In this article, Porus Confectioner pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses how a contract can be vetted.
Any contract sets out responsibilities and liabilities for parties thereto and remedies for breach along with cover for any unforeseen losses. Here we would look at the basic contract for the supply of goods to understand the vetting process.
A draft would need to be reviewed and where necessary, renegotiated with the counterparties.
- Legal vetting of contracts requires the person to do a very intense check of intent, clauses, recitals, and risk to protect a client’s needs, as well as facilitate a definite transaction flow.
- The English contract law from which main contract law is drawn placed a lot of emphasis on the intent of contracting parties to bind themselves in an agreement to exchange a business or service. The basis of contract, therefore, is that two parties legally bind themselves in commercial and business agreement.
- In Jones V Padavatton, the courts brought out the distinction between family arrangements and business agreements very clearly. The family agreement is not always binding and contractual agreements should clearly engrave within them, the commercial intent. Hence, while vetting contracts the intent to “bind each other legally in business” should be clear.
- It follows from the above, that it is important to check, that the Parties to the Agreement should be known and definite, their authority to represent their respective company or firm and ability to contract and place of business should be checked on. In cases where there are 3 or more parties to a contract, the intensity of scrutiny may need more rigour to establish the purpose of each person.
- When parties bind themselves in business, it must be clear as to the purpose of the contract. The recitals must be checked to be well defined.
- If the purpose is for sale of goods, it makes sense that “ x is a manufacturer and seller of AB goods and Z is in the business of manufacturing XY goods in which AB goods is an input “.
- In a simple Sale of Goods, where products are standardised, it may not require that specific definition may not be given, though, by way of abundant precaution it makes sense to state and define “ Goods “, “ Parties “, “ Purchase Order”, “ Date of Delivery”, “ GST”, “place of delivery”, “ date and mode payment, “ cancellation “ etc so that the terms “ mean the same thing in the same sense” to contracting parties and suit their requirements as accurately as possible.
- However, where there are complex customized product requirements – ie. Boilers, Engineering Goods, specialized electronics, etc it would be advisable to ensure that all specification and definitions are sharply delineated.
- Thereafter, the agreement should state the terms and conditions on which the business will be done.
Terms and Conditions
The buyer raises a Purchase Order in line with this Agreement terms and conditions.
The “Offer” is constituted by the Purchase Order. The Offer is considered “ Accepted” by Seller on his return to the purchaser of the copy of the “Purchase Order” under Sellers signature by fax, letter or email. The Definitions should clearly state what defines a valid acceptance.
Duties of Supplier of Goods
This part sets out the responsibilities of the goods supplier in this agreement:
This part should cover :
- Those goods should be as per specifications stated in the Purchase Order and that the supplier is well and truly able to deliver the goods within the timeline stated on the Purchase Order.
- That the goods will be as per quality standards as per specifications set by Buyer (as per previous Blueprints, specifications, sizes, shapes, standards, technical materials exchanged, Purchase Order, etc.). The quality standards could be in an annexure or in the Purchase Order and this should be stated in the agreement.
- That the product is free from manufacturing flaws or faults or defects.
- The product complies with all regulatory and statutory laws and guidelines in the country of sale, export or import.
- The supplier has not violated any intellectual properties rights, Copyrights, which could jeopardize usage of the goods.
- Proper packaging and shipping requirements are ensured by the supplier.
- That delivery will be as per terms agreed.
- Attend meetings to assist the servicing of the customer when called upon or supply relevant information when called upon.
Duties of Buyers of Goods
The Buyer promises that
- The goods will be utilized for the purpose set out in the agreement.
- That payment will be made within the stipulated times as per the agreement and as per the purchase order and by the agreed mode of payment.
- Payment of interest for any overdue amounts at the agreed rate of Interest.
- That buyer will not penalize seller for any error caused by himself in delivery or application of the product.
- Cancellation of order will be done as per invoice/agreement terms and conditions.
Note: Here it makes sense to follow appropriate Incoterms where possible or set out the terms of delivery and at which point the responsibility for liability of goods changes hands from buyer to seller. Checks on clarity on whether various charges i.e export, import, customs, GST, and Insurance are to the Buyer or the Seller are due here.Again, the rights and responsibilities of the Buyer and Seller would need to be more sharply described in the contract or checked thoroughly where the goods are complex, expensive and custom built to a particular requirement. Where the charges for the goods are paid over time and there are some reimbursements and costs to be paid i.e. Milestone payments, advance payments, reimbursements, it is also advisable to check and describe the payments terms, payments due dates, payment requirements, taxes, interest , late fees, etc. under a separate heading in the agreement.
Warranties and Representation
- Here the supplier represents and warrants that the goods are unencumbered and has the full right title and Interest to Sell. A seller also retains all power and authority to manufacture, sell, transfer, and deliver the goods to the customer.
- Where there are specific warranties related to the underlying goods, this should be incorporated or checked to ensure that they are clearly set out in the correct word and meaning sense.
- While this may be of lesser importance of standardized goods, it takes on a more critical role when the sales relate to immovable property, software applications, and specialized products.
Intellectual Property and Indemnities
- In cases of software or in case of specified licensed products, intellectual properties are an important element.
- The supplier would need to indemnify the Buyers against any costs relating to claims of infringement of patents, intellectual properties or other such copyright requirements.
- The indemnity should include a statement whereby the Buyer shall give support to the supplier where it is necessary to defend the claim, whilst the costs are to the supplier.
- Here, the check is to ensure that the Buyer retains a valid claim in the event of any such infringement so that his costs are covered. It is also important for the Seller to know such claim since it is in the supplier’s interest to also defend any infringement of his TradeMark, property or copyright.
Confidentiality and Data Protection
The Buyer and seller are subject to maintaining the confidentiality of the product, again more so in cases of software, where the buyer has information of sellers source codes and the seller also is aware of processes, systems and development works done on their main technology systems.
The agreement should entail the extent of confidentiality required of both parties to the contract and spell out that disclosure would be needed in case of Court summons, Tax requirements, relevant regulatory bodies, or other such situations.
These are necessary checks in vetting and negotiation of agreements.
Liability and Remedies
- The clauses here would protect the buyer and state compensation payable in the event of sellers inability to perform or fulfill his promise. Here it is advisable to state a cap on the liability based on the value or the product.
- Liability of supplier in the event of non-delivery, quality claims, or losses and damages arising out of such breach are maximum 150 % of the value of the invoice or non-delivery.
- Similarly, a clause may be set out regarding stoppage of further supplies to Buyer in the event of non-payment of invoices beyond a certain date, except in cases of quality claims.
- Based on the product the parties should agree and document in the agreement the method of resolution and amount remedies in the above cases.
- Parties thereto should agree that if there is a breach owing to force majeure ie. Flooding, terrorism, fire, civil commotion, earthquakes, etc.
- An outer limit of 1 to 3 months may be considered for termination of the agreement where the seller or buyer is affected to the extent that they are unable to produce or operate further where there is severe disruption and a substantial restoration is required.
Termination and Notice
Clauses here should cover the circumstances under which the agreement may be terminated by either party. Ordinarily, where there is repeated material breach of the agreement, business exigencies, etc.
Arbitration and Dispute Resolution
- Approaching the courts in dispute resolution is time-consuming and expensive. Arbitration is always an option in the resolution of disputes arising out of commercial causes. The Buyer and Seller may subscribe to an arbitrator. The Buyer and Seller agree to submit the case to an arbitration counsel under The Indian Arbitration Act.
- The number of arbitrators, selection process and requirements should also be incorporated.
- The terms and requirement should be spelled out. An arbitration clause should be incorporated where contracting persons are agreeable.
Governing laws and Jurisdiction
The appropriate jurisdiction should be stated here. Where counterparties are in India, they may submit to laws as applicable to the courts in India. In International contracts, it more common now to submit to the non-exclusive or exclusive jurisdiction of English courts as a viable option owing to accessibility and similarity of legal application. Non Exclusive jurisdiction gives the opportunity to counterparties to explore other options in the event submission to English laws is too expensive or prohibitive for various reasons.
Notably, in the past few years, Singapore law has also been commonly used in international financial contracts.
Spaces should be done indicating where the parties representatives are to sign. The persons Designation and Company Firm names should be included. Where appropriate, witnesses names, signatures and Designations are also included.
The Indian Contract Law requires certain other checks which need to be fulfilled. As per Section 1o of the Indian Contract Act “ All agreement are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and a lawful object, and are not hereby expressly declared to be void.
Hence the agreement would need to be checked to ensure that they adhere to the above requirements. Further, in accordance with Section 29 (g) of the Indian Contract Act, the following agreement is declared to be void–
- Consideration and objects are unlawful
- Without consideration
- Restraint of marriage
- Restraint of trade
- Restraint of legal proceedings
- Vague agreements
- Wagering agreements and
- Agreements to do impossible acts
These are also to be kept in mind whilst checking contracts. A check on Stamp Duty requirements, legalization, etc would also need to be done.
Contract vetting will require at least two to three readings. One reading to understand the transaction, the parties and to check that all appropriate clauses exist. Another reading would need to check clause by clause and include some which are missing or exclude those which appear vague and irrelevant. The final reading would be to understand the risks the client is exposed to and then build in clauses to cover the perceived risks.
A contract is an agreement enforceable by law, the last three words being critical. The checker must ensure that the contract has been vetted to ensure enforceability.