It is difficult for a developing company to “perfectly” draft, or approve, or sign a contract. Objectively, there might be no such thing as a “perfect contract”, since the agreement exists alongside every transaction, which is dynamically evolving, hus each and every contract should be made as per the background and status of the parties to the transaction, the purpose of the transaction, and the feasibility of the contract.
Corporate legal counsel, with extensive practical experience serving the same types of clients over years, are able to give more targeted and specific legal opinions on the risk management of the contract.
Drafting and Examination
A good contract is one that satisfies the commercial conditions of both parties and helps the company avoid risks at the same time. In general, the document is drafted by a sales person, or legal staff of the company, in the first place. When it is passed to the legal counsel, there is not much room for structural amendment, since the framework is set.
This approach is feasible in urgent situations, but might bring problems in terms of risk management, for example, the rights and obligations of both parties are not on equal footings, or key articles are missing. In this respect, it is recommended to engage the legal counsel in the draft of contracts for daily operation, in particular the framework contracts, so as to avoid unnecessary risks.
The legal counsel is exposed to the company for a long time, so he/she is aware of the characteristics of the company and is able to make vertical comparisons with past risks and experience, thus the goal of limiting the loss in time can be served. Meanwhile, the legal counsel is able to make horizontal industry-wide comparisons of risks and comprehensive analysis with industry-level features in mind, and predict risks based on the problems frequently seen in practice.
Furthermore, the sales person might hide some important information intentionally or inadvertently because of lack of the awareness of legal risk prevention, or because of the desire to bring about the transaction, so as to facilitate the internal approval process.
To make the examination of the legal counsel a pre-condition for signing the contract, and to allow the counsel to have sufficient communication with the legal staff and person in charge, will effectively manage the legal risks in
It is insufficient to prevent contract risks by solely relying on the review and revision of the legal counsel. The acts during the contract performance are no less important.
Take the sales contract dispute as an example. In practice, the supplier finds it difficult to produce evidence because it failed to keep the performance proof or other written records during the performance of the contract.
During the performance of the contract, the legal counsel is able to objectively analyse the possible legal risks when the risks are first emerging, or when the counterparty might have breached the contract, and weigh the pros and cons of different legal solutions, and effectively identify, avoid or resolve the risks to protect the legitimate interests of the company, and provide more practical and effective approaches as to what remedies to adopt, or how to reduce loss, or how to collect evidence. The company should engage legal counsel in the contract management, which will prominently reduce the cost of legal dispute resolution, rather than wait until entering legal proceedings.
Another common mistake is to believe that there would be no risks after the major provisions of the contract have been performed. For example, a warranty clause is a common provision in sales contracts, and so are the inspection and acceptance or re-inspection clauses in the construction contracts.
However, many companies leave them aside after the major contractual obligations have been performed and only think of the clauses when a dispute arises, which leaves them in an reactive position. To have timely and effective whole-process monitoring of performance in relation to the contract signed and performed is as essential as the final step of the contract performance.
How is an efficient contract document drafted? The legal counsel can draft regular trading documents (such as purchase documents, employment documents, quality management agreements, etc.) specific to the company’s main business in a systematic way, combining the business practice and operation of the company, as well as the industry features, to save communication costs.
These documents serve as the basic documents on which the legal staff or sales person only have to make minor changes and modifications based on the negotiations and contract status.
Contract management extends beyond the management of the contract documents to the review of the contracts that have been signed and performed, which is essential.
To classify the prior contracts, draw lessons from the risks involved, and deliver written reports or training to the employees of functional departments with the assistance of the legal counsel, will help further reduce the possibility of contractual risks.
To conclude, companies should engage the legal counsel in a whole-process dynamic management of contractual risks. The work of the legal counsel should not be constrained to the traditional approach of “writing down what the company intends and reviewing what the company has drafted”.
Instead, the counsel should consider both the legitimacy of the contract and the business needs of the company, and put emphasis on both the review process and substantial examination. Only in this way can the contract be used in more efficient ways under the pre-condition of risk reduction.
The legal counsel should diversify and extend the services, put themselves in the shoes of the clients, and keep calm as the legal practitioner.
Li Xiang and Zhou Le are associates at Tiantai Law Firm
Unit 2901&2915, T1 Building, Raffles CityNo.1133 Changning Road, Changning District, Shanghai 200051, China
Tel: +86 21 5237 7005
Fax: +86 21 5237 7006