How to avoid risks of non-fulfillment of the contract by the contractor

Any business in its activity faces the need to conclude agreements. Agreements for supply (purchase and sale), rent, labour, services are the most popular types of economic agreements. And of course, these are the agreements that are most frequently violated.

The court practice of contract law mostly consists of disputes arising from the violation of financial obligations to pay for the supply of goods and services, the supply of poor quality goods, improper performance of work, or late performance  of contractual obligations.

Today we will elaborate on how to protect yourself when drafting an agreement. As this is the basis of your business and the key to its safety.

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What steps can be taken to draw up a secure agreement with your counterparty?

The law provides companies with the freedom to conclude an agreement, choose a contractor and determine the terms and conditions of the agreement, but it does not establish general requirements for agreements. This leads to the fact that entrepreneurs use standard forms of agreements that are unable to protect their interests in the event of a conflict.

Here are some legal tips for the competent drafting of the agreement.

1. Structure your agreement. 

According to the law of Ukraine, a contract is concluded if the parties have reached an agreement in due form on all essential terms and conditions of the agreement. 

They include: 

  • The provision of the subject matter of the agreement; 
  • Provisions defined by law as essential or necessary for agreements of a particular type; 
  • Provisions on which at least one of the parties has reached an agreement.

Not everyone understands the vague wording of the essential terms and conditions of the agreement. However, the competent designation of such terms can be an effective tool to protect your rights in the event of legal proceedings. We recommend, first of all, that you clearly and without errors prescribe the following clauses of the agreement: 

  • The subject matter of the agreement is the essence of the whole agreement, a description of what each party must do for the other party. Each business transaction has its own peculiarities, so each subject matter of the agreement is individual. 

Thus, the subject matter of the supply agreement is the transfer of goods in due time and subsequent payment for them, while the subject matter of the service agreement is the provision of intangible services. 

One cannot simply take a template agreement and hope that it will cover the interests of both parties in full. Incorrectly specified subject matter of the agreement may further invalidate the entire agreement;

  • The price and due date. This clause often raise the questions about agreements with a price specified in foreign currency.  The law of Ukraine does not prohibit that the agreement specifies the monetary equivalent in foreign currency, as well as provides for the right to recalculate the monetary obligation, if the currency rate jumps. But you should take into account that monetary obligations must be performed only in hryvnia;
  • The rights and obligations of the parties; 
  • The procedure of delivery and acceptance of goods or services. In this clause, you may agree on the time limits and addresses for delivery of goods or provision of services, the type of transport, the accrual of ownership to the goods by the Purchaser, the list of shipping documents (the main such documents are the invoice, consignment note, certificate of delivery and acceptance of goods (rendered services), bill of lading). 

Goods shall be accepted by quantity and quality, it must comply with the data of supporting documents. As in the case of tax audit, the supporting documents will confirm the origin of goods.

To ensure the safety and accountability of the entire process, you can prescribe even the types of accounting documents to be signed in the process of acceptance and delivery of goods;

  • The liability of the parties for breach of the agreement; 
  • Duration of the agreement. You can find many standard formulations for the duration of the agreement. But they will not be appropriate if your situation is not standard. For example, in the case of automatic renewal of the agreement - that is, its automatic renewal under existing terms. If you choose this way of the agreement extension, then be sure to indicate the period for the automatic renewal of the agreement, which will allow to avoid extension of the agreement for an indefinite period of time, and eliminate unnecessary problems;
  • Termination of the agreement. Even here you can provide options that will help you to painlessly terminate the agreement, if necessary. However, it’s worth remembering that the article about the termination of the agreement unilaterally is legally incorrect, and at the request of one of the parties the agreement may be changed or terminated by a court decision;
  • Addresses and bank details of the parties

Based on the experience of recent events, do not forget to prescribe force majeure. 

Professionally prescribed essential terms and conditions of the agreement will help solve any dispute by peaceful settlement within the shortest possible time.

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2. Prescribe the penalties..

As the court practice shows, in case of breach of contractual obligations by the counterparty, such penalty clauses in the agreement help to fully restore your rights, reduce losses and collect various penalties. These clauses shall focus on the liability of the parties for non-performance or improper performance of the agreement. 

This section of the agreement should specify the possible ways of breach of obligations and the amount of penalties to be applied in case of such violations.  But remember that the waiver of the right to go to court is invalid, and the amount of penalties should not exceed the limits of justice. 

You should distinguish between such sanctions as as fines and penalties. A penalty is calculated as a percentage of the amount of the unfulfilled obligation, but a fee is calculated as a percentage of the amount of the unfulfilled obligation for each day of delay. At the same time, the fine may not exceed the double discount rate of the NBU, which was in force during the period of delay. 

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3. Check the counterparty.

Before entering into an agreement, do not forget to check your counterparty’s details in open public registers, especially if you are entering into a transaction for the first time. If you don’t know how to do it or what registers to check, contact us, we will help you to effect a secure transaction.

If you want to get a ready-made agreement designed to protect your interests, just give us a call.

Publication date: 24/04/2020

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