This article has been written by Arya Mirgane pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho).
Operations and Management contracts have been gaining popularity day by day. At this speed of the growing industrialization, there is a little time left to put your mind on one single business with the same efficiency and attention. Therefore, people have been entering into these contracts named Operation and Management Contracts (also called O&M contracts) to maintain and operate project facilities and gain a lot of profits with minimum attention and maximum speed. But the question that needs to be asked here is, does the owner enjoy the same rights in an operations and management contract as compared to the manager or the operator? In this article, we will try to answer this complicated question.
Basics of O&M contracts
When a professional management company engages in the task of managing and operating the business of another company in return for a fee for its financial development, efficient services, or simply because someone cannot invest as much time and effort in the business, it is known as Operations and Management. Goods, as well as services, can be offered by the Managing Company. It includes many factors such as finance, sales, human resources, IT, and if necessary marketing. O&M agreements establish contractual relationships between the project company and a professional management company that undertakes to handle the operations and management of the aforementioned project company.
The person that controls and operates the business is known as the Operations Manager. Efficiency, skills, leadership qualities, good predictability, perseverance, communication skills, risk taking nature are some important aspects for the operations manager. His tasks include training a staff to perform tasks excellently in the least time possible, which is a critical part of managing a team, recruiting, retention, etc. He needs to stay up to date with respect to the on-goings in the market so as to conduct training sessions, workshops, seminars, etc. to stay ahead in the competition and exceed.
When such an agreement is made between two business entities for the purpose of operations and management, they need to enter into a contract. The contracts that enforce such agreements between the parties are called Operation and Management Contracts.
- Appointment of Manager; Relationship of Company and the Manager– This clause dictates the relationship between parties and mentions terms and conditions for better working environment.
- Management Services- What must be included in the management services is specified in this clause.
- Obligations of the Company– The duties and obligations that need to be performed by the Management Company are mentioned in this clause.
- Additional Agreements of the Manager- If and when the manager needs any special kind of agreements on his behalf for the contract, this clause is important.
- General and Administrative Activities– Everyday tasks and obligations should be mentioned in this.
- Location– The location of the place of work or business needs to be specified via this clause.
- Compensation– The compensation clause is relatively important for both the parties i.e. the consultant and the client. This clause states the amount to be paid by the client for hiring the services of a consultant
- Term of Agreement; Termination of Rights– This is by far the most important clause in a contract and it states how long the agreement is in function and when it is going to come to a termination.
- Indemnification– It’s a clause that contractually obligates one party to compensate another party for losses or damages that have occurred or could occur in the future.
- Additional Provisions– Additional or Special Provisions should be mentioned here as well.
Parties to the contract
Though there are inevitably two parties to the contract i.e. the owner and the operator, their rights depend upon the drafting style of the contract. The more efficiently the contract is drafted by one party, the more it is beneficial to them. Therefore, one cannot say that the owner enjoys more rights than the operator because he is the owner of the business and vice-versa. These two parties to the contract may meet and mutually decide important things like the rights, responsibilities, timings, etc. while drafting the contract.
Rights of the owner in the agreement
The important points that need to be included in this clause are mentioned below:
- Inspection of premises – This point should be drafted carefully mentioning that owners continue to retain ownership and possession over the property even when the same is being operated and managed by the operator. The owner continues to enjoy the rights of possession of the property and can inspect the premises whenever they please. But usually, a prior permission of the operator needs to be taken out of common courtesy. In cases for conducting inspections, inspection of the operations being undertaken in the premises etc., the right of an owner to enter into his/her property may be enforced. Owners should also have the right to conduct the said inspections and audits using their authorised representatives and professional advisors.
- Retrofitting – In cases where the premises need a change in the setting or additional work is required to be conducted to transform the space into a co-working space, the funds for such retrofitting is typically paid for by the owner. In such cases, even though the specifications are provided by the operator, the owner should have the right to discuss the quantum of expenditure with the operator, and where it feels such expenses or modification is unwarranted, the owner should have the right to bring the same to the notice of the operator.
- Time commitments – Owners should ensure that the preparation, pre-opening and post-opening activities are being conducted by the operator as per the time schedule provided in the O&M Agreement. O&M Agreements may also provide that in the event the operator is unable to render its obligations in the manner as envisaged in the agreement, the owners will have the right to seek appropriate damages from the operator. This is to ensure that the owner is in a position to receive appropriate and timely return on the capital expenditure incurred by him/her on setting up the co-working space.
- Performance review – There is a definite time period decided upon which the owner and the operator shall meet to discuss and review the performance of the operator with respect to the co-working space. The operators are under an obligation to ensure that the revenue realised from the operations is at least at par with other similar coworking operations by third-parties (who are the competitors of the owner) within a fixed geographical radius. Such determinants provide appropriate standards of revenue that are expected to be generated from the co-working space. Owners may want to negotiate appropriate measures to be implemented in the event it is found that the revenue targets are short of the agreed targets. In such cases, for e.g. if the revenue falls short by more than 20% of the Competitive Set, the owner may retain the right to terminate the O&M Agreement. The owner may also retain the right to terminate the agreement in case the calculated gross profits from the operations do not reach the profits of the agreed minimum.
- Budgeting – Since in an operations and management arrangement the owners are responsible for providing the working capital for the operations of the co-working space, owners invariably have a significant say in the annual budget. Even though the annual budget and auditing is done by the operator, the owner’s say is considered valuable. Both parties to the contract i.e. the owner and the operator mutually meet and decide the annual budget. Therefore, before the implementation of the annual budget, the owner has to approve or disprove it. His/her say is considered the most important as compared to the operator.
- Exclusivity – Though this is a separate Clause as included in the Agreement, it is the right of the owner to ensure that the operator is providing services to the owner only and is not engaging in similar type of work with competitors of the owner. If this is the case, then there will be no exclusivity in the owner’s business arrangement and all the operations would just be a copy of another. This clause is drafted for the period of the Agreement as well as some time after the termination, for e.g. 6 months or 1 year depending upon the terms of the Agreement but not more than that.
- Confidentiality – This is also included as a separate clause. Though, it is the right of the owner to maintain confidential information used in the operation of his/her business so as to not generate a similar arrangement of the work by the competitors. This includes technical know-hows, plans, confidential ingredients, recipes, etc. If the confidential information is made public by the operator without due purpose or out of spite, then the owner has the right to retain the information back and sue the operator. Also, in the clause, it is stated that the disclosing party (herein, the operator) may inform about the disclosure promptly after the happening to the owner and take all necessary steps to retain that information back as if it were his.
The rights of the owner are an essential part of the Operations and Management contracts without which the owner cannot exercise full control over his business and there may even be chances of the operator taking over the business. Therefore, the drafting of the ‘Rights of the Owner Clause’ should be done efficiently and carefully so as to avoid confusion and future disputes. It allows the owner to exercise rights of his business without being fully entitled to engaging his time in the business. This article also emphasizes on the other important clauses that are necessary for the owner to exercise his/her right over the business. Where there is a right, there is a duty. Therefore, this clause proves beneficial for both the parties to the contract. So, there is no confusion between the parties regarding the responsibilities, duties and rights.
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