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October 29, 2014

 

5 LEGAL CHARGES IN CONTRACT,
THAT COULD UNDERMINE THE BUSINESS

 

When we conclude the contract we should be attentive and carefully read the conditions under which we are sign. In this review, we have chosen five one of the most innocuous but actually dangerous moments in contract, negligence to which will lead to very poor results.

1. Most of the contracts are begin from the name of the contract, the date and place of their conclusion. If the first condition can be depersonalized just naming a contract No___ so that, to the second and third elements you should come armed with 12 x zoom magnifying glass. From the date of conclusion of the contract depends a lot of things, actually all contractual arrangements of the contract starts to move with scratch from the date of the contract. If, due forgetfulness, you signed undated contract, relying on the wisdom of other employees, do not be surprised to discover that the wisdom of those persons had gone not far away from yours and the contract was signed a month before the actual date of its conclusion. Get ready then beg from the counterparty additional agreement to adjust the terms or count your losses for the payment of the penalty for delay in performance of contractual obligations. Well, if you handle it out and partner will agree not to impose you with penalty, do not relax you should look to the place of the contract conclusion. Remember? You do not doubt in the professionalism of the staff at the signing of the contract. So that, many people do not pay attention to the condition of the place of contracting, considering it insignificant. And it’s in vain, because from what city and perhaps the country you will specify as the location of the contract conclusion, will be defined mode of enforcement of the contract applicable legislation. Namely, the law of which country will be governed by a contract. Do you get the idea who will be the king of the party in some case and control the situation? By the way, you will not get invitations to the party, in this case. Also do not forget about taxes, because if the actual place of performance of the contract will be in another country, but the contract will specify it in the city of your country, you will not be able to rely on the exemption from tax under the contract and will have to pay income tax partner, not withheld at source of payments directly to the cashier of the widely smiling tax inspectors.

2. Beware of signing the contract by confidant partner, not his first person authorized by statute or regulation. In this case, there is always a high risk of recognition of the contract as null and void due to the possible uncertainty in the power of attorney in respect of the powers of the authorized person to sign the contract. In foreign trade contracts, the Achilles heel, besides other things, is the lack of legalization of the power of attorney, which, again will rise the question of the contract actuality. Legalization of documents is intended to certify compliance of the power of attorney with the requirements of legislation of the country of partner registration. However, do not cool it, if the power of attorney is quite clear about the powers of a trustee and is legalized  in the case of foreign trade contracts, contracting is quite safe.

3. It is essential to check the accuracy of the contract volume of the contractual obligations and their costs. If, for example, in the subject matter of the contract will be written an implementation of the facility construction with related liabilities or to deliver the goods in the mode of Incoterms with additional caveats. Be aware that only with performance of basic contractual obligation contract may not end, the partner may invoke the phrase "related liabilities" and ask to build the access road to the object of construction, according to the master plan, which it was provided. Or the counterparty may require compensate for the costs incurred for the transportation of goods from the customs border to the location of the customer, since the contract, notwithstanding the provisions of Incoterms delivery to the border «DAP», contain additional terms for the supply of goods to the customer's location. In this case, the term «DAP» will be treated as a supply to the location of the customer as Incoterms being trade customs always gives priority to the text of the contract.

There no need to speak on the importance of the contract value conditions, however. Perhaps the first and foremost thing on what Contracting parties are agreed is the cost of the contract, but many people mistakenly believe that after the successfully completion of the cost negotiations  , you can already unbutton collars and relax neckties. But we should not forget about another important point regarding the contract value. Namely, the fixity of the contract value or its estimation. Simply speaking, is it the final value of the contract in which the amount of the contract is firmed and will not be subject to revision in future or it is approximately at which the amount of the contract will be determined by the fact of the scope of the contract. After signing the contract for a certain amount, you can easily miss the condition, located just below, and determines that the final value of the contract will be formed on actual basis. Can you imagine what an unpleasant surprise will be discovered later that the sum of money, which you would expect at the beginning of the contract strongly diminished in weight to its closure. It is good, if it will ends only with surprise with valerian, and not bankruptcy with a heart attack.

4. One of the critical legal points in the contract which is not inferior in deadly sharpness to the samurai sword is the moment of the time of fulfillment and transfer of responsibility for the delivered products or results of performed works. Let’s imagine that you have agreed to deliver the goods to the customer and issued as a fact of delivery of goods an invoice, but forgot to read the terms of the contract that together with the invoice should be issued also an act of acceptance of the delivered goods. Taking into account that the invoice is not a document confirming the fact of the fulfillment of the obligations of parties (this is discussed in detail in our previous article "Acceptance checkout documents: questions of duplication and unification"), and that the contract terms for acceptance were not met, contractual obligations of the supplier without act of acceptance of goods delivery shall not be deemed to be satisfied. Accordingly, the customer can withhold a penalty from the supplier for the late delivery of goods or defects related to the quality of the goods, even caused by employees of the customer, to the supplier, since, due to the lack of an act of acceptance of the goods delivery, legal transfer of ownership of the goods from the supplier to the customer was not occurred and responsibility for safety and quality of the goods, still remains after the Supplier.

Remarkable such a case when under the construction contract, the contractor agrees to build a technological complex with the delivery of production equipment. Contractor insists to supply equipment with its acceptance by the customer and payment of its value before completion of the facility. Desire of contractor to protect itself financially and receive cash is understandable. But we should not forget that the contract is for the construction of the object, rather than the supply of goods. Accordingly, the time of fulfillment of obligations under the contract and transfer of property rights for the delivered goods should be made after acceptance of the whole factory by the state commission. Of course, in the case of private money, it will be made by the working committee, but we know that in the private sector there is no money to be found for the plant construction, so let it be the state commission.

So, if the customer, showing cowardice will agree on arrangements of the contractor for early acceptance of goods, rather than the target object at whole, first it will violate the Civil Code of the Republic of Uzbekistan on the construction contract time, second will not be able to issue accounting entries on the adoption the equipment to the balance, and if he made it, than the first inspection check will show that could not to did this, because again we remind that the contract is for construction works, and not for the sale and equipment receive to the balance should be done after target object final completion. And three, customer will expose itself under the contractor, on the results of the quality of the construction works. Remember, we mentioned the risk of transfer of responsibility for the goods. So, even if the customer in violation of order will agree to accept and pay for the equipment until the end of construction of the facility, he will not be able to challenge any flaws and defects in the equipment, since acceptance of equipment was made before the construction acceptance without technological tests, and customer did not   presented any claims and even if he wanted, he could not to do that, because it firstly requires factory built, wherever equipment would be mounted. A vicious circle, now can you see where the wind blows? That's right, do not rush the process, or rather do not accept equipment, if the plant is not fully accepted yet.

The logic of the situation pokes the head in response. But no, we like a sighted blinds persistently trying to paint ourselves into a quagmire. And then bitterly weeping, but it will be too late than and we are obliged to write a frank for embezzlement of the state means. Why? Did we forget to say that 90% of the contract value is directly equipment cost and pre-paying the money for the goods equipment, you will not have a chance to wave with your fists penalties, in order to get them back in case the constructed object won’t be accepted by the State commission due to its poor quality.

5. One of the trickiest terms of the contract, for which you can not pay attention, is the condition of the right of contract party to transfer its rights and obligations under the contract to a third party. That is, to use the right to transfer the debt and assignment of the right for the claim.

When you make a contract worth over a million dollars, be sure to limit the right of the partner and generally all of the agreement parties, to transfer their rights and obligations under the contract to a third party. So you'll be honest with each other and do not leave each other loopholes to get away at a crucial moment. Since the right to transfer the debt and assign the claims, are the default birthright of the Civil Code of the Republic of Uzbekistan given to the parties of the contract and lack of direct indication in the contract for such tricks will lead to the fact when you will now talk to the contract with one gentleman, and tomorrow with a completely different mister, which is called as mister with a stretch, since he will be dressed very flashy, if not poor.

Allegory provided here is not mocking under the poor taunts but regards to the numerous cases of fraudulent schemes, when the unsuspecting gentlemen’s were running around their fingers, signing an agreement on transfer of debt, the part of the debtor under the contract, to the bankrupt company, which are then paid to the creditor by the rags and tarpaulin boots, unless the nature was enough, and if not, then welcome to the world of cribbed losses.

What these dangerous similarity of the civil agreements presented like? Let's deal, transfer of debt is an agreement between your debtor and the third party, according to which, the third person takes over your to pay the debt of the debtor or to do what he had to do under the contract, that is how he become the new party of the contract, instead of the former debtor. And your old debtor becomes free as the wind, slyly rubbing his hands, became sweat from the excitement.

 

Transfer of claim or Cession is similar to the transfer of debt, only here you as a creditor giving your right to claim for the debt under the contract to a third party. Honestly speaking, this does not matter for the debtor, as the debt has not disappeared, but only changed the owner, but for some cases, when a person of the creditor is of fundamental importance, or it kept outstanding obligations, it is better to leave the old lender and not to give him to grow the wings.

 

 

 

 

Timur Abdulazizov
Legal expert

 

 

 

 

 

 

 




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