CLAUSES MAKE AGREEMENTS FLAWLESS

CLAUSES MAKE AGREEMENTS FLAWLESS

CS. Monika Bhardwaj, B.Com (Hons), Company Secretary

In common parlance the terms ‘Agreement’ and ‘Contract’ are used as synonyms. But in legal jargon, these two terms are not the same. Agreement is a vital element for a contract to become valid, but it’s not a contract in itself. The enforceability of an agreement makes it a Contract. It is said that, every Contract is an agreement, but every Agreement is not a contract.

In India, the entire law covering the concept of ‘Agreement’ is embodied in the Indian Contract Act, 1972. Commencing from our day-to-day life to the important decisions of the business world everybody is exposed to either one (express) or the other (implied) form of an Agreement; whether it’s an account opening form or a joint venture / technical collaboration; agreements touch life of every person.

However, in industry, drafting an Agreement is crucial task and extreme caution is required so as to protect the interest of the concerned entity. Increasing business activities makes it imperative to carefully draft or vet an agreement since this is the stage where potential disputes can be avoided and course of actions can be framed or freezed.

The art of drafting in India has developed without the aid of formalized structure of legislation; instead, it is totally based on legal traditions. Of late, India has immensely benefited by exchanging the drafting techniques with the rest of the world. Each type of agreement has some peculiar clauses, which need extra caution and care.

The purpose of this Article is to highlight the importance of drafting an agreement vis-à-vis few important clauses in an agreement. This article shall focus on drafting the general commercial agreements. Here in this article the term ‘Agreement’ is used as a synonym of the term ‘Contract’.

Indemnity

Almost all commercial agreements have an indemnity clause, wherein one party agrees to indemnify the other from the losses / damages caused by its own acts. Such clauses are inevitable and need to be capped. Further, amount of risk involved in the indemnification needs to be compared with the benefits to be derived out of the business relationship. Indemnification for exemplary, consequential, indirect and incidental damages should be avoided. In view of the risk involved, these clauses need careful drafting. Root cause analysis is required for the existence of such clauses. If not required in a particular situation, such clauses should be avoided.

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.

It was held that the agreement ousting the jurisdiction was void as it was opposed to the public policy [Rajendra Sethia vs. Punjab National Bank (AIR 1991 Delhi 285)]. That means, if a court in India has jurisdiction to entertain the suit and in agreement it is specifically agreed that any dispute between the parties will be submitted to a Foreign Court. Being opposed to public policy, such clause would be void. The plea that party agreed to submit to the Foreign Court will not up held. This can be considered for stay of a suit but cannot be a ground for rejection of a plaint.

(However, Supreme Court has now overruled this judgement)

Arbitration

Of late, the number of disputes in the industry has increased tremendously. Initially, the principal burden was on Courts that have traditionally captured the majority of such disputes. In an attempt to control litigation costs and expediting the process of dispute resolution, many companies are looking to employ alternate dispute resolution mechanisms commonly referred to as ADR -- 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 Arbitration clause is very must.

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. Well-framed IP clauses are the best means to limit the instances of IP violations. 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 time, indemnification should be taken for Intellectual Property Rights infringement of any third party.

Force Majeure

Sometime in spite of all the efforts, a party finds it difficult to fulfill its obligations under the Agreement for some reasons beyond its control. The situation becomes pathetic if the damage clause is severe. Here comes the ‘Force Majeure’ clause to rescue. Such clauses enables a party to escape from the liability arising out of non-performance of its duties under the agreement for some reasons beyond its control / 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. Such clause needs care, the party suffering from any factor considering Force Majeure must inform the other party about the existence of such factor responsible for nonperformance and must take due care for resumption of its obligations under the agreement at its earliest possible otherwise it may lead to termination of the agreement itself. The period of delay / non-performance should be excluded from the total term of the agreement.

Termination Clause

Every agreement must contain an ‘exit clause’. At times, it becomes difficult to carry the relationship throughout the term of the Agreement; then in such circumstances this clause comes handy. This depends upon the position and requirement of the contracting parties. Sometimes, the parties intentionally agree not to provide exit clause to one of the contracting party or to provide some lock-in period or to provide exit under some particular situations viz. in case of material breach of the terms of the agreement / insolvency etc..

Other cautions

Exclusive agreements should be avoided. Generally these agreements attract anti-trust laws. 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 non-disclosure clause for maintaining the confidentiality of the information till the time it comes into public domain; without breaching the terms of the agreement. In employment agreement, clause containing any restraint on the civil rights of the employee should be avoided.

In almost all agreements, the potential disputes should be kept in mind and accordingly the safeguards should be provided viz. in case of leases; refund of security deposit should be protected, in case of delay in refund the possession of premises should be retained, in case of non-vacation liquidated damages should be provided and so on. The clause pertaining to the governing law should be carefully considered since it provides the enforcement mechanism for the agreement. Scope of work, consideration, relationship between the contracting parties and the procedural part should be clearly stated. In conglomerates, the specific policies of the entity needs to be adhered whether it’s anti-corruption, anti-boycott or any other to save it from the consequences of international laws. The main purpose of an agreement is to bring transparency in a transaction, minimize chances of disputes by bringing as much clarity as is possible and also to avoid any misinterpretation.

To conclude, we can say that, ‘Clauses’ play a crucial role in agreements and contracts and help in creating a legal relationship which is transparent and forward looking.

© CS. Monika Bhardwaj, Gurgaon, India