9 Best Practices on Contract Vetting

If you look at two different agreements for similar purposes, let's say two sale purchase agreements or two credit agreements, you will find them to be similar to quite an extent. On the surface, drafting agreements seems like an easy job once you know the format and essential clauses.

A visit to civil court dealing with commercial dispute will enlighten any person of how many cases, related to the interpretation of the agreement between the parties, are registered every day and remain under litigation. One of the reasons behind so many disputes concerning commercial contracts is that parties could not come up with a good agreement covering all sides and at the same time is simple to understand and not ambiguous.

This is where agreement vetting comes into the picture. Agreement vetting can save you or your client from a lot of trouble in the future. Vetting in simple terms is properly checking the contents of an agreement before signing one.

Here is a checklist of how to do vetting right-

1) Research

Before drafting, it is essential to get hold of the relevant laws applicable to the transaction. You cannot agree in contravention of applicable law. It is also crucial to figure out the clauses other people have incorporated into similar agreements. This is only for the sake of the knowledge though; your approval need not be based upon other agreements available online for the following reasons:

  1. Publically available contracts are mostly for demonstration purpose.
  2. The terms in such contracts are generalized to fit the requirement of maximum people.
  3. Requirements of all transactions vary and therefore contract from one transaction cannot be used as it is for another transaction.

List out your or client’s requirements-

Customization is the key for drafting a well-suited agreement for yourself or your client. Call your client for a meeting, and ask questions like,

  • "What is more important for you in this particular deal, time or money?”
  • “How would you be affected if this deal goes sore?”
  • “Would you rather prefer to resort to alternative dispute resolution methods or litigation in a court?"

Prepare your list, based upon your prior understanding of client's requirement. When the client is a layman, they might not even know which information is vital to be incorporated in an agreement. Engage the client in a conversation to pull out the details. Based upon your prior research, ask if they would like to incorporate certain conditions that others have also incorporated, especially when such conditions are for the benefit of the other party.

2) Check out the draft thoroughly

If you are asked only to vet an already vetted agreement, thorough due diligence is essential. Jot down the critical points you wish to make sure the agreement should have and make a checklist. Do not hesitate to add or subtract a few words or the entire clauses.

Go through the draft more than once, and mark the portions that have the possibility of being interpreted in more than one ways. The ambiguity of an agreement could result in different interpretation by both parties leading to a dispute. Simplify the language and remove most of the uncertainties. Add clarifications wherever possible.

3) Definitions

Definitions are most valuable when it comes to interpreting any clauses. Make sure that every technical word used in the agreement is defined. Also, words, which could be misinterpreted, should be set.

4) Duties and Liabilities

Duties are central to business transactions, and so are the liabilities. It is crucial to define and lay down the responsibilities of both parties. Obligations may arise while doing any business, e.g., if the products are delivered late and lead to loss to a party. Such general scenarios should be chalked out, along with the other likely event relevant to the business transaction. Liabilities needs to be undermined and well laid in the agreement.

5) Guarantees, Warranties, Indemnities, etc.,

Guarantees, warranties, indemnification, etc., are the well-set liabilities. Each of these should be well understood in the context and defined wherever required. It should also be clarified that such liability is being created in on happening of which event. Don’t feel shy to ask your client to reconsider, if you find any of these clauses not in the best interest of the client.

6) Intellectual Property Rights

In transactions like licensing, the grant of the dealership, etc. the issue of IPRs comes up necessarily. It must be remembered that IPR has a vast scope of application. It is suggested to take a check if any problems with IPR could come up during transaction and relevant additions should be made to the draft agreement.

7) Dispute Resolution Method

It's about being practical, and not about being a pessimist, to assume that a disagreement may arise at a certain point of time. It is better to be prepared for such a situation, and hence a practice of incorporating Dispute Resolution clause has been adopted in the commercial contracts. Mostly, the dispute resolution clause provides for arbitration and lays down the procedure to be taken in case of a dispute.

8) Broader vision

It is vital to keep the bigger picture while drafting an agreement that brings clients or your welfare. The limitation periods allowed under the civil laws will enable litigation to be started well after months of the conclusion of the transaction. It is important to play fair and ensure that the agreement reflects fairness.

9) Jurisdiction and termination

Even if parties agree to resort to an alternate method of dispute resolution, they still have the option to approach a court of law in case of a dispute. Therefore, to prevent any future trouble, it is imperative to lay down the law and the court, which shall have jurisdiction in case of litigation.

In addition to that, it is also important to lay down conditions and procedure to terminate the agreement. It might happen on the part of both the parties that they might not wish to go on with the business transaction. Therefore, it is better to lay down such safety procedures which shall allow one party to make a move out of the agreement in such a way that there are least damages caused or no damage caused at all.

-Akshay Mankar


Posted On: 04 Sep 2019 Home / Legal / 9 Best Practices on Contract Vetting