Contracts executed by Organizations with Customers in the past years have been based on customer requirements. The terms agreed with customers are invariably not in line with what is offered by Vendors. However, Organizations absorb most risks with the primary objective of winning significant business. From a Salesperson viewpoint and defense, these contracts are merely meant to provide comfort to the Customer and will never be used against the Seller. However, in reality this argument does not hold ground, as a Contract is a legal document that governs all transactions between the parties.
Going forward, considering the current situation and in general, it would be prudent for organizations to take extra care on the following legal clauses while complying with customer contracts.
? Termination of a contract at will or for convenience. This is a clause insisted upon by most Customers. However, the Vendors do not often accept this clause. Vendors do not agree to termination of contract or to take back goods once sold. In the post Covid scenario, it is essential to re-negotiate such clauses with the Customers and Vendors.
? Limitation of Liability: Many Contracts have a clause that mandates an Organization to indemnify customers to a liability cap of 100 to 300% of contract value or in some cases unlimited liability. However, all vendors indemnify only to the extent of the orders placed on them, which translates to a cap of 100%. Hence there is a mismatch in what is received and what is offered. Know that in the current scenario, you may be in a position to find a middle ground with your customers and vendors.
? Contracts involving multiple parties must be carefully scrutinized and agreed upon. For example, consider a project that involves an Owner of the project and also involves a Main Contractor and multiple Sub-contractors, here the Sub-contractors must be careful while signing the contract. Since in such cases invariably the terms imposed by the Owner on the Main Contractor may be passed on to the Sub-contractor. Sub-contractor may not be relieved from his liabilities even after completing his scope of work. Payment terms and relieving terms may be back to back upon clearance from Owner of the entire project. Ensure that as a sub-contractor you have included clauses to protect yourself from unwanted liability.
? Some contracts from the Vendors make it mandatory for Resellers to commit to certain conditions, however in reality Resellers are not in a position to achieve it. For example in contracts concerning software, vendor mandates that it is the Resellersresponsibility to get EULA (End user license agreement) signed by the end customer. However, these entities (end customers) refuse to honour the EULA. Hence liability falls back on to the Reseller.
? Some Contracts of customers make it mandatory for Organizations to provide Source code/patents of vendors/IP rights etc or even agree to system rejection if a product fails. However, the Vendor may not oblige to any of these terms and in turn the Reseller cannot agree to the same. If you are the Reseller, ensure that you check with respective vendors and add in an exception to the clause in the contract to this effect.
? Make sure that the penalty levied by Customers on delayed projects does not exceed reasonable limits. At the same time, in the post Covid scenario anticipate delays in your supply chain leading to delays in projects. It may be prudent to re-evaluate your supply chain now and consider measures to address long lead procurement issues.
? Ideally governing law in any contract must be of the country in which the business is conducted. This must be insisted upon with both our customers and vendors alike.
? Avoid stringent audit related clauses with both customers and vendors.
? Ensure that the Payment terms agreed with vendors and customers have reasonable parity. This is essential to protect your organizations interest.
In conclusion, Organizations must also create awareness with its Customers and Vendors alike to highlight its perceptions as to why it feels that a particular legal clause cannot be accepted and the threats thereof.
(Above article has been prepared by professionals who are not lawyers but guided by true life experiences and case studies)