In any case, these seven steps are the self-considered to be able to fully grasp the contract risk, to assist in the completion of the transaction of the seven important steps and methods. For contract review novice or new contract review, this method is also very useful, very comprehensive. The following details.
One, the understanding of the background of the contract
Contract background, including the purpose of the contract, the contract party's position in the transaction and other important information. Grasp of background information, is the first step in the legal review of the contract, but also the legal review of the contract is extremely critical step. Any time a new or large transaction amount of contract, the legal affairs should be careful to understand the background of the contract.
The purpose of the contract is the motive behind the contract review that needs to be understood. With most contracts, it can be understood from the terms and conditions what the parties to the contract need to do? Why this or that? For example, in a contract of sale, the seller is to obtain goods or services and the seller is to obtain money or consideration. There is usually no mistaking this contracting purpose. But there are also many contracts that have one purpose on the surface and another in substance. For example, an equity transfer contract can be considered a special sale and purchase contract in which the transferor gives up equity for cash and the acquirer pays cash for equity. But that is only the purpose of most equity transfer transactions. There are also many equity transfer transactions where the business purpose is not to obtain equity, but to obtain the target company's land use rights, the target company's financial licenses, the target company's marketing channels, and so on. This kind of embedded transaction purpose will affect the contract in view of the terms, the contractual rights and obligations provisions, the contractual commitments and guarantees provisions, the contractual liability for breach of contract provisions and so on. Another example is the consulting service contract, this nature of the contract can be used for many purposes, some are really to deliver the results of the consulting, some may be only for the use of financial payments. Different purposes determine the focus of the contract review is very different.
The position of a party to a contract in a transaction is also important to understand before a contract review. Contract review is sometimes awkward or deadlocked in the contract is because of a lack of understanding of the position of the contracting party in the contract, especially the weaker party. Legal personnel in the weaker party, see the other party's terms in the contract performance is very dominant, strong, and desperately want to take back the situation, tit for tat. Unbeknownst to them, the status of the transaction has determined the trend of the contract terms. The pursuit of fairness and reciprocity is just wishful thinking. The deal is either not made or the terms of the stronger party are accepted. Contract reviewers cannot ignore this fact. In this case, it is also better to put energy into those terms that can protect the specific interests of the weaker party than to go to the strong party and talk about reciprocity. On the contrary, if it is the strong side of the transaction, the contract reviewers try to take into account the interests of the company in place, for the provisions of the protection of the strength of the protection of the scope of the contract than the general terms of the contract to be deep, to be wide, or in vain dominant position. This point, some lawyers or judges, including some legal scholars, do not quite understand that this is contrary to the principles of contract law. In fact, as we mentioned in the previous section, the goal of legal work is to help enterprises to obtain profits within the scope of the law. There is nothing forbidden by law, which is reflected in the contractual transactions.
Two, the performance of the contract investigation
Contract signing is only the beginning of the transaction, the performance of the contract is the purpose of the contract signed. The performance of the contract and must rely on the performance of the other party to the contract and willingness to perform. In the contract review process, we must consider the future performance of the other party to the contract, otherwise even if the contract is well expressed, it is still a dead letter. Therefore, the second step in the whole process of contract review is to investigate the performance of the contract.
Competence investigation, first of all, the other party to the contract is the subject of qualification, as well as past transactions, past bad record investigation. The main qualification situation is the other company's basic situation, including whether the company name is accurate, whether the company address is real, can be found, whether the company's authorized representative is real and so on. For the main qualification situation, now you can quickly check through some third-party platforms. Such as enterprise letter treasure, enterprise check and other APP software. Past transaction records, refers to whether the counterparty of the contract has cooperated and transacted with the Company or the affiliates of the Company. Past bad records, refers to whether the other party to the contract belongs to or has been on the blacklist of "executors", or whether it is always in trouble with the lawsuit. These records can also be checked through some official websites.
The next step is to assess the performance ability of the other party to the contract. That is, whether the other party to the contract has the economic strength and technical strength to fulfill the contractual obligations as agreed in the contract as well as the strength to bear the contractual responsibility when there is a breach of contract. The market economy is the majority of transactions between strangers. The lack of understanding of the strength of the other party can greatly increase the risk of the contract. This concern is often addressed through mechanisms such as supplier qualification, submission of performance bonds, and handing over the money in one hand and delivering the goods in the other. This is really an assessment of the contracting party's ability to perform and the remedies that follow that assessment. But when these mechanisms are not in place, it is up to the contract reviewer to assess the contracting party's ability to perform.
Finally, it also includes a ranking of one's own company's ability to perform. This is often an area that reviewers tend to overlook, and one that many corporate outside counsel pay little attention to. Your company's ability to perform, in addition to considering your company's performance strength, but also consider the possibility of changes in your company's willingness to perform. Such as an investment company, the main business is to invest in the acquisition of some of the subject company, for the party's (own) funds required to be in place within the expected time; for the party's judgment of the market to be accurate. If the former is not in place, it will affect the fulfillment of their payment terms. If the latter is inaccurate, it affects the continuation of the entire transaction. The purpose of this type of ranking, in addition to ensuring that your company can perform, but more importantly, to design some terms to adapt to such possible changes, without being very passive. The previous investment company, in its model acquisition contract, that is, there are such two types of clauses. One is that the time of the investment money is a flexible period, and the relevant liability for breach of contract is moderate. One is the agreement on the investor's right to rescind the transaction, and there is no liability for breach of contract.
The performance survey is designed to ensure that the contract can be fulfilled after it is signed. Although performance is a real concern after the contract is signed, but in an incomplete credit economy, this investigation must be front-loaded, must be implemented before the contract is signed.
Third, the contract module combing and the necessary terms of the complement
Article 12 of the Contract Law provides for eight advocate terms of the contract, namely, the name (name), the subject matter, the quality and quantity, the price or honorarium, the period of time for the performance of the performance of the performance of the place and manner of fulfillment, the responsibility for breach of contract, and the method of dispute resolution. In contract review, clauses of the same nature grouped together are modules of a contract. Modules of a contract may also be scattered among the various clauses of the contract, with the modules intertwined. For example, the module of liability for breach of contract, may be embodied in the contract specifically "liability for breach of contract" clause expression, may also be embodied in the contract of a party's obligations immediately after the "liability for breach of contract".
The eight advocacy clauses constitute the eight required modules of the contract. In addition to these 8 modules, the contract can also have in view of, promises and guarantees, confidentiality, force majeure, notice and service, applicable law, validity, annexes, signing, other 10 modules. These 8 modules are not mandatory for every contract. The lack of one of these modules, as long as it does not affect the complete expression of the meaning of the two sides, uncompensated.
Different business contracts, the final composition of the module is not necessarily the same, depending on the circumstances. For example, the Beijing Municipal Construction Commission, Beijing Municipal Bureau of Industry and Commerce in May 2017 revised and issued the "Beijing City Stock Housing Sale and Purchase Contract" (self-transaction version, 2017), a *** 14 articles (modules), respectively, the main body (the main module), in view of (in view of the module), the basic situation of the house (the subject matter, the number of modules, the quality of the housing), the housing tenure situation (the number of modules, the quality of the housing), the seller and buyer of the buyer self Transaction between the seller and the buyer to reach a deal (performance module), the transaction price, payment and transfer of funds (price or honorarium module), the property rights of the house and the specific conditions of the commitment (commitment and guarantee module), the delivery of the house (performance module), the liability for breach of contract (liability for breach of contract module), the provisions of the tax, fees (performance module), the transfer of ownership of registration (performance module), force majeure (force majeure) Module), Dispute Resolution (Dispute Resolution Module), Entry into Force (Effectiveness Module), Attachments and Signatures (Attachments Module), etc. It can be seen that, unless the contract consciously put the same content (terms) together, the concept of the module is larger than the concept of the terms. The contract module is to summarize the contract from the content, is the structural form of the contract.
The contract from the structure of the 18 modules described above, the purpose is twofold. One is to deepen the reviewer's understanding of the framework of the contract, and familiar with the standardized expression of the modules to strengthen their "contractual knowledge and skills system" capabilities. Secondly, it helps reviewers to quickly identify gaps and focus their review on those key modules that reflect the purpose of the contract, so as to improve the efficiency of the review. For example, when the subject matter, quality, quantity and price have been basically determined, the focus is on three modules, such as the mode of performance, commitment and guarantee, and liability for breach of contract. In the case of a contractual transaction where disputes and controversies have previously occurred, focus on the modules of notice and service, dispute resolution and confidentiality. Further, in the module of liability for breach of contract, more attention will have to be paid to whether it is comprehensive, detailed and actionable.
The third step in contract review is to sort out the constituent modules of the contract, the reason for which is to structure the contract. The reason for structuring is that structuring the contract helps us to understand the content of the contract in depth, and also helps us to visualize the parts that are "missing". More importantly, as long as the structure is structured, there is always a way to improve its productivity. For the first 8 of the 18 modules (advocacy clauses), every contract has to have all of them. If they are missing, most cases will affect the understanding and performance of the contract. Therefore, the third step of the grooming process also serves the purpose of filling in the mandatory clauses (advocacy clauses), otherwise the completeness of the contract will be compromised, which means that the understanding of the terms of the contract will be compromised.
Four, the contract process combing and transaction logic verification
Any contract is some kind of transaction. There is a transaction, there is a process. If the module reflects the contract "horizontal part", then the process reflects the contract "vertical part". Through modules, we know the distribution of rights and obligations in a contractual transaction. Through the process, we know the flow of rights and obligations in a contract transaction.
Contract process sorting refers to stand on their own side of the position of the contract transaction steps are arranged to see the logic of the transaction, for the next step of the review work to lay the foundation. Contract transaction logic is the main line of the rights and obligations of the parties to the contract. The basic transaction logic is so a dozen, complex or new type of contract, the transaction logic can be superimposed by the basic transaction logic. Such as an equity acquisition contract, as the buyer, you need to pay the price, with changes and handover, financing, compliance with commitments, etc.; as the seller, you need to handle changes and handover, guarantee, authorization, compliance with commitments, etc.. This is the logic of equity transactions. Another example is a construction contract, as the contractor, you need to pay the price, review the progress of the project, acceptance, compliance with commitments, etc.; as the contractor, you need to organize the construction, completion on schedule, quality assurance, maintenance, compliance with commitments, etc.. This is the logic of engineering construction transactions.
But many of the actual contract, the contract transaction process is not clear, the logic is not clear, and there are even contradictions. This needs to be in the contract process sorting process, the steps of the contract transaction is organized, the transaction logic it contains to verify. This work, can be shown with the help of some visualization tools. Depict each party to the contract, starting from the signing of the contract, in what kind of timeframe and what kind of actions are to be accomplished, respectively, in a set of flowcharts. This can be called the visualization of the contract process sorting. The advantage of this is that it allows you to visualize where the parties are in the process so that you can capture the key points and prepare for the next step in the review. At the same time, it can be quickly observed whether the logic of the transaction is complete, clear or even reciprocal. For example, in an equipment procurement contract, the buyer's main obligations are payment, etc., and the seller's main obligations include delivery, installation, warranty, etc. In the transaction flow chart of the procurement contract, if we find that for the transportation and insurance before delivery of these two actions are not shown, we should ask which party to bear them, if the seller to bear, we should consider whether the seller's offer price includes these two costs. Assuming that they are not included, the seller's profit from the transaction will be reduced, and assuming that there is a risk of an accident occurring during transportation, the seller's expectations of the transaction may be affected.
Contract process combing and contract module combing, are the contract "deconstruction", the purpose is to better understand the content and logic of the contract, in order to establish the overall cognition of the contract under review. For contracts with which the reviewers are already very familiar, these two types of combing may be accomplished quickly. In practice, for the reviewer, belonging to the first encounter or the relationship between the complexity of the contract, these two kinds of combing is very necessary.
Fifth, identify the key risks of the contract
Through the contract module combing and process combing, we re-established the cognitive structure of the contract under review. We see the composition of the contract text, the contract transaction process, the next step is to combine the reviewer's "contractual knowledge and experience system", to find those unfavorable to their own side, over-protecting the other party, not easy to understand, there are omissions and so on. This is the step of identifying key contractual risks.
So, what are the terms or behaviors that constitute a key risk for a party in a contract? What are the principles of judgment? First of all, it should be "different from person to person". Different companies, the same nature of the contract, the key risk of their opinion must be different. Even different reviewers may have very different risk preferences. In this way, is it impossible to say what is the key risk of a contract? Because it is only subjective? Actually, no. Risk is both subjective and objective. Secondly, there is a certain *** generality in the determination of critical risk. As mentioned earlier, any contract is a transaction. Any transaction, has its own transaction logic. Transaction logic can be regarded as the underlying content of the contract. The parties to the contract in the logic of the transaction of the underlying part of the "concern" is in fact the same. These "common concerns" are the cost and risk clauses of the contract. The content of these two clauses constitutes the key risk of the contract.
Cost clauses in a contract are clauses that increase the cost of performance for one party to the contract. For example, for the buyer in a contract of sale, the price, the payment method and so on are related to the cost of its performance of the contract, these clauses are cost clauses. Risk clauses of a contract are clauses that are likely to cause risk to both or one of the parties to the contract. Such as unclear semantics, etc., may create additional risks. Generally, cost clauses are bound to give rise to some kind of risk as well, and the risk can ultimately be absorbed by the cost. Cost and risk are closely related, they are just described from different perspectives.
Typical clauses that may increase costs include whether or not the price includes taxes, the time limit for payment, the time limit for delivery, the requirement for an additional deposit, the calculation of liquidated damages, the scope of compensation for damages incurred, the scope of application of the underpinning clause, and the place of jurisdiction, among others. Typical clauses that may cause risks include ambiguous semantics, subjective expressions that cannot be clarified, failure to take relevant circumstances into account, inconsistencies in semantics, failure to define the relationship between the two contracts, failure to verify the qualifications of the subject matter, granting of special rights to a single party, and so on.
Identifying the key risks of the contract to be examined is to find the cost and risk clauses of the said contract. As you can see, these clauses are both issues for contract reviewers to focus on when using the legal profession and key issues for contract commercial staff when considering contractual transactions.
Six, the contract text modification
Contract review of the first five steps of the seven-step method, in fact, are prepared for this step. At this step, we really start to modify the contract. Text modification is the core of the contract review to the practical step, otherwise the first five steps belong to the "paper".
After understanding the background of the contract, sorting out the contract module and process, and identifying the key risks of the contract, we compare ourselves with our own "contract knowledge and experience system", and then we start to make specific textual modifications to the contract. The basic actions are additions, deletions, and changes.
Add, is to make up the contract text. The reason is that the contract there are omissions, may be absolutely necessary provisions, may also be relatively necessary provisions; may be a risk clause, may also be a cost clause. If there is an agreement in a contract, B to the Party A to provide products A should be in line with the relevant national quality standards, otherwise it should be liable for breach of contract. The problem here, is that the quality standard is not clear, easy to dispute, which leads to risk. In order to avoid the risk arising from the inconsistent understanding of the standard of product quality, it is suggested to read: "Product A provided by Party B to Party A shall comply with the national GB/T xxxxx-2017 quality standards, otherwise it shall undertake to bear the liability for breach of contract in accordance with Article X of this contract."
Delete, is to delete certain contract language. The reason is that the article is illegal, wrong, repetitive, contradictory, inoperative and so on. Such as many form contracts will be agreed in the exemption clause, the contract law provides that if the other party caused personal injury and claim exemption clause is invalid. Encountered such a clause expression, it is best to recommend the deletion. Contracts also often appear some of their own unfavorable, strong party to a non-reciprocal conditions of their own terms, the reviewer can also be deleted directly, unless the two sides have a better, more compromising way of expression. Such as a contract agreement, party A in the receipt of party B's payment notice, if party B is not in breach of contract within five working days to pay. Standing in the position of party B, can be "such as party B without default" these words to be deleted.
Change, is to modify the contract expression. This is the most common contract review action. The reason is that the terms of the contract is not completely unacceptable, or the terms of the module should have existed, just to change the expression of the text of the contract to a more favorable expression of their own. For example, a contract agreement, "Party B agrees and undertakes that if the confidential data is disclosed to a third party without Party A's written permission, the direct loss caused to Party A is confirmed by a third party, Party A has the right to claim compensation from Party B through legal channels." In Party A's position, it can be changed to "Party B agrees and undertakes that if the confidential data is disclosed to a third party without Party A's written authorization, Party A shall have the right to claim compensation from Party B through legal channels for any loss caused to Party A."
Additions, deletions, and changes are specific means of contract review work, to be carried out around the background of the contract in the early stages, the scale of its grasp depends on the module to be examined contract and the process of sorting out, as well as the identification of the key risks of the contract, and so on. Of course, there are also hidden factors behind, that is, the reviewer's contractual knowledge and experience system.
In the actual contract review by the legal staff, there is another point that must be mentioned is that when the reviewer has doubts about the contract and needs to further confirm the situation, or believes that the contract exists in the basic transaction methods and processes are unclear or contradictory, the contract to be reviewed will generally be returned to the business sector, so that they can verify, modify their own conditions, and then re-sent for review. This is also a way of handling contract review.
Seven, the contract winning ability to assess
Reviewers proposed specific text changes, it seems that this round of contract review has ended, but in fact there is still important work to be done. And, this work is often overlooked. This final step is to assess the contract's ability to win. In this way, to form a complete set of contract review closed loop.
The work on a contract is not over with the issuance of a review opinion, but the contract must also be able to be used for fulfillment and be able to withstand the test of disputes. Hence the need to assess the capacity of the reviewed contract. It is a check on the ability of the contract to win the case before the review of the contract has been completed and the contract is fulfilled. The check is based on the assumption that the contract has entered into the performance stage, and according to the contract, if there is a dispute or controversy, the possibility that your party will "win" through the judicial/arbitration route, etc.
Assessment of the ability to win the contract can reflect the core modules of the contract review, such as commitments and guarantees, breach of contract provisions, dispute resolution, etc. Whether the correct expression, whether comprehensive assumptions of the various scenarios, whether there are sufficient measures to deter the other party's breach of contract as well as adequate compensation to restore the losses caused by the other party's breach of contract. For example, through the simulation of contract litigation, the reviewer found that in the setting of liquidated damages, even if the case is won, the initial business interests of the enterprise can not be recovered, or even partially recovered, which prompted the reviewer to revise the calculation of liquidated damages, increase the proportion of liquidated damages, and so on.
Through the assessment of the ability to win, the contract reviewer again returned to the contract text modification, to the end for the beginning, the reviewer can continue to optimize its review of the views, but also to complete the contract review of the last step of the seven-step method.