How should you check your contract for traps?

You are about to enter into a contract. How should you avoid falling into dangerous traps? This articles explains how.

 

This little article may save you millions of dollars and save you years of headache.

[A]. The 3Ps

The ‘3Ps’ are the most important consideration when you are about to enter into a contract. You have to ascertain the exact identity and character of each. Each ‘P’ represents a crucial factor. Thus:

P1 = ‘Party’

P2 = ‘Property’, and

P3 = ‘Price’.

[1]. Party

Suppose you desire to enter into a contract with A limited. First, examine whether the company called ‘A limited’ exists. For all you know the person sitting before you may not even represent A company.  Company A may in fact exist. But because the person before you is a fraudster, he may bring you all of A Co’s stationery, but he does not represent Company A.

He may be a real person. His name may be, for example Johns or James. But he may not be representing A company.

A company may not exist, or Johns may not exist. The name of the person before you may in fact be Henry, but he will say, ‘My name is Jones’.

So be very careful the identity of the party you are contracting with. Ensure that the person with whom you’re contracting:

  1. exists;
  2. is not a bankrupt,
  3. is a real person, and
  4. if it iss a company, ensure it is indeed A Company.

Search these things out. A company search is easy to carry out.

[2]. Property

You may for example intend to buy a house. Does that house exist? Are you buying a freehold or a leasehold property?

Do a search on the property. For all you know the property being sold may exist, but it may not be a freehold property. It may be a leasehold.  Do not get deceived.

Check that the property that you are buying is exactly what you desire to buy.

[3]. Price

You must immediately pin down the exact amount of money or consideration that you are to pay.

You may pay a $100 million as part of the purchase price. You may transfer to that person 100 million shares in a public listed company. You may give him, as consideration, a piece of land: e.g. in Central London. You may, as the purchase consideration, agree to give him some 50 million pounds sterling in cash, as well as some shares .

Lock it down and ensure that the money or the property does not ‘walk across’ to the other side until after they deliver to you, your property.

Use your solicitors in order to ensure that they hold the monies as stakeholders.

[B].  The ‘eight Ts’

These are essentially:-

  1. Terms 
  2. Time
  3. Timing
  4. Termination
  5. Exclusion clauses
  6. Force majeure clauses 
  7. Arbitration clauses
  8. Foreign law clauses

[1].  Time

You must understand and put it in your contract when does time start to run.

You may buy a house or a machinery and the seller may say that the contract starts on the 1st of January 2022. If you pay money and then realize that he in fact says the contract started in June of 2021 you would have lost six months.

So, make sure that time is set.

[2].  Timing

Sometimes the goods are to be delivered in parts. The machinery may be in four parts. They all are independently working. The first set of parts would be delivered to you say in June of 2021. The second part in August and the third part in October of 2021.

Ensure that he is able to send you these goods because of covid-19. The airports may be shut down. So he may not be able to deliver those goods.

Then you tell him you will not pay him those monies until you receive delivery of the same.

If you buy a landed property, make sure that you check when these payments are to be made.

When goods are to be delivered check the delivery as against the payment obligation.

You must not only think about making the contract a success, you must think about what’s going to happen if the contract is unsuccessful.

Can you walk away from a broken contract?

A number of lawyers use these words: termination, breach, and repudiation.

[3].  Termination

Termination means the contract has come to an end.

A breach means somebody is supposed to do something and he has refused to do it. A man is supposed to deliver to you a hundred thousand grade A eggs on May 25th he doesn’t deliver these goods to you.

If he doesn’t deliver these goods to you he is in breach. He may correct that breach by sending you those eggs and ask you to pay money at a later time. So he is in breach.

A breach means that the person hasn’t performed his part of the obligation.

A breach doesn’t mean termination.

Then there is repudiation. A repudiation is where a person does not want to perform the terms of an agreement, but he also does not want to follow up. He may want to break it.

For example, you have now decided to buy a property in the middle of London. You have agreed to pay 1.5 million pounds sterling for the land alone. So you have agreed to pay him the money. You handed over the money to solicitors to be held as deposit and as the balance purchase price.

Then, suddenly he calls you and tells you, ‘I am sorry. I am not selling this property to you because I found someone else who has agreed to give me 1.75 million pounds for it.

That is not only a breach. He is refusing to perform in those circumstances. You can rush to the court and get an injunction to stop him from selling the property to a third party, put in a caveat. Stop him from transferring the property and then get a specific performance

Order compelling him to deliver the property to you the moment you pay him.

So be very careful of these three words: breach, repudiation, refusal and termination.

[4]. Exclusion Clauses

A company in England is delivering goods to you worth 20 million pounds sterling. Those goods are to be sent to you. There is a clause in the agreement that says if we send you defective parts you cannot sue us. You cannot do anything to us. You cannot even sue us for damages if, while we are delivering we injure somebody in Kuala Lumpur for example or in Singapore.

Ask your lawyer to check when someone tries to exclude liability. Be very careful of those clauses.

Ask your lawyer, is there anything where he is protecting himself but by protecting himself he is going to injure me.

[5] Arbitration

Unless you are going to enter into a contract that is worth a million US dollars or more, do not include an arbitration clause unless it is a consumer contract.

A consumer contract is when you buy consumer goods and if there is a defect or the person does not perform, you can go to a consumer Court.

If you are entering into a commercial contract and it is worth less than a million dollars do not enter into an arbitration clause unless you really want to. This is because arbitration is expensive.

Unless you have deep pockets, you should never get into an arbitration.

[6] Force Majeure clauses

If you get into an agreement. It states what happens if there is a disaster or a typhoon while the goods are being transported. The seller sends the goods. You have received them at the airport. There is a covid-19 breakout. You cannot remove the goods from the warehouse.

The stevedore has not transferred the goods into the warehouse and the officer says here is my bill of lading paid. You cannot pay because you cannot send it over to the purchaser. You are going to be in problems. Make sure the Force Majeure clauses are properly complied with.

If there are escalation clauses. First, you must do step one then you must do step two, then you must do step three.

[7] Foreign law clause

You enter into an agreement to buy some machinery from Austria. It says, this agreement shall be governed by English law. You are living in Venezuela. If something goes wrong, then if you are going into an arbitration, the law that determines your rights is English law.

So if it is an English law get an English lawyer who understands the law in the united kingdom to tell you what your rights are.

[C].   THE ‘THREE DS’

  1. Normal Damages
  2. Consequential Damages 
  3. Future Damages &
  4. Penalty clauses

[1] Damages

When a contract has been broken there are only two kinds of damages that the law in the commonwealth jurisdiction caters for.

The first is, what both parties knew would be the damages. You buy, for example, a particular kind of ceramic tiles from Germany to use it for your house. The seller sends it to you but it does not fit the purpose, and you have paid him. He has to pay you the damages – the purchase price you paid.

But what if you install it in the way is instructed. He is not liable for any other damage. But if it falls down and injures one of the workers and you are faced with a 1.5 million pounds suit in the middle of London then what happens? Who is going to pay for that?

So, the courts will only give you damages that are naturally arising. An old English case called Hadley v Baxendale (1854) 9 Exch 341.

A similar provision exists in Malaysia, section 74 of the Contracts 1950.

[2] Consequential damages

Someone sends you some goods. You use them and it causes poisoning and somebody else dies. If the parties know that there is going to be this possibility and they cater for it, you can sue the party breaching the contract.

In an English case, A sold some nuts for cattle. The cattle ate this food. All the cattle perish, but B is supposed to send them to another farm for a higher price. B now sues A. A says ‘I will only give you the price of the nuts for which you paid me 1.5 million pound sterling. You can only ask me for that’. B says his cattle died and A was in control of the materials and the chemicals that went into the manufacture of this cattle food. A has to pay B for the price not only of the cattle but for the profits for which B was supposed to make.

So, it depends on whether both parties knew that this would happen. In those cases you can get second level damages. These are known as consequential damages

[3]. Future damages

Suppose you enter into a contract of insurance and something happens in the future. The insurer says he is not liable for this. You have to check the contract.

[4]. Penalty

Particularly in building contract agreements there is a clause that says unless you finish the project within 18 months starting on the 1st of January 2019 ending a year and a half later you will be charged for every single day euros 300,000 as penalty.

The first thing you need to do is whether in the jurisdiction that you are going to perform the contract that kind of penalty is allowed.

In the common law, unless the parties have in fact suffered those damages and they fall within the accepted limits of the law of damages, the court will not award it.

But in certain cases, the law – because of consumer protection – will allow some amount of penalty clauses.

You have to be careful about these things.

Every time you walk into a contract, ask your lawyers:

  1. the 3Ps questions: who is the party, what is the price and what is the property?
  2. the 7Ts: what are the terms, what is the time, what is the timing, what is the termination clause, when will there be breached, when will there be repudiation, are there exclusion clauses, what does the arbitration clause say, what about the force majeure clause, what about foreign law jurisdiction clauses,
  3. the 3D:s damages, first level damages, second level damages which are consequential damages (which is more difficult to get because unless both parties know, the court will not award it).

These are methods by which you can ensure that you do not put your foot into a trap just knowing these basic things.

You now have some understanding of how to get into a contract; and how not to get into a contract.

You can have an intelligent conversation with the legal advisor on the other side or your own legal advisor.

So be mindful of these things

 

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