Is the exclusive clause strong enough to protect the company?

1. C has bypassed W as the exclusive reseller and approached KS directly for support & maintenance services for job search & job matching modules. (Kindly refer to Supplemental Agreement - Appendix, clause 1.0 & Subcontract Agreement - Appendix, clause 1.0). Is the exclusive clause strong enough to protect us?

2. We have officially wrote to KS and C, warned them about the potential breach of contract.

3. Further, we have requested for quotation for yearly maintenance. However, C refused to supply the quotation to us.

4. If KS awards the contract directly to C, can we sue C and KS for breach of contract? Will there have any anti-competition issue arise due to the “exclusive” contract?

Ø Is the exclusive clause strong enough to protect us?

Subcontract (SC) – W & C

· Based on Recital E of the Subcontract, C shall supply the Products along with its Maintenance and Professional Services as specified in Appendices, W is given the right to resell the Resale Products, Maintenance & Professional Services to KS.

· License and Maintenance Fees is as per Appendix and the Maintenance means the maintenance services to the Resale Products to KS.

· Clause 30 further states that W shall issue Purchase Orders to C in respect of Resale Products and Maintenance to KS.

· Clause 20 further strengthens W’ position as the exclusive reseller in Malaysia.

· And Clause 4.0 states that C shall have full knowledge of all provisions and documents (among others the Supplemental Agreement & Principal Agreement) incidental to the Subcontract except for the prices included in the documents.

· Clause 1.0 – Appendix also states that the Licensor licensed the Product together with its maintenance as specified in Appendix to KS under the License Agreement through Integrator, as the exclusive reseller.

Supplemental Agreement (SP) – W & KS

· Clause 9 says that KS agrees that W shall the exclusive contractor for all maintenance works in respect of the EIS Portal and even though there are 2 separate and independent maintenance works for the Subcontracted Modules and W’ scope of work, KS acknowledges that W as the developer of the EISIMS shall maintain the same. W shall be the exclusive contractor for all maintenance works in respect of the EIS Portal.

· Clause 1.0 – Appendix also states that the Licensor licensed the Product together with its maintenance as specified in Appendix A to KS under the License Agreement through Integrator, as the exclusive reseller.

· Clauses 5.2 & 5.3 provides that KS agrees that all terms and conditions in respect of the Job Search and Job Matching Modules shall be subject to and strictly in conformity with the back-to-back Subcontract between W and C.

KS shall discuss and negotiate with C in the presence of W in order to clearly identify and finalise the following:

i. The solutions, products and maintenance that required by KS;

ii. The solutions, products and maintenance that may be provided by C together with its pricing;

iii. Whether such solutions, products and maintenance provided by C is able to meet KS’s expectation; and

iv. The implementation timeline for C to complete Job Search & and Job Matching Modules.

License Agreement (LA) – C & KS

· The Maintenance Fees are set forth in the Supplemental Agreement concluded between W and KS in relation to the Job Search and Job Matching Modules.

· KS shall pay license fees, royalties and all other prices, costs and charges for KS‘s use of the Products and all fees related to the Maintenance Services in accordance with this Agreement to W.

(a) Taking into consideration of the above provisions, firstly, as for the Resale Products and Maintenance work, KS & C have both consented to the following-

Ø W as the main contractor, appoints C to provide the Products and Maintenance services for the Subcontracted Modules with the consent of KS;

Ø W at all times remains as the main contractor answerable to KS in case of C’s default (clause 110(v) of the SP) albeit with limited liability;

Ø KS shall pay W, the main contractor for the Products and Maintenance services provided by C and W in turn pays C, its Subcontractor;

Ø C has given the right to resell the Products and Maintenance services to W and both KS and C acknowledged that W to resell the Products and Maintenance services to KS, as the exclusive reseller subject to the License Agreement;

Ø C also has full knowledge that KS shall pay all fees/charges in relation to the Products and Maintenance services to W first and thereafter W will pay C.

(b) On the basis of the foregoing, it appears safe to conclude that all parties, in particular KS and C have full knowledge that W is the exclusive reseller for the Products together with the Maintenance services.

(c) It can also be confirmed that C, the subcontractor cannot recover the fees / charges from KS where they do not have a direct contractual relationship or any express right to be paid directly.

(d) Against this backgrounds, it is also clear that C is to provide the Products together with the Maintenance services to KS by way of W as the exclusive reseller.

Ø If KS awards the contract directly to C, can we sue C and KS for breach of contract?

(e) Before anything, it is pertinent to ensure that there exists a contractual relationship between W and C. W has to make sure that the Subcontract still subsists and continues in effect so that the obligations under the Subcontract continue to be binding upon the parties.

(f) The warranty period and maintenance period under the Subcontract have come to an end. Even so, the Subcontract also states that the Contract Period of the Subcontract shall be back-to-back with the Supplementary Agreement.

(g) Therefore, the recent EOT of the Principal Contract period is very important to keep this Subcontract alive. After the Main Contract Period is extended, advisably a supplemental agreement to extend the contract period of the Subcontract has to be executed to reinforce the maintenance period and warranty period in the Subcontract. This is because, the Subcontract was entered into between W and C and it doesn’t bind KS. If the EOT to main Contract Period succeeded, C needs to be informed in writing and take cognisance of the EOT to the extended main Contract Period’s agreement via a supplementary agreement to the Subcontract.

(h) Despite the fact that the Job Matching & Searching Modules have been carved out from the original scope of work, this doesn’t ipso facto alter/change or take away rights to subcontract all works or appoint a third party to carry out maintenance services from W. W remains at all material times the main contractor vested with the rights to subcontract the works (with consent of KS) and appoint a third party to perform Maintenance Services.

(i) Based on the Subcontract, Supplemental Agreement and License agreement, KS is not obliged to pay C directly or entitled to engage C directly for the provision of the Products and the Maintenance Services as there is no direct contractual relationship between the two parties (unless a collateral warranty/convenant between parties is present).

(j) The performance of the contractual obligations shall always be conducted in good faith and fair dealing between the parties in compliance with the terms and conditions of a contract.

(k) In performing the obligations, the parties must honour their reasonable expectations and performance requires faithfulness to an agreed common purpose and consistency with the justified expectations of the other party. If a party to a contract acts in bad faith, they may be in breach of the contract.

(l) Therefore, KS in awarding the maintenance services directly to C and vice versa could result in disputes between the KS and W and would prove to be disadvantageous to all Parties.

(m) This is because, it should be noted that while the W delegates performance of a part of the works to its subcontractors (C), W still has full responsibility with respect to the works and the payments to the subcontractor. C is liable to W for defaults, similarly W is liable to C for non-payment.

(n) Further, the Subcontract is a back-to-back contract, in which the obligations of the main contractor (W) are transferred partially to C. Thus C is bound to main contractor (W) as the main contractor is bound to KS and, accordingly, guarantees the execution of its performance in the same way and under the same conditions to which the main contractor (W) is obliged towards KS.

(o) In the premises, if the Products together with the maintenance services are awarded directly to C, KS would be regarded as effectively breaching the terms and conditions in the Principal Contract and Supplemental Agreement. C would be regarded as effectively circumventing the terms and conditions in the Subcontract and hence, both KS and C are in breach of contracts.

(p) Yes, W can take legal actions against both C and KS.

(q) The dispute resolution clauses in the Subcontract and Principal Contract have to be observed.

(r) Besides that, W may call on the performance bond if C shall in any respect fail to execute the contract or commit any breach of its obligations.

(s) Clause 5 of the Subcontract states that the performance bond shall be regarded as a security for the due and successful performance and fulfillment of C’s obligations under this Subcontract and W shall be entitled to call on this performance bond if C has received prior written notice by W detailing the default(s) and that C has failed to cure such default(s) within the stipulated time as provided in Clause 0 of the Subcontract.

(t) To call on the bond–

- Written demand has to be issued after the failure to cure the default within a specific time period;

- The demand must assert the default and failure in fulfilling obligations; and

- Demand must accompany proof of default.

Ø Will there have any anti-competition issue arise due to the “exclusive” contract?

(a) The agreement is a "vertical agreement" between the parties. Simply put, it is an agreement between a statutory body (KS) and a system / software development development company (W).

(b) Parties entered into the agreement on an exclusive basis for the Products and Maintenance Service of EIS only during the subsistence of the contract period.

(c) There is no restriction or limitation on KS in engaging other IT companies for other projects or maintenance services because the exclusivity is solely in respect of EIS only. This does not curtail, limit or control technical or technological development competition in the IT industry for technological services or maintenance services.

(d) Other IT companies can still provide technological / maintenance services to KS for other projects or developing other software applications or system application for KS or to complement EIS.

(e) If it is to complement EIS, there will be another maintenance services to be provided by a third party with the agreement of W and of course KS has to pay double for both W and the third party.

(f) KS may also enter into other agreements for maintenance services to replace W if W does not maintain and / or refuses to maintain the system in accordance with the ambition/aspiration of the Principal Contract.

(g) From another point of view, it must be emphasised that basically KS is the owner of the project and W is the developer appointed by KS to develop EIS. Considering the fact W is the main contractor that has contributed its expertise and know-how with respect to the design, specifications, warranty and development of EIS, it is justifiable for the maintenance services to be exclusively performed by W as other contractor might not be able to provide maintenance services as effective as the developer, W.

(h) In a nutshell, it is clear that the maintenance services could not reasonably have been properly provided to the EIS without the agreement having been made on an exclusive basis. This is also because the Principal Contract in respect of the EIS comes with a warranty period which requires the main contractor to provide the maintenance services.

(i) In any event it is obvious that C / KS / W do not operate in the same market. Pursuant to the MyCC Guidelines on Anti-Competitive Agreements, MyCC will consider an anti-competitive agreement to be "significant" if:

> the parties to the agreement are competitors in the same market and their combined market share is more than 20% (C & W’ combined market shares are not more that 20% in Malaysia);

> where the parties are not competitors in the same market and their market share individually in the relevant market is 25% or more % (W’ market shares are not more that 25% in Malaysia).

(j) The arrangements between KS and W and Supplementary Agreement must be regarded as a common practice that takes place between a project owner and its appointed contractor, collaborating to build something on an exclusive basis. This is because, even on a non-exclusive basis form of agreement, the appointment of other contractor by the project owner to do the same job just does not make any commercial sense as this will definitely double the project costs or the price would be considerably more expensive.

(k) It must also be pointed out that if the project owner terminates the contractor just because the project owner wants to appoint another contractor to do the same job, the project owner will be liable for wrongful termination and hence, breach of contract.

(l) The exclusivity does not in any way have the object of significantly preventing, restricting or distorting competition in any market for goods or services because other software application developers/owners who provide maintenance services are not prohibited in dealing with KS when the contract period ends.

(m) However, as for the Subcontract, Clause 2 which provides that W shall be the exclusive reseller in Malaysia might run foul of the Competition Act. However, W and C did not further discuss on the exclusive reseller status in Malaysia, therefore, the contravention of Competition Act is not definite and remains arguable.

The opinion provided above does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available are based on my personal views and for general informational purposes only. The opinion may not constitute the most up-to-date legal or other information.

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