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How many legal risks are hidden in your sample contracts?LEGAL VIEW
10 Sep 2012 Business Focus
Have you been using the same sample contracts for your business for years with only small modifications and so far nothing bad has happened? Unfortunately, this is no guarantee that there are no hidden risks which can endanger your business.
In the course of their business activities most entrepreneurs usually use the same sample agreements with some modifications for the provision of their goods and services, or, the purchase of the same. As far as no legal dispute arises with business partners, clients or employees, one is maybe not even aware of legal “mines” hidden in such sample contracts. Often changes to the law and its interpretation by public authorities result in the need to adapt these sample contracts to the current situation, otherwise risks arise which can evolve to the detriment of one’s business.
For example, contracts for the sale of goods and services usually refer to the general business terms of the supplier. First, these business terms are usually not adapted to changes in the law for years, and - even more serious - it is often not safely secured that these terms actually apply to the contract, as local law specifics must be observed in this regard. Similarly, if contracts with consumers are concluded, often changes to the consumer protection regulation may trigger the need to adapt sample contracts in order to avoid the exposure to public sanctions and penalties. Another issue is the clear stipulation of the moment when the title and the risk of damage is transferred to the purchaser, as surprisingly this regulation is often not sufficiently defined. Moreover, if references to Incoterms are made, it should be re-checked whether these references are still actual (as updated by the ICC) in order to avoid later misunderstandings and disputes with business partners. Furthermore, if goods are sold to a customer abroad, a non-negligible risk is that the provisions of the Convention on the International Sale of Goods may become automatically applicable.
As such, work contracts should also be regularly reviewed with respect to references made to legal provisions and technical norms, as the change of these technical norms and applicable standards may trigger higher costs for the work which can result in a dispute over which party shall bear these costs. Furthermore, surprisingly often, work contracts lack a clear provision on the ownership title to a partially finished work (i.e. work in progress) which would apply if the work is not completely executed for various reasons. Finally, one should also bear in mind that each (new) delivered work could be protected by copyright. Thus, regulations reflecting the transfer or licensing of copyright must not be omitted, and should be regularly reviewed from time to time to make sure they comply with current legal provisions. Moreover, especially at larger construction projects or other complex works, it often happens that additional work has to be carried out as a result of a wide range of different reasons, e.g. requirements of public authorities, previously unknown characteristics of the land, vis maior, or, the additional works are simply not included in the contract. These additional deliveries may substantially increase the price of the works and trigger disputes. Thus, the sample work contracts must cover these situations as well.
Regarding sample lease contracts there are often hidden risks in
As regards carriage contracts, one should be aware of the fact that the Slovak Republic has a rather unclear regulation of contracts related to the carriage of goods. The Slovak Commercial Code regulates two types of carriage contracts, i.e. the Contract on Carriage of the Goods, and, the Forwarding Contract. The distinction between these two contracts is very narrow, but it can have a substantial impact on various legal issues applying to the parties, such as the recovery of damages, the liability of the forwarder etc. Apart from that, the provisions of the Convention on the International Carriage of the Goods by Road apply automatically whenever the carriage of goods crosses Slovak borders. The carriage contracts should further mirror the contracts concluded with the customers, with respect to the use of Incoterms, the insurance of the goods, labelling matters etc.
In addition to the above, real estate purchase contracts usually lack a number of crucial warranties to be provided by the seller in favour of the purchaser e.g. with regard to possible environmental burdens, the accessibility of the real estate over public roads or private land, and the feasibility of the planned project on the purchased land. Further, escrow arrangements that define the regimen of the purchase price payment often bear a considerable risk to the detriment of one of the parties, if there would be an attempt to misuse certain gaps in escrow agreements by the other party. Finally, if building land is purchased together with a valid building permit, the contract should also include warranties for the event that the building permit is challenged or even cancelled after the transaction.
Regardless of the business field in which a company is active, it often uses the same sample labour contracts for years without having them reviewed by its lawyers, even despite the fact that the Labour Code has undergone several substantial amendments in the last five years and another substantial amendment is underway. From the recent amendments of the Labour Code the following should be reflected in the sample agreements (if applicable):
Regardless of the type of sample contract, relatively often there is a lack of detailed regulation on the settlement of the parties´ mutual rights and obligation in the event of a premature termination of the contract, as most legal disputes are triggered by an unsuccessful cooperation between parties and an early break-up of the cooperation due to various reasons. In addition, a sample contract should not lack an appropriate data privacy regulation (if applicable), the regulation of tax implications triggered by the contract´s execution, the protection of the parties´ trade secret and good-will, and, as the case may be, a sufficient regulation of copyright aspects related to the contract´s subject.
Thus, entrepreneurs shall observe changes in law in their business field and periodically review their contractual concepts. As experienced lawyers are in a position to review sample agreements in a couple of hours, including the insertion of changes, such precautionary review of sample contracts is worth the effort.
Timotej Braxator and Matej Šebesta are partners with Senior Consultants – Braxator s.r.o.
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