This article is written by Sachin Singh, pursuing a Diploma in Cyber Law, Fintech Regulations and Technology Contracts from Lawsikho.com. Here he discusses “5 Pointers on how to set up a contract review mechanism for your own company”.
In the current business scenario, Contract Management has taken a bigger role in the growth of any company whether it is a large scale or small business. An effective contract is not only show’s the intention of the parties to enter into a legal relationship but also lays out the respective obligations of the parties with necessary safeguard and efficient remedies.
In today’s globally connected economy, two people can enter into the legal relationship by signing contracts either to economize trade at the domestic or international level. Accelerated globalization has developed few principals such as GAFTA, FOSFA and Incoterms which has been widely used by the corporates while drafting/ reviewing any domestic or international contracts. These principals have almost removed the disparity of required terms between the domestic and international contracts.
Sloppy and careless drafting or reviewing of contracts have overall huge impacts on the corporates. The contract should not be considered as a compilation of standard terms but a considerate replication of the understanding of the parties in respect to the purpose of the agreement, scope of work, performance, consideration and type of industry.
There are certain basic rules which govern any drafting or reviewing of any contract which keeps on progressing with the change in the law and practices. To have a successful contract, certain parameters should be checked before initiating drafting or review of a contract. Following are the parameters or questions which should be answered:
- Who is going to draft or review the contract?
- Is the purpose of the contract defined?
- Is it a domestic or an international contract?
- Are all boilerplate terms included effectively in the contract?
- Are all important terms included in the contract?
- Is the correct Arbitration clause included in the contract?
Who is going to draft or review the contract?
A person who is going to draft or review the contract should have relevant skill, expertise, background and experience for the effective and successful execution of the contract. The person who usually reviews the contract drafted by another party must have knowledge of its own standard terms. Such person usually prepared a check-list that guides the review to find out whether the terms of the contract are in sync or are deviated with standard terms and practices.
If there are any deviations then such contracts are called again for negotiations. Companies working in multiple sectors like constructions, software export, manufacturing etc. Have checklist specific to their requirement. Application of this of practices is best suited for confidentiality agreements, licensing agreements, supplier contracts etc.
By availing the services of the person having above mentioned skills for reviewing or drafting contract not only secures companies own interest but also save a good amount of monies from any future dispute arising from faulty drafted or reviewed contracts.
Is the purpose of the contract defined?
The purpose is the main instrument in the construction of any contract which usually includes scope, design and requirement of the terms. For example, an EPC contract shall have the terms related to the type of work, milestone achievement, bank guarantees as security, indemnity, Liquidated damages, arbitration etc.
If the purpose is illegal or opposed to the public policy then such contract shall be voidable at the option of other parties. For example, an agreement in restraint of marriage, an agreement to commit a crime.
Hence it is very important to examine the purpose of such contract before drafting or reviewing any contract.
Whether it is a domestic or an international contract?
With the growth of business and technology, terms of domestic and international contracts are finding common ground during construction of the respective contracts. A domestic contract uses fixed language for miscellaneous clauses whereas in the international contract there is need of some groundwork which include a high level of negotiations. While drafting or review of an international/domestic contract, special attention is needed for the following clauses:
- Language: Parties should always decide upon the language which will control the contract. E.g. A German entity enters into a contract with B, an American company will both want to control the transactions arising out of the contract in their native languages, and so, it will be important to arrive at a mutually decided language and inserted into the contract.
- Location of Performance: When the Parties belong to different countries then certain clauses need to be inserted or modified depending upon the location of performance of a contract. For example A, Chinese company enters into a contract with B, a Saudi entity and the location of performance of the contract in China. In such a case, certain important clauses like security and confidentiality of information, force majeure, and governing law etc. Should be carefully constructed.
- Payment Currency: Since most of the countries have their currency and so it is utmost required to insert a clause in the contract defining the currency in which the agreed payment shall be made.
- Governing Law: Every party will try to impose its own country’s law into the contract which could be challenging for both the parties. But good consensus can help in mitigating such issues. It is required that the person drafting and/or reviewing the contract to should able to analyze risk in accepting the other country’s law as the governing law. For example: Where the contract refers any dispute to arbitration, it is important to confirm whether the countries of both the parties to the contract are reciprocating countries for the enforcement of the arbitral award. Where they are not reciprocating countries, an enforceable award in one country will just have evidentiary value in the other without any direct enforceability rights.
- Court Jurisdiction: Most of the time the countries whose law is agreed under governing law clause its court will have the sole jurisdiction to entertain the disputes arising out of the contract.
Are all boilerplate terms included effectively in the contract?
In every contract, boilerplate clauses are included as it contains standard terms and conditions of a contract which includes an assignment, governing law, arbitration, Force Majeure, severability, termination, indemnity etc. A contract reviewer/ drafter should remember that even though it is having standard terms and conditions but it is not always same for every type of contract
- Termination: Termination clause can be a termination for the convenience of either party or termination by Force Majeure or termination due to breach of contract. A contract can be for a fixed tenure, evergreen, or renewable all these have a bearing on the construction of the termination clause. Effects of termination form an essential part of the termination clause.
- Indemnity clause: Indemnity clause is an essential part of the contract, either parties or all parties agree to indemnify and hold harmless each other from all claims, losses, damage etc. arising out of the contract. Indemnification should be either capped to a certain percentage or otherwise, it can be unlimited. Most contracts include this clause to indemnify the party from third party claims.
So even if the boilerplate clauses define to be a standard part of the contract, the person responsible for drafting or reviewing should give utmost importance to safeguard the interest of its party.
Are all important terms included in the contract?
Other than boilerplate clause there are few other terms which are of critical and need a deep interpretation. Following are some clause for reference:
- Parties to the Contract: Name and correct address of the parties to the contract should be mentioned in the contract.
- Duration of the contract: Always try to define the duration of the contract as in whether the contract is for a fixed term or it has to be annually renewed.
- Payment of price: Check whether the payment is to be done lump sum or in instalments. Or in which currency the payment is supposed to be made and what is the mode of payment i.e. by Check, Cash, draft, account transfer etc. In huge and complex projects it is not good to enter into fixed price contracts as there is a greater chance of hold, delay, changes in the price of the contract.
- Defect removal: Always have this clause in the contract, where any party failing to obliged with its obligations mentioned in the contract. It gives an opportunity to the defaulting party to cure its defect and save its damage within a framed time period.
- Intellectual property: What type of license or to what extent the license can be used? What are the remedies if any party infringes other parties license?
- Confidentiality: It is a must clause and should be diligently checked as it modified according to the purpose of the contract. In EPC projects, Confidentiality can be like Employer not allowing the bidder to advertise about the project before a certain stage of the project is completed or by taking prior written permission.
All relevant terms suitable to the particular contract must be included and constructed in a way so as to facilitate the purpose of the contract and the smooth completion of its performance by the parties.
Diligently and carefully drafted or reviewed contract not only saves man-hours but also saves a huge amount from any potential litigation which ultimately helps in the growth of the company. A contract can be considered as a mirror of any company’s horizon, awareness and its positive mindset to grow in the economy at its fullest level. A company should always have a strong contract review mechanism as well as contract management life cycle and should approach experts to draft or review all its contracts and negotiations.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.