – The flow of money must be well charted out in the agreement, so that disputes do not arise at the time of payment.For example, if you are thinking of entering into a marketing agreement, possible issues could be –
Does the marketer has the ability to collect money on your behalf and deposit it in your account on a monthly basis, or should he simply ask customers to directly pay money into your account.
How would you recompense the marketer? Does he deduct his share of the commission from every sale on his own and repatriate the balance? Or do you pay him a fee at the end of every periodic cycle?
Mode of payment – The method of making the payment for the goods/services sold/delivered has to be clearly defined. Whether the whole consideration would be paid at the time of delivery or the payment would be broken into tranches? Whether there would be some amount payable as advance at the time of executing the agreement and balance amount payable at a later date? How the payment would be made – by cheque or electronic transfer of funds or simply in cash?
Timelines for performance of obligations and for payment – It is essential to mention clearly the time and duration for performance of the obligations under the contract and for making the payments to avoid arising of disputes for breach of contract.
Provisions in case of faulty goods/deficient services or non-adherence to service levels – In the event goods supplied or services provided turn out to be defective or deficient then the purchaser has recourse under the clause of Warranty which defines the extent to which a defective good or deficient service is covered for repairs or replacement by the supplier/service provider and the duration of time for which the Warranty would remain effective. To be added
Further, the parties can define their liabilities in terms of some maximum amount which would be payable by the supplier/service provider in case the buyer of goods or recipient of services suffers some damage due to defective goods/deficient service under the clause Liability.
2. Boilerplate provisions for protection of a party’s interest
There are certain provisions which are standardised in most contracts. They may require some element of customization but no major overhaul or substantial modification is required to those terms. (We will be discussing about boilerplate clauses in the next article)
The parties to an agreement want to ensure that they will not be sued by a third party for the actions of the other. To safeguard against this possibility, depending on the specific situation of a case, one party agrees to indemnify the other in case a liability arises due to actions by a third party.
- An indemnity is a promise to reimburse the other party in respect of a particular type of liability, should it arise.
- The purpose of an indemnity is to provide a guaranteed remedy to the other party or to provide a specific remedy which might not otherwise be available in law.
Example: In the case of Software License Agreement, a third party can claim that the intellectual property rights in the software or some component of the software lies with it and not with the provider of the software. This third party can sue the user of the software for using his intellectual property without valid permission without any fault being of the user of the software. In such a scenario, it is the responsibility of the software licensor to ensure that the software being licensed is free from all encumberances and hence he would indemnify the licensee for the damages claimed by the third party. To be added
4.Confidentiality and non-disclosure
Confidentiality and non-disclosure are important aspects in any agreement so much so that there are separate agreements executed for this namely Non-Dislcosure Agreements. There is a lot of information about the company and its business which is not in public domain and the companies would not want to make it to the public domain, yet some amount of such confidential information may have to be disclosed to the other party while entering into a contract with the other party. So, the parties bind themselves to confidentiality and non-disclosure of each other’s confidential information. Breach of this covenant leads to disputes and court battles. 2 line description of why this clause is there in the first place
- Definition of the confidential information is the key element in a confidentiality clause. A disclosing party will like to make it very wide while the recipient will make it narrow. However, a very wide definition which covers any and every information which is not inherently confidential is not likely to find favour with courts. An alternate approach is to specifically identify by marking or indicating disclosed information as confidential information.
The main remedy for breach of confidentiality provision is an injunction. Damages for breach of contract could be available to the disclosing party.
5. Exclusivity and non-solicit clause
Exclusivity means that during the duration of the contract, the contracting parties would not enter into negotiations or even into an agreement with a third party for similar nature of work/product/services. For example, in an agreement for marketing of diesel gensets, the supplier may ask the dealer to market its products exclusively. It may be qualified by some time duration. 2 line description of why this clause is there in the first place, say, in a marketing or supply agreement, or in an acquisition transaction
The contracting parties agree that during the tenure of the agreement and for a certain period of time thereafter, the parties would not solicit the services of each other employees till the time the employee is in their employment. 2 line description of why this clause is there in the first place – say, when there is a possibility that the other party’s closeness or interaction with your employees or consultants pursuant to the commercial relationship may provide opportunities to him to poach or hire them for his business or to start a competing business