The Law of Contracts is one of the core subjects taught in law school. We are taken through the various requisites of a valid contract, taught to differentiate between an offer and an invitation to offer, to identify if a consideration is valid or not and other similar principles integral to the Law of Contracts. However, as is the case with the rest of legal studies, when we venture out into the real world with a law degree, the basics taught to us at law school are insufficient for dealing with practical contracts. It’s unlikely that you will be asked to negotiate a contract with an unlawful object. Or be asked to sign a contract without consent. While these principles are critical to get a background of what contracts are and how they operate, they rarely help when you sit across the table with someone to close a deal.
And so – the fact remains that the skills for drafting, review and negotiation of contract is something that can be acquired more on the job than in a classroom.
In this blog and the series of upcoming blogs we will discuss the importance of contracts reviews, and what we need to keep in mind while reviewing contracts.
WHY REVIEW CONTRACTS?
Businesses today enter into multiple agreements on a day-to-day basis. It is crucial that these contracts are well negotiated before either party agrees to it. A thorough review of a contract is important to
- Set expectations right.
- Manage risk.
- Prevents misunderstanding.
Setting Expectations
The Indian Contract Act states that “Every promise and every set of promises, forming the consideration for each other, is an agreement;”. So, each party basically promises to do or not do certain things in return of a reciprocal promise of the other party.
It’s important that parties be clear on exactly what needs to be done. If you are procuring services clarify what services you need, the quality of services that you expect, the time within which you expect them to be delivered and other expectations that may impact the services you receive. On the flip side, if you are providing the services you need to make sure the contract is clear on the consideration payable for the services, by when you will receive the payments and if there are certain things that are clear exceptions to the services you will provide. Similarly, in a non-disclosure agreement if you are disclosing information you will want to put in as many fetters to the sue of confidential information and have robust obligations of confidentiality in place as opposed to when you are receiving information, where it will be preferable to have an option to use the confidential information for certain specific purposes, an ability to share it with specified persons, etc.
These are just a few examples using a couple of common agreements. Contracts may be of various kinds, there may be lease agreements, SAAS agreements, employment agreements, work orders. But the principle remains the same. As a party entering into an agreement, you need to know precisely what you are getting and what you are providing. And then put it in the contract in as many words.
Managing Risk
When entering into an agreement it’s important to ascertain the business objectives underlying the relationship, as well as the business risks created by entering into the same.
Contractual risk transfers intend to shift financial and other responsibility for any related risk vulnerabilities to one party or the other. By transferring risk, you can relieve yourself and assign it to the other party. Having certain clauses in a contract can help you allocate the risk efficiently. This may be accomplished by clauses for indemnification, limitation of liability, termination rights, etc.
Prevents Misunderstanding
The parties while negotiating a deal may have various discussions regarding the same. A lot of information goes back and forth and normally, the final terms agreed are much different from what the parties started negotiating with. Besides, the people actually involved in the business relationship may not have been involved in the negotiation process. So, the exact terms of the agreement need to be recorded clearly in writing so that the parties are on the same page.
THINGS TO KEEP IN MIND WHEN REVIEWING CONTRACTS
For reviewing an agreement there are a few basic concepts that must be clear before you proceed with the review. If there is any doubt regarding any of the below, do check with the concerned person (who has raised the review request) and seek clarity before starting the review.
What is the purpose of the agreement?
Always be clear on the purpose for which the agreement is being undertaken. The purpose will often determine what clauses on an NDA are crucial and if any new point needs to be considered beyond what is generally covered in an Agreement. Depending on the kind of agreement, you may want to take specific points into consideration.
E.g.,1: While an IP clause will be crucial in a SAAS agreement, it’s not so important in a facilities service agreement.
E.g.,2: If you are entering into a confidentiality agreement and you need to take special care to put in the restrictions on the use of confidential information and be clear on the additional persons with whom information may be shared. In such an agreement the clauses primarily will focus on the use and disclosure of information itself.
Whose side are you on?
Once you know what the purpose of the agreement is, you need to take note of the side that you represent. The review should be in favour of the side you represent. So, taking the example of the confidentiality agreement, if you are the party that is sharing the information, you will want to put in as many fetters as possible to restrict the usage of the information.
On the other hand, if you are receiving information, your review will focus on putting in rights to share the information with certain persons as required.
What is the value of the agreement?
When reviewing a contract, you also need to ask if the review is really worth the time and effort being dedicated? Basically, if it is a high value or long-term agreement then you may want to spend considerable time making sure all clauses are well negotiated. On the other hand, on a short term/ one-time/ low value contract you may be a little more liberal with the review.
In view of the above, it is important that a thorough review of agreements be done before signing. As a starting point, the draft of an agreement may be proposed by either party. And if you happen to receive a draft from the other side, a review becomes crucial. Skimming through the agreement is insufficient.
With companies juggling multiple commercial aspects of their business on a daily basis, having to vet contracts becomes an added obligation. The general practice that creeps into the system is to get these “formalities” out of the way as soon as possible so that parties can commence the actual transaction. What ensues is a string of poorly reviewed and drafted contracts that sit as a potential risk between the parties and could be extremely damaging to the business should any contingency arise requiring parties to invoke terms of the contract.
To avoid such an eventuality, it is best to have experts review contracts. Having an outsourced team makes sure a thorough reading is done of the entire draft instead of just focusing on the commercial terms and any unreasonable clause can be highlighted/ deleted. Having a dedicated team does away with the risk of a shoddy review where the person responsible would try to get the document off the table to move to more “critical stuff”. An expert will also be able to better understand the impact of the legal terms which may not be fully grasped by others, they bring the necessary expertise and know-how to the table. Besides, with experts, the job will be done relatively quicker as they will be conversant with different types of agreements and will come with experience – thus business get more done at a lower cost.
Outsourcing this work also relieves the internal teams of the company from this additional pressure and they can focus on the roles and responsibilities assigned to them while the legal experts deal with reviewing and negotiating terms of agreements.
Channeling all agreements through a dedicated team also makes sure that complete records of each negotiation and final agreements are kept in a single place where they can be easily accessed later.
As highlighted in this blog, the review of commercial contracts is an essential requirement for a sustainable business and is a much more exacting job than what it’s generally understood to be. While it’s important that an
accurate review is done before any agreement is signed, it is equally important that such review is done by people who are proficient with handling contracts. Getting in experts from outside turns out to be the most efficient way of dealing with the situation in current business environment. For more information on contract review services, please click here or drop us a line at inquiries@lexplosion.in.
