Written by Aditya Kumar, Co-Founder & Publisher, All India Commercial Law Review.
Enforceability and accountability are the fundamental requirements of any commercial or business transaction, with the proliferation of trade regime and privatization in the contemporary era it becomes even more important to ensure that your time, money and information is secured and the delivering party in such deals stick to their promises. Commercial Contracts aids one in achieving the same and ensures that the promises made are enforceable and in case of default by the party in keeping their part of the promise, they can hold liable for the same in the court of law.
Commercial contracts define and regulate the scope of the business relationship and regulate business relationships, commercial contract can vary depending upon the subject matter or scope of the commercial agreement, for instance to prevent disclosure of crucial information one might enter into non-disclosure agreement and at the same time commercial contracts can be much more complex agreements like merger and acquisitions. Owing to the increasing litigious environment it becomes imperative to understand and master the principles guiding commercial contracts, how to protect your interests, and minimize commercial litigation.
What are the types of the commercial contracts
The success and sustenance of a business is pivotal to the commercial contracts a business enters into. A business cannot sustain alone without any support from other businesses or individuals which provide key services. Irrespective of the size of the business, its success is heavily dependent on the companies’ ability to ensure your commercial contracts accurately capture its business arrangements, adequately protect its interest, and limit its liability. The following are the different types of commercial contracts and with relevant provisions:
Joint Venture Agreement: A Joint Venture Agreement is a legal agreement between two or more parties to collaborate and undertake a specific business venture or project. In India, the Indian Contract Act, 1872 governs the formation and enforcement of such agreements. Additionally, the Companies Act, 2013 and the Foreign Exchange Management Act, 1999 impose certain regulations on the formation and operation of joint ventures involving foreign entities.
Shareholders Agreement: A Shareholders Agreement is a contract between the shareholders of a company that sets out their rights, obligations, and restrictions regarding their shareholding in the company. It typically covers issues such as management control, dividend policies, and dispute resolution mechanisms. The Indian Companies Act, 2013 and the Securities and Exchange Board of India (SEBI) regulations govern the formation and enforceability of such agreements in India.
Business Purchase Agreement: A Business Purchase Agreement is a legal document that governs the purchase of a business. It typically includes details about the purchase price, payment terms, warranties, and representations of the seller, and the conditions for closing the transaction. The Indian Contract Act, 1872, and the Indian Sale of Goods Act, 1930 regulate the formation and enforceability of such agreements in India.
Purchase and Supply Agreement: A Purchase and Supply Agreement is a legal document that governs the purchase and supply of goods or services between two parties. It typically includes details about the terms of sale, delivery, payment, warranties, and representations of the parties. The Indian Contract Act, 1872 and the Indian Sale of Goods Act, 1930 regulate the formation and enforceability of such agreements in India.
Sale and Distribution Agreement: A Sale and Distribution Agreement is a legal document that governs the sale and distribution of products between two parties. It typically includes details about the terms of sale, delivery, payment, warranties, and representations of the parties. The Indian Contract Act, 1872, and the Indian Sale of Goods Act, 1930 regulate the formation and enforceability of such agreements in India.
Franchise Agreement: A Franchise Agreement is a legal document that governs the relationship between a franchisor and a franchisee. It typically includes details about the use of intellectual property, payment of fees, obligations of the parties, and termination provisions. The Indian Contract Act, 1872, and the Competition Act, 2002 regulate the formation and enforceability of such agreements in India.
Non-Disclosure Agreement: A Non-Disclosure Agreement (NDA) is a legal document that governs the confidentiality of information shared between two parties. It typically includes details about the information that needs to be kept confidential, the parties involved, the duration of the agreement, and the consequences of a breach. The Indian Contract Act, 1872 governs the formation and enforceability of such agreements in India.
Employment Contracts: An Employment Contract is a legal agreement between an employer and an employee that sets out the terms and conditions of the employment relationship. It typically includes details about the job description, compensation, benefits, termination provisions, and intellectual property ownership. The Indian Contract Act, 1872, and the Industrial Employment (Standing Orders) Act, 1946 regulate the formation and enforceability of such agreements in India.
Intellectual Property License and Assignment: An Intellectual Property License and Assignment Agreement is a legal document that governs the use and transfer of intellectual property rights between two parties. It typically includes details about the scope of the license or assignment, payment terms, and warranties and representations of the parties. The Indian Contract Act, 1872, and the Indian Copyright Act, 1957 governs its formation and enforceability.
Essentials of a commercial contract
1. Define rights and obligations
It is imperative that a commercial contract defines the rights and obligations of each party in the business arrangement. The contract details the terms agreed upon so parties know their responsibilities.
2. Provide a reference for dispute resolution
Business disputes are common. Whether parties try to resolve the dispute themselves or via arbitration or litigation, the commercial contract shall be used to determine the method in which the dispute shall be resolved.
3. Protect business interest
While entering into commercial transaction it is imperative that the company should protect its interest against an kind of vulnerability, the same can achieved via a confidentiality clause, an indemnity clause, or any other means.
4. Parts of a commercial contract
The commercial contracts should identify the parties in the transaction. It is crucial that the names of the parties are correctly mentioned. The transaction details, date, the goods or services sold, price, payment details, and how the agreement can be terminated should be written in clear terms. Otherwise, the contract might be unenforceable.
Pertinent clauses to protect the interest of the parties to a contract.
Confidentiality clause to prevent unauthorized disclosure of confidential information.
Confidentiality: The parties to this Agreement agree that each shall treat as confidential all information provided by a party to the others regarding such party’s business and operations, including without limitation the investment activities or holdings of the Fund. All confidential information provided by a party hereto shall be used by any other parties hereto solely for the purposes of rendering services pursuant to this Agreement and, except as may be required in carrying out the terms of this Agreement, shall not be disclosed to any third party without the prior consent of such providing party. The foregoing shall not be applicable to any information that is publicly available when provided or which thereafter becomes publicly available other than in contravention of this Section 3.2 or which is required to be disclosed by any regulatory authority in the lawful and appropriate exercise of its jurisdiction over a party, any auditor of the parties hereto, by judicial or administrative process or otherwise by applicable law or regulation.
Dispute resolution clause stating how disputes arising from the transaction will be handled.
Dispute Resolution:. All or any disputes arising out or touching upon or in relation to the terms and conditions of this Agreement, including the interpretation and validity of the terms thereof and the respective rights and obligations of the Parties, shall be settled amicably by mutual discussion, failing which the same shall be settled through the adjudicating officer appointed under the Act.
Details on the court that will have jurisdiction over matters arising from the transaction and the governing law, especially for domestic and international cross-border transactions.
Jurisdiction: The Parties mutually agree that any legal proceeding against party Y regarding any claim, hear, settle and or determine any dispute shall be commenced in the court of New Delhi and laws of India shall be governed.
Termination clause detailing how any party can opt-out of the arrangement and conditions that will end the contract.
Termination. This Agreement may be terminated at any time, and without payment of any penalty, by the Board, on behalf of the Fund, upon sixty (60) days’ written notice to the Advisor. This Agreement may not be terminated by the Advisor without the consent of the Board. This Agreement and the Control Agreement will automatically terminate, with respect to the Fund listed in Appendix A if the Advisory Agreement for the Fund is terminated and the Fund continues to operate under the management of a new investment adviser, with such termination effective upon the effective date of the Advisory Agreement’s termination for the Fund.
Indemnity clause to protect parties from liabilities caused by a breach of contract or negligent acts of third parties.
Indemnity The Warrant Agent shall be liable hereunder only for its own gross negligence, willful misconduct or bad faith. The Company agrees to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and reasonable counsel fees, for anything done or omitted by the Warrant Agent in the execution of this Agreement, except as a result of the Warrant Agent’s gross negligence, willful misconduct or bad faith.
Liquidated damages clause to specify damages upon breach of contract.
Liquidated Damages. The Company’s obligations to pay any partial liquidated damages or other amounts owing under the Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid partial liquidated damages and other amounts have been paid notwithstanding the fact that the instrument or security pursuant to which such partial liquidated damages or other amounts are due and payable shall have been cancelled.
Force majeure to remove liability for failure to perform contractual obligation caused by unforeseen and unavoidable circumstances.’’
Force Majeure. In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes.
Why Include an Indemnity clause?
The indemnity clause is a common provision in commercial contracts, and it is one of the most contentious clauses to negotiate or litigate. It is a promise by the contracting party (the indemnifier) to protect the other party (the indemnitee) from liabilities caused by the indemnifier’s negligent actions, breach of contract, or third party actions. Essentially, an indemnity clause transfers liability from one party to the other.
The indemnity clause allows you to:
Restrict the amount of risk you are willing to expose yourself to in every transaction.
Transfer liabilities to the party that is most suited to bear them, usually the party that has more control in the transaction.
While drafting an indemnity clause, ensure it reflects the parties’ intention to avoid conveying wider or narrower protection than what you both intended. Parties can also use an indemnity cap to restrict the indemnifier’s liability to a specific amount.
Mistakes to avoid while drafting a commercial agreement
Inadequate due Diligence
Hasty and inadequate due diligence can land one in serious troubles, it is important to conduct a proper due diligence of the proposed agreement before entering into a legally binding contract. One must ensure that the agreement is in consonance with needs and specific requirements of a particular deal and must also provide for risk management.
Use of ambiguous terms and failure to define the terms with precision an clarity
When parties seek to evade their contractual obligations, they often resort to identifying perceived ambiguities in the contract language. However, the risk of such loopholes can be minimized by meticulous drafting that anticipates potential ambiguities and addresses them with specific language. Vague or ambiguous terms can lead to disputes and legal action, causing undue delays, additional costs, and damage to business relationships. Therefore, contract drafting should prioritize clarity, specificity, and unambiguous language that accurately reflects the parties' intentions.
Failure to include dispute resolution clause
“Hope for the best prepare for the worst”
Although at times it might seem that there is no scope for dispute in a commercial transaction, Its always safer to include an arbitration clause a litigations can incur huge cost. An arbitration provision must specify how representatives will be chosen, the language in which the arbitration will be conducted, the location of the arbitration, the seat, and the applicable law. It is also necessary to state the jurisdiction of the court under which such a contract enters into force and under which the arbitration is to take place. It should be made clearer still that the arbitration board's ruling is to be accepted as final. The requirement that any party who declines to participate in such proceedings automatically forfeits their right to be heard shall be included in the clause itself.
Failure to include provision for defaults, termination, life span of the contract
Occasionally, businesses are hesitant to bring up issues like defaults, opportunities for cure, and termination for fear that doing so will make their business partners reconsider signing the contract. However, these kinds of clauses are crucial for encouraging performance and preventing lawsuits. Parties who may otherwise litigate are compelled to try to resolve their disputes if notice of potential breaches and opportunity to cure are required Contracts should also specify how long an agreement will be in effect for, as well as how and when it may be renewed or terminated. It is frequently preferable to have an early termination clause so that there is a way out should unfavorable events arise.
Conclusion
In a commercial contract both the parties try to protect their interest and make the other accountable. Its splendid how a simple legal instrument ensure that all the transactions in the world run smoothly. However, for this vessel to stay afloat and to serve its true purpose it becomes imperative to understand the needs and scope of the agreement. The nature of commercial contracts depends on nature of the transaction. Further, irrespective of the transaction there are certain clauses a commercial contract must include. As discussed in the aforementioned text, these clauses protect the parties when things go south. Lastly, one must avoid common errors which might as well give someone the opportunity to escape its liability or incur heavy cost on the party.
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