Class-5-Drafting of various important clauses in a contract.pptx

Drafting of various important clauses in a contract

1. Contract Drafting and Negotiation Class-5 Prepared by: Anuj Pandey, Adv. (CS, LLM, LLB, B Com (Hons)) Corporate Lawyer & Company Secretary Email Id: [email protected] Contact No.: 9555613873

2. Drafting of various important clauses in a contract Contract Breach & Execution Annexure & Schedules Signature on the each of Page Other important required clause.

3. Meaning of clauses in a contract “ a clause in a contract is a unique section that addresses a specific need, privilege, right, deadline, or duty .” “Basically, a contract clause is a written section that unscrambles any contractual confusion.” 3

4. Clauses generally fall into three categories: Enforcement Clause; Interpretation clauses; and Execution clauses.

5. 1. Contract Breach & Execution 5

6. 6 Meaning: A breach of contract is any violation of a contractual contract’s agreed-upon terms and conditions. A breach might range from a late payment to a more serious offence like failing to deliver a promised item. A contract is legally binding and will hold up in court. It is essential to be able to establish that a contract breach occurred in order to effectively pursue a breach of contract claim. When one party to a legally binding agreement fails to deliver according to the terms of the agreement, it is called a breach of contract. A contract violation can occur in both written and oral contracts. In the event of a contract violation, the parties may address the matter among themselves or in a court of law.

7. 7 Ingredients of breach of a contract: The elements that must be present in order for a party to a contract to claim damages over a breach of contract are:  1. The fact that a contract exists :   In order to show the court that the contract was valid, it must be shown that there was an offer, acceptance of the offer, and consideration involved in accepting the offer. 2. Plaintiff’s performance or some reason for non-performance:  Take for instance, even if the contract’s provisions were not carried out exactly as requested, the defendant obtained services that were basically as requested. The defendant is obligated to pay at this time. For example, if a person painted a room but the receiver didn’t like the colour clarity, he or she will be obligated to pay, even if not the whole sum, at least something. If the colour was a key term in the contract, he or she may refuse to sign it.

8. 8 3. The defendant’s failure to execute the contract:  The defendant cannot claim that the plaintiff is not entitled to compensation because of his or her own fault. The plaintiff will not be held liable if he or she was unable to fulfil specific tasks because the defendant made them impossible to complete. He or she has the right to make a claim. 4. The plaintiff’s damages as a result of the defendant’s failure to perform as per their contractual terms:  Each party’s pledge should be included in the contract they have entered into. The quality of the contract’s preparation will determine whether or not there is a breach of contract.

9. 9 Reasons behind the breach of a contract It is the court that will determine if the violation of a contract had a legal justification or not. The defense, for example, may argue that the contract was fraudulent because the plaintiff misrepresented or suppressed key facts. The defendant might also claim that the contract was signed under duress, claiming that the plaintiff used threats or physical force to compel it to sign the agreement. In other circumstances, both the plaintiff and the respondent may have committed mistakes that led to the breach.

10. 10 What are the types of breaches of contract? A contract violation might be classified as minor or materia l. When you don’t obtain an item or service before the due date, it is referred to as a minor breach. One may, for example, bring a suit to your tailor for custom fitting. The tailor guarantees (in an or all contract) that the altered garment would be delivered in time for your essential presentation, but it arrives a day later. When you obtain something that differs from what was specified in the agreement, it is referred to as a material breach. Furthermore, a breach of contract can be classified as either an actual breach (when one party refuses to completely implement the contract’s obligations) or an anticipatory breach (when one party declares in advance that they will not be delivering on the contract’s terms).

11. 11 Material breach of contract In essence, a material breach takes place when “all the circumstances are wholly or partly remediable and are, or are likely to become, serious, in the wide sense of having a serious effect on the benefit which the aggrieved party would otherwise derive from the performance of the contract in accordance with its terms.” ‘The scale of the breach’ is strongly tied to the word ‘ material .’ The scale of a breach in a business contract might be presumed to relate to the commercial repercussions of the breach if it is not corrected. Justice Colman had analysed the terminology ‘material breach’ while referring to “a serious violation of any of the guilty party’s responsibilities,” enabling termination of the contract if the remedy of such breach had not been initiated within seven days, in National Power plc v. United Gas Company Ltd . (1998). The judge ruled that the fact that a material breach could be remedied was the factor responsible for distinguishing it from a repudiatory breach and that a clause restricting the innocent party’s common law rights in relation to a repudiatory breach made no commercial sense, so ‘material breach’ must refer to a non-repudiatory breach.

12.   Application of a material breach of contract: When one party obtains considerably less advantage or a significantly different result than what was stipulated in the contract, it is considered a serious breach. Failure to execute the contract’s responsibilities or a failure to perform are examples of material breaches. A good application of the breach is when someone is looking to buy a property. A substantial breach of contract occurs when a buyer completes the necessary documentation and pays the seller before closing, but the seller suddenly decides not to sell or refuses to hand over the deed and keys to the house. 12

13. 13 Difference between breach and material breach of contract:- A contract violation might be classified into ‘material ’ or ‘ non-material ’ breaches. The less serious of the two is a non-material violation. A non-material violation is one that involves a minor or peripheral contract element. Anon-material violation might arise, for example, if a homeowner and an electrician agreed that the electrician should wire the residence with yellow wire but the electrician instead used blue wire, the same results in a non-material violation since it has nothing to do with the contract’s core terms. Although the wire’s insulation has a different colour , this is only a tiny difference that has no bearing on the wire’s operation. Further more, because the cables are buried within the home’s walls, the colour difference isn’t evenevident . A material breach of contract is a more serious sort of contract violation. A major breach reduces the contract’s worth and is deemed a failure to execute a contract’s fundamental part. Take, for example, there was an agreement between a house owner and an electrician to install copper wire since it is more reliable and durable. However, in or derto save money on materials, the contractor opts for aluminium wire, which is more prone to failure and requires extra attention if future electrical work is carried out. Thus the same results in a material breach of the contract since the deficiency in the performance of the same affects the electrical system’s performance, longevity, and safety, or put simply, the ‘heart of the matter.’

14. Legal implications of a material breach of contract When a material breach of contract occurs, the non-breaching party may be excused from completing their contractual obligations, and may even be forced to stop doing so as soon as a breach is detected. They may also file a lawsuit against the other party to collect any damages. 14

15. Termination of a material breach of contract When there is a genuine basis to terminate the contract before the performance has been finished, it is regarded as a legal termination of a contract. The most fundamental way to end a contract is to terminate it. A contract can be legitimately cancelled by providing justifiable grounds, under the Indian Contract Act, 1872 . 15

16. 16 Minor breach of contract: A minor breach of contract, also known as a partial breach of contract or an immateriall breach of contract, occurs when the contract’s deliverable is eventually received by the other party, but the party in breach fails to fulfil some element of their commitment.

17. 17 Material vis a vis minor breach of contract A minor breach of contract happens when one of the contracting parties fulfils the majority of the contract’s conditions. The party may breach a minor contract provision that has no substantial impact on the other contract conditions. A material breach of contract, on the other hand, is deemed a serious violation of the contract’s provisions. A minimal violation of contract normally does not prohibit the deal from being completed in a timely and satisfactory way. A major breach, on the other hand, makes achieving a satisfying result difficult or impossible. Anything less than complete performance is considered a significant breach of contract in some countries. Any breach in such jurisdictions releases the non-breaching party from the contract. In other words, the contract’s non-breaching party has no further performance obligations and may claim for damages. However, some states’ laws require a judge to decide whether a minimal breach of contract has occurred and if any remedies are necessary. Even if there was a slight breach of contract, damages may or may not be given if the non-breaching party obtained the same result, as was guaranteed by the contract. Also, the non-breaching party will be compelled to fulfil the contract’s requirements.

18. 2 Annexure & Schedules 18

19. 19 Meaning of Annexure of Contract: An annex to a contract is one or more documents, that constitute an immediate extension of a contract. At times, a contract can be kept very short, e.g. if it is designed after a  framework contract  or if it is a copy of an earlier contract. Annexes are often used for practical reasons; e.g. in large-scale contracts. Often, there are also more technical reasons - these could be price lists, licensing terms, schedules, promotional material and product descriptions, for instance. They are therefore often used in complicated and technical agreements - e.g. big purchase and sales agreements. However, there are other purposes for an annex. They are sometimes used to add a form of documentation of the agreement process. Other times, it can specify how to interpret the agreement. An annex is not to be confused with an additional agreement. These are used to amend or prolong conditions in an already concluded agreement.

20. 20 Meaning of Schedules to contracts (annexes and exhibits): Many contracts contain one or more  schedules, annexes or exhibits . The naming style – exhibit, schedule, attachment, appendix or annex – is not of significance, except that a chosen term should be used consistently throughout the entire agreement. French lawyers may prefer different terminology, because the translated original term simply fits the English counterpart (e.g. annex vs. annex, appendix vs. appendix); and some industries may have an established terminology. English law firms seem to work with  schedules , whilst American firms sometimes prefer  attachment  or  exhibit ). Schedules as integral part or stand-alone obligation?  Without further explanation, a schedule may be deemed to form an integral part of the obligations of either or both parties. Obviously, the scope or binding nature of such schedule depends on the way it is referred to in the obligatory language of the main agreement. Accordingly, merely attaching the general terms and conditions of sale without explaining to which part of the sale they apply or which provisions apply does not subject a sale pursuant to the body text of the agreement to those general terms and conditions.

21. 21 Why using exhibits, annexes or schedules to contracts? Complexity : The transaction is complex, in which case the structuring into schedules enhances the overs eeability of all the transaction documents. Various sub-transactions . The transaction in the main agreement entails various smaller transactions each of which is of a different nature: a  product sales agreement  may include a licence of technology; a  secured loan agreement  will have the (agreed form) agreements by which such security (e.g. a mortgage, a deed of pledge, a parent guarantee or suretyship arrangement) is established or vested attached as a schedule; a  share purchase agreement  is often accompanied by a transitional services agreement and ongoing business agreements between the seller and the acquired companies; a  joint venture agreement  will typically include one or more business arrangements, as well as a (business) contribution agreement; a  joint development agreement  may require that one party provides certain tools or equipment on loan, in which case the goods on loan will be dealt with by a separate schedule; the  lease  of a car may include an insurance policy and a financing arrangement; an  employment agreement  may include the applicability of a collective labour agreement or pension scheme.

22. 22 Different disciplines involved. The transaction requires the involvement of different disciplines and different types of contributions: a  joint development agreement  typically contains a statement of work (i.e. a technical document specifying various aspects of the work to be developed, such as for example the product specifications, testing criteria and acceptance procedures, deliverables and milestones, go/no-go decision making points, budget allocations, persons involved in the various stages); a  service agreement  may contain a description of the work to be created as part of the services or the agreed service level (e.g. response times, allowed failure rate, technical criteria); a  shareholders agreement  may refer matters related to decision making (i.e. matters reserved for approval by the shareholders; or arrangements in cases of conflicts of interest) to a separate schedule; this is probably not immediately recognised as such, but certainly related to the question who may or must see what; in a  share purchase agreement , in respect of the period before completion of the share transfer, various important business decisions will require the prior approval of the purchaser (who might not start to manage the business but will certainly want to prevent that the acquired business acting in a way which is inconsistent with its prospective business plans); the subject matters requiring approval are sometimes listed in a schedule;

23. 23 Separation of facts and obligations. It is strongly recommended to move informative aspects, specifications and technical facts to a schedule; it avoids the drafter having to keep track of all changes in technical documents (for which the technical people are responsible). an  asset purchase agreement  may contain lists of assets, inventories, registered details of transferred real estate and numbers of transferring bank accounts; a  share purchase agreement  may contain such a large number of sellers or acquired entities that separating the details of these parties will reduce the size of the contracting parties’ block or the definitions section by moving those details to a schedule; a  credit facility agreement  (such as the LMA) contains the required notice letter formats to be used by the borrower in case of a drawdown, a prepayment or an event of default; a  joint venture agreement  will typically contain a description of the joint venture’s business; because sharpening the scope of the business does not require a full document to be circulated each time, separating this in a one page schedule may support the discussions; similarly, a  joint venture agreement  will normally contain a business plan for the joint venture. The business plan may be a Powerpoint presentation or an Excel spreadsheet (depending on the kind of persons who are responsible for preparing the business case). A contract should not contain spreadsheets or presentations;

24. 24 Updateable documents attached. Several schedules will be updated from time to time: the  products  or  services  provided from time to time; list prices, rebate structures  and  purchase commitments  for the products sold under the master sales agreement; ordering procedures  reflected in supply chain and logistical manuals and guidelines of the purchasing enterprise; statements of work : the initial projects are probably well-defined but future projects and services will probably be subject to the principles in the main agreement; in an  M&A transaction , the agreements that are in an agreed form but to be signed on the day of completion of the transfer formalities. a  share  or  asset purchase agreement  contains a schedule with all the seller’s warranties; whereas such a warranties schedule will contain factual details and lists of assets, intellectual property rights and material contracts in annexes attached to the warranties schedule; the same applies to the disclosure schedule, which is usually a schedule to the  share or asset purchase agreement , and which will itself have annexes in which the disclosed court proceedings, claims, intellectual property infringement claims, disputed patent registrations or building renewal plans are attached; a  joint venture agreement  may have a business contribution agreement as a schedule, such contribution will take the form of a share or asset transfer agreement and, accordingly, any warranties will be addressed in an attachment to the contribution agreement.

25. 25 Annexure or Schedule? Annexure and Schedule are both commonly used terms in legal and business documents. While they are similar in nature and function, there are some differences between the two. An annexure is an attachment to a document that provides additional information or details that are relevant to the main document. Annexures can be used to include supporting documents, images, or diagrams. A schedule, on the other hand, is a part of the main document that outlines specific details related to the subject matter. Schedules are typically used in contracts to outline key terms and conditions, such as payment schedules or deliverables. In summary, annexures are used to provide additional information or documentation related to the main document, while schedules are used to outline specific details that are relevant to the subject matter of the document. While the terms are often used interchangeably, it's important to understand the distinction between the two when drafting contracts.

26. 3. Signature on the each of Page 26

27. IS THERE A LEGAL REQUIREMENT TO SIGN AGREEMENTS ON ALL PAGES ? Yes it is necessary and important to sign on all papers of agreement because it shows and proves that executants have clearly read the contents of the agreement or contract and after signature on each page we cannot remove any page or add any page without the signature of executant.

28. 4 . Arbitration Clause 28

29. Meaning of Arbitration Clause: Arbitration clauses, also known as arbitration agreements or arbitration provisions, are alternative dispute resolutions. Both parties essentially agree to settle disputes out-of-court with an arbitrator. Decisions coming from arbitration are legally binding unless the parties otherwise stipulate that the outcome is non-binding. A standard arbitration clause defines the terms and conditions surrounding the dispute resolution process. Dispute resolution addresses legal concerns that go beyond customer service issues. However, arbitration clause signers should understand that they limit their right to civil court redress when they sign them. 29

30. Purpose of an Arbitration Clause 30 The purpose of an arbitration clause is to reduce costs associated with settling disputes. Arbitration proceedings are faster and private. Parties can also choose whom they want to handle the proceedings. For example, international contracts follow an arbitral tribunal process where proceedings consist of one or three arbitrators. Other laws apply to other locations

31. 31 What Should Be Contained in an Arbitration Clause? What If an Arbitration Clause Is Violated? Generally , contract arbitration clauses contain language similar to: “ The parties to this contract hereby agree to resolve legal disputes through arbitration methods rather than civil lawsuits”. An arbitration clause may be tailored exactly to the disputing parties needs. Arbitration clauses should be as specific as possible. As a baseline, they should contain information such as: Information regarding which parties are affected by the clause; When the clause will go into effect, and when it will terminate, if ever; Whether the clause can be modified in the future; and The consequences of violating the clause. The most common way in which an arbitration clause is violated is if one of the parties seeks to file a lawsuit, disregarding the fact that they agreed to settle disputes through arbitration. By signing a contract which contains an arbitration clause, the parties forfeit their right to file a lawsuit with an arbitration clause. Doing so would constitute a violation

32. 32 What Are the Advantage and Disadvantages of an Arbitration Clause? There are some notable advantages and disadvantages to including an arbitration clause in a contract. Arbitrations are generally faster and more efficient than going to court in order to resolve the dispute . This is because the process avoids courtroom procedures and is less technically involved . Additionally, arbitrations can be very flexible. What this means is that the parties can set up their own times in which to settle the dispute, rather than having the court give them specific dates to attend. The disputing parties may also choose their own arbitrator. Doing so can help ensure that the arbitrator has more technical knowledge of the specific issue that they are disputing over. This would be in opposition to having a judge provide a ruling when they have no experience in either area. Although there are numerous advantages to the arbitration process, there are several disadvantages as well. The biggest disadvantage of arbitration is that once a ruling or determination has been made, the decision becomes final and binding. Unlike the court ruling, arbitration decisions cannot be appealed. The only way in which an arbitration decision can be appealed or set aside is if a party proves that the arbitrator was biased or unfair when making their decision. As a result, the arbitrator violated some type of public policy.

33. 5. Jurisdiction clause; 33

34. Introduction of exclusive jurisdiction clause The laws in India have prescribed certain set of rules by which an aggrieved party can institute a suit in Court of law. The general scenario to refer the disputes to the Courts is provided under Code of Civil Procedure, 1908 (CPC). One of the provision is enumerated in section 20 of the CPC which provides that a suit may be instituted either at the place where the defendant ordinarily resides or carries on business or where any part of the cause of action arises.[1] The parties to a contract may mutually agree to refer the disputes to a particular Court or Courts. Such a clause in a contract is called as exclusive jurisdiction clause. The parties agree to exclusively refer the disputes arising from the contract, if any, to a particular Court or Courts. 34

35. 35 Elements of exclusive jurisdiction clause: Even if CPC provides for the rules where the parties can file suits, an exclusive jurisdiction clause in a contract would not violate the provisions of CPC. Exclusive jurisdiction has to qualify the following: Where one or more Courts have jurisdiction, parties can agree to exclusive jurisdiction of one Court and exclude the other courts. Where one or more Courts have jurisdiction, parties cannot agree to exclusive jurisdiction of some other third Court. Contract and exclusive jurisdiction clause: Where one or more courts have jurisdiction, parties by agreement choosing one jurisdiction would not violate the provisions of section 23 and 28 of The Indian Contract Act, 1872. Thus, when parties come to such an agreement, the contract would not be termed as unlawful or restraint to legal proceedings.[2] Exclusive Jurisdiction Clauses are extensively used by parties to an agreement as often it may not be convenient for the parties to sue at the place at which the cause of action for the dispute may have arisen. In such cases the exclusive jurisdiction clause offers a party the opportunity to establish a convenient pre-determined place where disputes arising in regard to the contract would be referred to, if and when they arise.

36. 36 Arbitration and exclusive jurisdiction clause: The Supreme Court has also provided clarity on exclusive jurisdiction clause in case of Arbitration Agreement. The Supreme Court in  Indus Mobile Distribution Case [3], stated that in cases where the parties include an exclusive jurisdiction clause in an arbitration agreement designating a particular place as the seat of the arbitration, the Court in whose jurisdiction the seat of the arbitration falls would have sole jurisdiction to entertain petitions in respective of non-arbitral issues arising out of the agreement, to the exclusion of any other Courts. Once the seat of arbitration has been fixed, it would be in the nature of an exclusive jurisdiction clause as to the courts which exercise supervisory powers over the arbitration. A Juridical seat' in arbitration is nothing but the  legal place  of arbitration. Once the parties have decided a particular place as the juridical seat or legal place of arbitration (example: Mumbai or a foreign country), then the courts of that place alone would have jurisdiction over the arbitration

37. 6. Payment of stamp Duty; 37

38. 38 Liability of paying stamp duty: Liability can be imposed by agreement on either of the parties of the agreement for payment of the stamp duty.  Section 29  of the parliament legislation provides the power to the parties of agreement to decide who among the parties of the agreement shall be liable to pay the stamp duty imposed on the concerned agreement, which, in absence of an agreement, imposes on certain persons the liability of paying stamp duty. Similarly,  Section 30  of the state legislature provides a choice to the parties of the agreement to decide who among the parties of the agreement shall be liable to pay the stamp duty imposed on the concerned agreement and which in absence of any such agreement, impose on a particular party the liability of paying stamp duty. It is logical to pass the burden of paying the stamp duty on the party who is paying the consideration under the agreement, as stamp duty is the cost to the subject matter of the agreement

39. 39 Whether all agreements should be on stamp paper? No, agreements can be made on both the stamp paper and on non-stamp paper also. According to the Indian Contract Act, 1872 an agreement can be enforceable if it fulfils all the essential conditions like offer, acceptance, lawful object, consideration, competent parties, and free consent . It is important to note that in India, even oral agreements are valid and enforceable under the contract Act, provided they fulfil all the essential conditions of a contract. The Indian Contract Act, 1872, does not contain any provision that makes stamping of agreement compulsory or declaring any unstamped agreement as invalid or unenforceable. So from this, it is clear that for an agreement to be valid, stamping is not necessary and even without a stamp they are valid and enforceable.

40. 40 Stamp duty implication on e-agreement: Under the Indian Stamp Act, there is no provision that deals with electronic agreements or stamp duty payable on such agreements. Most of the state stamp legislation does not have any provision related to electronic records except some like in Maharashtra  the Maharashtra Stamp Act, 1958 (“MSA”)  mentions electronic records in the definition of  “instrument’ . States like Delhi, Uttar Pradesh, Karnataka, Gujarat, and Rajasthan mention electronic records within the definition of the term “instrument”, thus imposing stamp duty on electronic records.

41. 7 Recitals 41

42. Recitals Should give a very clear description of the nature of parties and the purpose of contract; Should ideally not contain the terms of the contract though Recitals may also be binding in nature;

43. 43 WHEREAS , Authority desires to engage the services of Contractor to provide the services herein described; and WHEREAS, Contractor desires to perform such services for Authority; NOW, THEREFORE , in consideration of the facts recited above, and the mutual covenants, terms, conditions and restrictions contained herein, and pursuant to the laws of the State of California, the parties agree as follows:

44. Some do’s and don’ts in commercial contracts: Do’s Prepare a structure of the commercials; Contract should follow the commercials and not the other way; Use definitions for generic terms such as “Law”, “Event of Default”, “Loss” etc.; The structure of the Contract should be, as far as possible, as per sequence of events such as introduction of parties, purpose, payment, roles, etc. Don’ts Don’t depend on customary usage; Avoid lengthy sentences; Avoid using sub-headings beyond three levels unless necessary; Avoid too many cross references; Avoid too much of subjectivity such as “ as the parties may agree” or “best efforts ” 44

45. 45 Thanks! Any questions? You can contact me on [email protected] Contact No. 9555613873