Whether in good or bad times, every business will find itself in the position of reviewing its existing contracts, be it for I.T., purchasing, product, services, distributorship, sales and marketing, maintenance, manufacturing, logistics or outsourcing, or whenever it wishes to systemize its operations moving forward and create a positive contractual relationship with its contracting parties like customer or supplier.
It also makes sense to initiate a review on those contracts which are frequently used to generate income or which is costly to the business.
We point out a few key takeaways whenever we embark on a contractual review exercise:
Part 1: Preliminary Considerations
Some may term it pre-contractual inquiries, but we consider such corporate information searches of company or bankruptcy searches of an individual or such other necessary searches to be ongoing due diligence, which should be intermittently done as any contract may be rendered void for illegality or frustration should parties were found to be insolvent subsequently.
2. Outline parties’ obligations expressly and clearly.
In Malaysia, whenever a written contract exists, the intention of the parties was to be ascertained by the actual words used and the court must give effect to the plain meaning of the words used in the contract.
3. Preamble (or recital)
It is not only important in setting out the background to the transaction, it assists the courts to consider not only the natural and ordinary meaning of the words, but also consider the contract as a whole, including the factual background of the agreement.
Part 2: Operative Provisions to Focus On
4. Price and payment
Every business contract needs to have clear payment terms, especially from the supplier’s point of view.
In the event staggered payments, terms or credit terms is allowed to the customer, the customer may want to clarify in the payment terms clauses, for example, the right to invoice at the end of either the month or quarter in question and for payment period to be within a certain number of days to be calculated from the date of receipt of goods or services, instead of the date of invoice.
Lastly, such clause should also provide remedies in the event of the customer’s late or non-payment, for example, interest on late payments, right to suspend deliveries, right to terminate the contract (in whole or in part), withdrawal of any beneficial prices or payment terms to the customer, etc. In Malaysia, such provision for late payment interests is left to contract in the absence of any statutory provision or laws.
In the event the duration of contract or when the duration is open-ended or lengthy, it makes sense for the supplier to request for periodic price increases or reviews, taking into account of any increases over time in the costs of producing the goods or services, including for raw materials, labour and transport.
Be that as it may, a fixed-term agreement may also be pertinent to include such a review mechanism as well as for renewal or extension of the term.
6. Guarantees and indemnities
Some suppliers may even consider some form of indemnity or guarantee for payment, normally in view of the weak credit standing of the customer or corporate structure of the customer, such that it is a subsidiary wholly owned by a parent company.
7. Retention of title
It is also in the interest of suppliers to ensure valid retention of title (ROT) clause is incorporated into supply contracts if the goods are easily identifiable, such as machinery, equipment, and, in particular, rent-to-sell items.
This can allow direct access to goods, and to recover them in full from the insolvent company or whenever the contract terminated.
8. Warranties and liabilities
A supplier should also warrant that the goods or services are of certain relevant quality and that services are provided with skill and care practiced in certain standards in the professions or industries.
Whereas, the liability provisions serve to ensure what would be the remedies available to the customer for breach of warranty. For contracts between business-to-customer (B2C), parties may refer to statutory warranties contained in Consumer Protection Act 1999 and the liability thereunder in the event of a breach.
It needs to be stated clearly a list of events that may lead to termination of contracts which should then be followed by the mechanism to terminate the contract including termination notice periods, and parties’ obligations following termination.
Typical clauses that survive termination, for example, confidentiality, intellectual property rights, and others restrictive covenants, such as non-solicitation and non-compete clause, that remain in effect post-termination for an agreed period of time, ought also to be stated expressly in the contracts as well for the purpose of avoidance doubts in case of a dispute.
10. Limitation of liability
Considering the nature of liability that may be incurred, and the damage that may arise in the event of a breach, Most parties to contract would want to have such liability can be limited by a capped amount, which once called upon in full extinguishes any future liability.
However, such liability for death or personal injury caused by negligence, fraud, and fraudulent misrepresentation may not be avoided.
11. Assignment and sub-contracting
Assignment of contract or sub-contract should strictly be prohibited from the supplier’s perspective to ensure that the contract does not permit the customer to assign or novate the contract without the supplier’s written consent, including for the purpose of evading debts or restructuring its finances.
This clause ensures that the parties maintain some control over the person whom it is contracting.
12. Force majeure
Take, for instance, the Covid-19 pandemic, many sought to suspend its performance obligations under a contract or to terminate a contract, it depends on whether ‘pandemic’ is not specifically referred to, does it fall within one of the itemized ‘Force Majeure Events’.
Despite expansive wording such as ‘any event beyond a party’s reasonable control’ are included, its effect may be confined to the type of specific events to which it is stated.
13. Applicable (or governing) law, Jurisdiction, Dispute resolution
It is important for contracts which contain some degree of cross-border trade, to consider which local law to apply, and to specify the chosen jurisdiction of the parties, as well as the forum to resolve parties’ dispute.
Most importantly, parties must keep in mind that commercial reality requires parties to keep an open mind of such reviews or re-negotiations, especially when parties’ business relationship permits.
Should a re-negotiated deal is reached, it is important to document the new terms of the contractual relationship clearly via some form of variation agreement accordingly.
Lastly, having a bespoke commercial contract with such standard terms and conditions incorporated will serve the said purpose consistently, which most businesses view it as fundamental to generate maximum business income while minimizing its financial risks at the same time.
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