IMPORTANT CLAUSES IN DRAFTING COMMERCIAL CONTRACTS Commercial contracts/agreements are the backbone of the economy. In India, the entire law covering the concept of ‘Agreement’ and Contracts is embodied in the Indian Contract Act, 1972. ‘Clauses’ play a crucial role in agreements and contracts and help in creating a legal relationship which can be a strong basis for a productive and transparent relationship. Boiler plate clauses are often neglected while drafting. These are very important and if not considered carefully can lead to costly litigation and delays in case a deal goes sour. In this paper we focus on these and some additional important clauses in commercial legal agreements. BOILER PLATE CLAUSES Boilerplate provisions or clauses usually appear at the end of a contract. The following are some typical boilerplate clauses:
Entire Agreement, Time of the Essence,
Submission to Jurisdiction, Governing Law, Assignment and Enurement, Remedies Cumulative, Notice and Waiver. NOTICES - Careful attention should be given to the drafting of this clause, as disputes can arise regarding whether effective notice was delivered.
The notice provision
typically applies to all communication that is required or permitted to be delivered to any party pursuant to the agreement. The purpose of this provision is to clarify and set out how certain information is to be delivered between parties, in order to eliminate 1
any disagreements as to the evidence of delivery and receipt of notice. A typical clause on the issue is as follows: “Every notice is to be given under this Agreement (Contract) shall be in writing and either delivered by hand or sent by facsimile or by registered [post/airmail]. The address of each party for the service of notices shall be as set out in this agreement (Contract) (unless or until that address is changed by notice given under this clause). Notice sent by registered [post/airmail] shall be treated as being received [2/5] working days after the date of posting. Notice delivered by hand or by facsimile shall be treated as being received on the day it is delivered unless delivery occurs after the normal working hours of the recipient, in which case delivery shall be treated as having occurred on the next working day.” However, it is best to avoid identifying an individual by name, since people move around and change positions.
It is best to indicate an office, such as President of Chief
Executive Officer. The notice provision include: (i)
the method by which notice should be given;
when notice is considered to be delivered and received;
what, if any, is the effect of a disruption in deliver;
the nature of the notice provision, including whether the notice provision is mandatory or permissive; and
the individual to whom notice must be delivered when notice is required to be delivered to a corporation, partnership or trust.
Methods of Delivery of Notice
All methods of delivery contemplated by the parties should be addressed in the notice provision.
The most common methods of delivery are post, facsimile,
personal service and courier. While agreements provide for delivery by facsimile or other means of electronic communication, providing for notice by email has its risks, as there is no reliable way to conform its receipt. (b)
When Notice is Considered Delivered and Received
ASSIGNMENT Neither party shall assign or otherwise transfer any of its rights, interests or obligations under this Agreement (Contract) to a third party [without the prior written consent of the other party] [which shall not be unreasonable withheld]. An assignment occurs where one party to an agreement assigns its rights and benefits under the agreement to a third party. An assignment provision restricts a party’s ability to do this. Generally, where it is absent, a party is free to assign the rights and benefits of an agreement except where the agreement is a personal services 3
contract or where an assignment would increase the other party’s obligations under the contract. Furthermore, it must be noted that while rights and benefits may be assigned, contractual obligations and liabilities cannot be assigned. There are a number reasons why one party would wish to control another party’s rights to assign, the most obvious being that the other party may not want to engage in commercial arrangements with a proposed assignee. SEVERABILITY If any provision of the Agreement is found by any court, tribunal or administrative body of competent jurisdiction to be wholly or partly illegal, invalid, void, voidable, unenforceable or unreasonable it will, to the extent of such illegality, invalidity, voidness, voidability, enforceability or unreasonableness, be deemed severable and the remaining provisions of the Agreement and the remainder of such provision will continue in full force and effect. Alternatively, if any provision of this Agreement (Contract) becomes invalid, illegal or unenforceable, the parties will endeavour, acting in good health, to agree the terms of a provision which may be substituted for the invalid, illegal or unenforceable provision. The invalidity, unenforceability or illegality of any provision will not affect the remaining provisions of this Contract. TIME TO BE THE ESSENCE
A time is of the essence clause confirms the parties’ intent as to the importance of timeliness. Failure to perform an obligation in accordance with a time is of the essence of this provision allows the non-defaulting party to terminate the contract. In order to take advantage of this provision, the non-defaulting party is required to be prepared to perform all its obligations pursuant to the agreement. Time will not be of the essence to contractual obligations unless the parties so provide or the circumstances clearly indicate that this is the parties’ intention. Time being of the essence will not be implied in a contract unless “the express word of the contract, the nature of its subject matter or the surrounding circumstances make it inequitable not to treat the failure of one party to comply exactly with the stipulation as relieving the other party from the duty to perform his obligations under the contract.” WAIVER The failure by a party to enforce any provision of Contract shall not be treated as a waiver of that provision, nor shall it affect the right of that party subsequently to enforce that provision. Waiver of a right can be express or inferred from conduct which is inconsistent with the right. Delay or failure to exercise a right may, in certain circumstances, constitute a waiver of that right. It is therefore common for parties to include in their agreement a provision providing that no waiver of any
clause in the agreement is binding unless it is made in writing and signed by all the parties entitled, as pursuant to the agreement, to grant the waiver. JURISDICTION ‘Jurisdiction’ determines which Court should properly adjudicate a case / dispute i.e. Competent Court. Jurisdiction means the authority to govern or legislate and such authority is derived out of the subject, type or cause of action. The clause excluding one out of two competent courts should not be against the public policy. The contract ousting the jurisdiction of the Indian courts, however, the Indian courts was not without jurisdiction. GOVERNING LAW (CHOICE OF LAW) Parties to an agreement are permitted to choose the law that will govern any dispute that may arise between them. This freedom of choice, however, is subject to certain limitations. The selection must be bona fide and legal and there must be no public policy reason for avoiding the choice of law. For example, where the choice of law has been made to evade the laws of a particular legal system and the transaction is closely connected to that system, the choice will likely be disregarded. Accordingly, where the choice of law of an agreement is not expressly stated, a court will attempt to ascertain the intention of the parties as implied in the agreement. If
this intention cannot be discovered, then the court will be governed by the system of law with the closest connection to the contract. ARBITRATION In an attempt to control litigation costs and expediting the process of dispute resolution, companies resort to alternate dispute resolution mechanisms commonly referred to as ADR (alternate dispute resolution) to avoid the lengthy court procedures. Two of the most commonly used ADR mechanisms are ‘mediation and arbitration’. Mediation is a voluntary process through which the parties meet and try to negotiate a resolution to their dispute by referring to a third-party facilitator. Arbitration is a process that results in a binding decision that the parties can seek to enforce through the courts. Arbitration through a single arbitrator, mutually appointed by the parties, is a cost effective and speedy way for dispute resolution. Generally companies seek mediation and if they fail, they prefer to refer the dispute to Arbitration. Therefore an Arbitratin clause is necessary. Before signing an Arbitration Agreement the following must be properly addressed: Applicable law to arbitration, Location of Arbitration, Number of Arbitrators, Discovery procedure, Limitatin to arbitration powers, Interim measures / Provisional Remedies, Privacy, Rules Applicable, Appeal & Enforcement, local pecularities, Survival after Termination of the main agreement. A bad Arbitration Agreement could result in double jeopardy; arbitration as well as litigation arising out of arbitration. It is important to state clearly that the parties have agreed to binding arbitration. Because arbitration is 7
a creature of contract, if there is no contract, there is no agreement to arbitrate. The Indian Arbitration and Conciliation Act, 1996 is the governing arbitration statute in India. MODEL ARBITRATION AGREEMENT All and any disputes arising out of or in connection with the present agreement shall be finally settled under the The Indian Arbitration and Conciliation Act, 1996 by sole (or three) arbitrator(s) appointed by ……………(an arbitration institute of your choice) in accordance with the said Rules. The place of arbitration shall be ……. The arbitration shall be conducted in ……… language. The arbitration award shall be final and binding. The arbitration shall be governed under the laws of……….” INDEMNITY Almost all commercial agreements have an indemnity clause, wherein one party agrees to indemnify the other from losses / damages caused by its own acts. Such clauses are inevitable and need to be capped. Further, amount of risk involved in the indemnification for exemplary, consequential, indirect and incidental damages should be avoided. TERMINATION Every agreement must contain an ‘exit clause’. At times, the relationship must be ended before the term of the Agreement, then in such circumstances this clause is very useful. It depends upon the position and requirement of the contracting parties. 8
Sometimes, the parties intentionally agree not to provide an exit clause to one of the contracting parties or to provide some lock-in-period or to provide an exit under some particular situations viz. in case of material breach of the terms of the agreement / insolvency etc. INTELLECTUAL PROPERTY RIGHTS Intellectual Property Rights (IPR) has gained significant importance amidst globalization and liberalization. The agreement should provide for the protection of IPR of the parties. Mere acquisition of Intellectual Property (IP) rights is of little importance if it cannot be enforced effectively. Declaration of ownership on all intellectual Property Rights on the subject matter is imperative. The party must seek protection of the intellectual property rights on its own products / services. At the same, indemnification should be taken for Intellectual Property Rights infringement of any third party. EXCLUSIVE AGREEMENTS Exclusive agreements should be avoided. Generally these agreements attract ‘The Competition Act 2002’. Any agreement, which is a restraint on the civil rights of a party, is generally void. Agreements wherein one party is to reveal some confidential information to the other for the execution of the agreement, must provide a nondisclosure clause for maintaining the confidentiality of the information till the time it comes into public domain, without breaching the terms of the agreement. In an 9
employment agreement, clauses containing any restraint on the civil rights of the employee should be avoided. The main purpose of an agreement is to bring transparency in a transactions, minimize chances of disputes by bringing as much clarity as is possible and also to avoid any misinterpretation. AMENDMENTS No amendment to a Contract will have any effect unless it is made in writing and signed by a duly authorized representative of each of the parties. CUMULATIVE REMEDIES The clause generally states that each right or remedy of the party under the agreement is without prejudice to any other right or remedy of the party whether under the agreement or not. A remedies cumulative clause allows for a party to choose remedies under the general law such as misreperesentation or breach of warranty without relying on the indemnity clause in the agreement. ENTIRE AGREEMENT This clause generally states that the Contract represents the entire understanding and agreement between the parties and supersedes all previous negotiations and understandings between them with respect to the subject matter. Further it supersedes all previous agreements between the parties with regard to its subject matter and those agreements are now terminated and of no further effect. 10
FORCE MAJEURE Sometime in spite of all the efforts, a party cannot fulfill its obligations under the Agreement due to factors outside their control. The ‘Force Majeure’ clause enables a party to escape from the liability arising out of non-performance of its duties under the agreement due to unpredictable circumstances viz. delivery failure due to transport strike, non payment of dues due to banker strike, act of god, lock-outs, war, riot, sabotage etc. Each party shall be relieved of its obligations to the extent that fulfillment of such obligations shall be prevented by or delayed by circumstances beyond the reasonable control of such party affected including, without limitation, acts of God, governmental actions, war or national emergency, acts of terrorism, protests, riot, civil commotion, fire, explosion, flood, epidemic, lock-outs, embargo, strikes or terrorism, protests, riot, civil commotion, fire explosion, flood, epidemic, lock-outs, embargo, strikes or other labour disputes (whether or not relating to either party’s workforce), or restrains or delays affecting carriers or inability or delay in obtaining supplies of adequate suitable materials. If such cause continues unabated for a period of thirty (30) days, both parties will promptly meet to discuss the possibilities to overcome such case of Force Majeure and the potential implications on the further performance under this Agreement.
Authors: Mrs. Mohini Narain & Mr. Rajan Narain 1st Floor (Rear Entrance), Jeevan Vihar Building, 3, Parliament Street New Delhi -110 001 Phones: 23341671, 23341673, 23341674, 23341675, 23341675, 23341677, 23363855 Mobile (Rajan Narain): 9810016341 Mobile & phone (Mohini Narain): 9871605262 / 011-65690700 Fax: 011- 23363856 Emails : [email protected]
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