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How to vet a contract

April 12, 2018
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Vetted

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In this article, Porus Confectioner pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses how a contract can be vetted.

Introduction

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.

Main Aspects

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 :

  1. 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.
  2. 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.
  3. That the product is free from manufacturing flaws or faults or defects.
  4. The product complies with all regulatory and statutory laws and guidelines in the country of sale, export or import.
  5. The supplier has not violated any intellectual properties rights, Copyrights, which could jeopardize usage of the goods.
  6. Proper packaging and shipping requirements are ensured by the supplier.
  7. That delivery will be as per terms agreed.
  8. 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

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

Intellectual Property and Indemnities

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

Force Majeure

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

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.

Signatures

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.

Conclusion

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–

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.

 

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