contracts in india- key legal and practical aspects

Som Bathla

FCS, LLB

Company Secretary & GM-Legal- ADM (India)

Contracts- Legal & Practical Aspects

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Do we need a Contract?

Yes!

But, what are the key objective of having a

Contract?

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Key Objectives:•Contract is at the heart of most business dealings-because:

•Records business/commercial understanding

•Stipulates scope and obligation of Parties

•Dispute Resolution:• Court cannot read minds- written agreement is judged

objectively.

•Indemnification obligations- if default.

•Claim damages or seek specific performance.

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What is

Contract?

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Contract-meaning?

As per Dictionary :“An agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration”

As per Indian Contract Act, 1872:Sec. 2(h)- "An agreement enforceable by law is a Contract.”

Sec.2(e)- “every promise or set of promises forming consideration for each other, is an Agreement”

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Agreement Legal Obligation

Contract

“All contracts are agreements but all agreements are not contracts.”

CONTRACT = AGREEMENT + ENFORCIBILITY BEFORE LAW

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Let’s understand the essentials of a Contract!!!

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Essentials of a valid contract:• Offer and Acceptance

• Intention to create legal relationship

• Lawful consideration

• Capacity of the parties- should be major, of sound mind,

not disqualified by law otherwise.

• Free consent – i.e. not caused by Coercion; Undue influence; Fraud;

Misrepresentation; Mistake

• Lawful object i.e. should not be illegal, immoral, against public policy,

wager

• Certainty of terms- not vague

• Possibility of performance- shouldn’t be impossible

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Which one is better?

Oral Contractor

Written Contract

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Always prefer written Contract over oral agreements

As it is difficult to prove existence of Oral contract.

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What about contract Language?

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So Here it is….

The professor of a contract law class asked one of his better students, "If you were to give someone an orange, how would you go about it?"

The student replied, "Here's an orange."

The professor was outraged. "No! No! Think like a lawyer!"

The student then replied, "Okay. I'd tell him

`I hereby give and convey to you all and singular, my estate and interests, rights, claim, title, claim and advantages of and in, said orange, together with all its rind, juice, pulp, and seeds, and all rights and advantages with full power to bite, cut, freeze and otherwise eat, the same, or give the same away with and without the pulp, juice, rind and seeds, anything herein before or hereinafter or in any deed, or deeds, instruments of whatever nature or kind whatsoever to the contrary in anywise notwithstanding...'"

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Okay! let’s discuss- How to

Efficiently manage our contracts

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Efficient Contract

Management

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CONTRACT MANAGEMENT- Actions Points:

I. Structuring of Contract-scheme/flow of contract

II.Categorization of Contracts- based on certain criteria

III.Standardization of Contracts.

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I. STRUCTURING/SCHEME OF CONTRACT:

Parties to Contract

Preamble

Scope of the Contract

Default/Termination

Boiler plate Clauses

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Structuring/Scheme- FLOW OF CONTRACT:PARTIES TO CONTRACTPREAMBLESCOPE- BUSINESS

ARRANGMENT/UNDERSTANDING.Obligation of Both Parties-Product/service delivery.

Consideration/Invoicing/payment

Representation and Warranties

DEFAULT:Termination- by notice/on default.

Indemnification.

Liquidated damages

BOILERPLATE CLAUSES: (refers to standardized language in contracts)

SCHEDULES TO THE AGREEMENT, IF ANY

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Few Examples of Boilerplate Clauses

• Waiver

• Severability

• Notice

• Relationships between the Parties

• Assignment

• Force majeure

• Confidentiality

• Announcements.

• Counterparts.

• Arbitration

• Choice of law

• Jurisdiction

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Payment of proper Stamp duty.

Ensure stamp duty is affixed as per Indian stamp act on agreements- based on place of execution.

Instruments not duly stamped-inadmissible in evidence in Courts.

Not duly stamped instrument may be impounded by the authorities under Stamp Act.

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II. CATAGORIZATION OF AGREEMENTS:

A.Key Business Contracts

B.Business-support routine contracts

C.Transaction Documents (Inorganic growth phase)

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II-A KEY BUSINESS/COMMERCIAL AGREEMENTS:

• Distributors/Dealer Agreement

• Sale/Purchase Contracts

• Business- Job-work Agreements.

• Service Level Contracts – in case of service companies i.e. Software/IT companies.

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Key precautions in business contracts:

• Most important organic mode business growth document.

• Commercial/business involvement is must to make you understand the real objective.

• Meticulously understand the whole transaction process and capture minute details.

• Make indemnification very strong- as stakes could be very high.

• Choose better recourse in case of default- liquid security (Guarantee) vs. litigation?

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• II-B- SUPPORT RELATED ROUTINE CONTRACTS:

• Lease Agreements for residential/warehousing purposes.

• Contracts for hiring manpower/labour

• Third Party services contracts

• Consultant’s appointment

• Broker/Agent appointment

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•Key precautions in support contracts:

• Don’t pay advance or pay bare minimum (lease contracts)

• Keep your stake minimum- Pay after work.

• Cost-benefit analysis: Don’t think of litigation as preferred strategy here, as stakes might be low.

• Ensue the continuity of benefits, even if the service provider moves away/sells out (like lease contracts)

• Registration requirements..

• Obligations to be completed after termination, which arose during validity of agreement.

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• II-C TRANSACTIONAL CONTRACTS:

• Asset Purchase (Itemized sale)

• Asset Purchase (Slump sale)

• Joint venture Agreement

• Share Purchase Deal

• Private Equity deal/Strategic investment

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Key precautions in transactional contracts

• Most important –inorganic growth oriented transaction.

• Stakes really very high- engage professional lawyers/tax advisors.

• Structuring most important- else you may end up in a pandora box of liabilities –i.e. asset purchase/equity/JV

• Lots of uncertainties- as target is outside party- Rely on put covenants based on due diligence findings.- i.e. conditions precendent

• Ensure change of control provisions are duly addressed.

• Look at the license/permissions validity and continuance…

• JV-Ensure that you get enough management rights- directors/reserved matters.

• FDI policies compliances- depending upon sector.

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III. STANDARDIZATION OF CONTRACTS:

Pick the best clauses from different sources and keep at one place.

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Analyse the number and frequency of various contracts running around.

Prioritize the standardization project i.e. maximum the number & frequency- do it first.

Contracts standardized well in time, will free you up for other important activities.

Periodically update the standard contract- based on new business arrangement/legal update.

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Practical approach:

*Divide the contracts in few categories depending upon the industry.

*Don’t prefer vetting of other persons contract, rather give them your formats.

*Standardize your contracts, as much as possible.

*Always consider the legal recourse/remedy in mind, if default, while drafting.

*Be mindful of the enforceability of provisions, as per extent laws.

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“Practice does not make perfect…..

To be continued….

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… only perfect practice makes perfect”- Vince

Lombardi

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Questions?

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Thank you