Based on my nine months of experience as Director of Legal Services at StarBPO Malaysia Sdn Bhd and having reviewed more than 50 contracts received from SMEs, I have observed the following concerning trend among businesses:
- contracts are often poorly drafted, leading to significant legal risks.
- some agreements are merely adopted from standard templates (purchased off the shelf?) and /or re-purposed old contracts with minimal, often inadequate, amendments to suit the current terms for a new project / transaction.
- crucial clauses such as “Non-Solicitation,” “Non-Compete,” “Force Majeure,” and “Confidentiality and Personal Data Protection”, to name a few, are frequently overlooked or poorly worded.
What are the legal consequences under the Contracts Act 1950?
A poorly drawn-up contract can lead to a host of legal issues, ranging from unenforceability to significant financial losses, and damaged relationships. Some of the potential legal and /or other consequences are:
Unenforceability (Void or Voidable Contracts)
Contracts lacking essential elements can be rendered void (as if they never existed) or voidable (cancellable by one or both parties). These elements include:
(i) Offer and Acceptance: Clear terms and mutual agreement.
(ii) Consideration: An exchange of value. Without consideration, an agreement is generally void, with some exceptions (e.g. promises in writing, promises to compensate for past acts, promises to pay a time-barred debt)
(iii) Intention to Create Legal Relations: Parties must intend the agreement to be legally binding.
(iv) Capacity to Contract: Parties must be legally capable (e.g., of legal age and sound mind), and not disqualified from contracting by any law (e.g. minors, persons of unsound mind)
(v) Legality of Object/Purpose: Purpose of the contract must be legal, moral and not against public policy.
(vi) Certainty of Terms: Terms must be clear, unambiguous, and complete. Vague or incomplete terms can render a contract void for uncertainty.
2. Disputes and Litigation:
Ambiguous or missing terms often lead to disagreements over obligations and rights, resulting in costly and time-consuming disputes. Courts may apply the “contra proferentem” rule, interpreting ambiguities against the drafting party.
3. Financial Losses:
Unenforceable contracts mean parties may fail to recover payments or enforce obligations. Poorly drafted agreements can also lead to damages for breach, loss of intellectual property, and unforeseen costs due to unclear scope or timelines (“scope creep”).
4. Damaged Business Relationships and Reputation:
Beyond legal and financial ramifications, poorly drafted contracts can erode trust, damage business relationships, and harm a company’s reputation due to frequent disputes or perceived unreliability.
To mitigate these risks, SMEs should:
- Ensure all essential contract elements are present.
- Use clear, precise, and unambiguous language.
- Explicitly define all terms, responsibilities, and expectations.
- Include clauses for dispute resolution, termination, and force majeure etc.
- Comply with all statutory requirements.
- Regularly review and update contracts to align with current laws and regulations such as the Personal Data Protection Act (PDPA) and the Cyber Security Act.
Ultimately, outsourcing legal matters to experienced professionals can provide PEACE OF MIND, allowing SMEs to focus on growth without the burden of potential litigation or non-compliance issues.
