tiecon delhi oct 2011 - legal commercial contracts

Legal Essentials in

Business ContractingUnderstanding the fine printUnderstanding the fine print

Kapil Dev Sapra

Founder & Managing Partner

Sanjeev Vasdev, Managing Director

Flash Electronics (India) Pvt. Ltd.

Table of contents

• Business Contracts - Their Significance

• Business Contracts - Their Objectives

Section I: Business Contracts

• Essential elements/ingredients of a contract

• Outline of Standard Business Contract

Section II: Structuring of business contracts

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• Non-compete, Non-solicitation, Confidentiality

• Intellectual Property Rights

• Damages

• Boilerplates clauses

Section III: Key provisions of business contracts

• Use of ‘Not known’ & ‘Known not’

• Use of ‘comma’

• Some other drafting tips

Section IV: Illustrations and tips

Flash Electronics and Kapil Sapra & Associates

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BUSINESS CONTRACTS

Section I


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Business Contracts- Their Significance

• Being a business owner means that you will have to sign many commercialcontracts, with vendors, customers, employees and others.

• Agreement versus Contract

• Written versus Oral

• Complex and heavily regulated business environment.

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• Complex and heavily regulated business environment.

• Ensure competitive advantages.

• Comply with sectoral regulatory and legal requirements.

• Interpretation by a Court/Arbitral Tribunal.


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Business Contracts- Their Objective

Legally binding

Privity of Clarity of

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Objectives of contract structuring

Privity of Contract

Ease of implement

ation

Certainty of rights and obligations

Clarity of scope

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STRUCTURING OF BUSINESS CONTRACTS

Section II

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Essential elements/ingredients of a

contract

Offer

Acceptance

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Consideration

Object

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Essential elements/ingredients of a

contract

consensus ad idem: i.e., meeting of the minds

clear and comprehensive terms

consistency in expression and terminology

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consistency in expression and terminology

coherent flow

intention of the parties explicitly laid down

simple language-words used in same sense as understood by men of commerce and business

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Outline of Standard Business Contract

S. NO MAIN HEADS

1 Place and Date of execution

2 Parties

3 Recitals

4 Definitions

5 Interpretations

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5 Interpretations

6 Purpose/ Scope of the Agreement (i.e. of Appointment/ Engagement)

7 Rights and obligations of the Parties, which should include:

• Regulatory approvals;

• Licenses;

• Personnel;

• Penalties, etc.

8 Consideration and payment terms


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9 Taxes

10 Term (including Renewal) and Termination

- Termination with Cause

- Termination without Cause

11 Consequences of Termination

12 Confidentiality

13 Intellectual Property Rights

14 Representation and Warranties of the Parties

Contd.

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14 Representation and Warranties of the Parties

15 Indemnity (one way or both ways)

16 Limitation of liability (one way or both ways)

17 Co-operation between the Parties

18 Assignment and sub-contracting

19 Compliance of relevant laws

20 Non-Compete/ Exclusivity

21 Non-Solicitation 10


22 Waiver

23 Severability

24 Relationship of/ between the Parties

25 Entire Agreement/ modifications

26 Precedence Clause

27 Cumulative of Remedies

28 Right to set off

Contd.

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29 Notice

30 Survival Clause

31 Force Majeure

32 Arbitration and Dispute Resolution Procedure

33 Governing Law and Jurisdiction

34 Execution

35 Witnesses

36 Schedules/ Annexures 11


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KEY PROVISIONS OF BUSINESS CONTRACTS

Section III

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Non-Compete, Non-solicitation &

Confidentiality• Non-Compete

• Agreements in restraint of trade are void – Section 27 of the Indian Contract

Act, 1872

• Exception – Sale of Goodwill of a business. Buyer / person deriving title

from buyer may restrict seller from carrying on competing business provided

restrictions are reasonable on:

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restrictions are reasonable on:

• Scope

• Time

• Geographic area

in context of business

• Common law → Reasonableness

• Indian Law → Sale of Goodwill + Reasonableness13


Applicability of Non-Compete

• In Term or Post Term

• Qua employees in employment contracts:

• Service bonds – enforceability

• Qua vendors, suppliers, agents, etc.

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• Qua vendors, suppliers, agents, etc.

• Qua shareholders in shareholders agreements

• Qua buyers and sellers of business

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Non-solicitation

• Meaning: An obligation not to take away customers, venders, employees, etc.

• Scope:

• In Terms

• Post Term

• Work Around & It's mitigation

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• Work Around & It's mitigation

• Enforceability

• Burden of Proof

• Evidence

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Confidentiality• Meaning: Protection of trade secrets & proprietary information

• Contract must specify as to how a party can classify an oral information as being

“Confidential”.

• Exceptions

• information that can be demonstrated to have been in the public domain at

the time it was disclosed;

• information that can be demonstrated to have been known to the Receiving

Party at the time of disclosure with no obligation of confidence;

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Party at the time of disclosure with no obligation of confidence;

• information that becomes known to the Receiving Party from a source other

than the Disclosing Party without breach of any obligation of confidence by

the Receiving Party; etc.

• Scope:

• In Terms

• Post Term

• Enforceability - Burden of Proof and Evidence 16


Intellectual Property Rights• Means – Trademark, copyrights, Design, Patents and other proprietary rights.

• License versus Assignment

• Scope:

• In Terms

• Post Term

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• an ideal contract should contain:

• define what constitutes IPR

• declare ownership on all IPR on the subject matter

• provide for accessibility and authority and conditions for use by the other

party

• provide for the protection of IPR

• provide for indemnification in case of infringement 17


Damages

• Means: Compensation for loss or damaged caused to one party due to breach

of terms and conditions of the Contract, misrepresentation, negligence, etc.

of other party.

• Law of Damages

• Direct Damages versus Indirect Damages

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• Direct Damages versus Indirect Damages

• Actual Damages versus liquidated Damages

• Enforceability - Burden of Proof and Evidence

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Boilerplate clauses

• Means: any text that is or can be reused in new contexts or applications

without being changed much from the original. In most negotiations, the

parties spend little or no time focusing on or re-writing these clauses.

• In most standard contracts, roughly the last part of the contract consists of

such, most standard, little-noticed boilerplates such as assignment, waiver,

notices, etc.

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notices, etc.

• Boilerplate clauses are also important because they affect the legal rights of

the parties under the contract as much as any other important clauses.

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Boilerplate Clauses for Discussion

• Force majeure

• Entire Agreement

• Precedence

• Notice

• Waiver

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• Waiver

• Term and Termination

• Clauses on settlement of disputes

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Force Majeure• ‘Force majeure’- a French phrase meaning superior force or overwhelming

circumstances.

• Normally events of ‘force majeure’ are interpreted to mean events over whicha party has no control and in some cases to mean events in the nature of ‘Actsof God’ e.g. flood, earthquake, fire, etc.

• Through careful drafting, the scope and kind of events that would constitute‘force majeure’ event can be limited or expanded.

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• Inclusion of the words “beyond the control of the parties” expands the scopeof a ‘force majeure’ clause by encompassing events covered beyond thetraditional ‘Acts of God’ like extreme cold weather which may not beconsidered as an ‘Act of God’ as it cannot be regarded as ‘catastrophic’.

• Act of government

• Labour unrest – Affecting party or affecting industry as a whole

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• Specific force majeure events or catchall category or both

• End result of the force majeure events:

• termination of the contract; or

• extension of time.

• Obligation of the Parties

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Entire Agreement

• The entire agreement clause (also called an integration clause) is typical language included in many contracts, which:

• limits the terms of a written agreement

• creates clarity and certainty

• Suggested Clause

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“This Agreement constitutes the whole and entire agreement among the

parties in connection with the transactions contemplated herein and cancels

and supersedes any prior agreements, undertakings, declarations,

commitments, representations, written or oral, in respect thereof, and there are

no express or implied terms, conditions, agreements, undertakings,

declarations, commitments, representations or warranties or other duties

(legal, equitable, fiduciary or in tort) whatsoever among the parties not

expressly provided for in this Agreement.”23


• When there is more than one agreements, then in case of contradiction

which agreement will prevail over the other agreement.

• Suggested clause

“The following documents shall be deemed to form, and be read and

construed, as part of the Contract in the following order of precedence to

resolve any conflict between the documents:

Precedence

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resolve any conflict between the documents:

a. This Contract;

b. Special conditions of contract, annexed as Annexure “A”;

c. General conditions of contract, annexed as Annexure “B”;

d. Purchase Order, annexed as Annexure “C”;

e. LOI, annexed as Annexure “D”;

f. Technical Specifications of Work, collectively annexed as Annexure “E”;

g. Price Schedule of Quantities/ BOQ, annexed as Annexure “F”; and

h. Any other documents forming part of this Contract.”

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Notice • Typically applies to all communication that is required or permitted to be

delivered to any party pursuant to the Contract.

• Needs to be drafted carefully, as disputes can arise regarding whether

effective notice was delivered or not.

• The notice provision include:

(i) the method by which notice should be given;

(ii) when notice is considered to be delivered and received;

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(ii) when notice is considered to be delivered and received;

(iii)what, if any, is the effect of a disruption in delivery;

(iv) the nature of the notice provision, including whether the notice provision

is mandatory or permissive; and

(v) the individual to whom notice must be delivered when notice is required to

be delivered to a corporation, partnership or trust.

• Advisable to avoid identifying an individual by name, since people move

around and change positions. It is best to indicate an office, such as Manager,

Chief Executive Officer.

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Waiver • Limits and clarifies a party’s ability to avoid certain contractual obligations.

• Failure by a party to enforce any provision of a contract shall not be treated asa waiver of that provision, nor shall it affect the right of that party subsequentlyto enforce that provision.

• Express or inferred from conduct which is inconsistent with the right.

• Delay or failure to exercise a right may, in certain circumstances, constitute a

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• Delay or failure to exercise a right may, in certain circumstances, constitute awaiver of that right. It is therefore common for parties to include in theiragreement a provision providing that no waiver of any clause in the agreementis binding unless it is made in writing and signed by all the parties entitled, aspursuant to the agreement, to grant the waiver.

• Any waiver must be made in writing.

• Distinguished from Estoppel.26


Term & Termination/Expiry

• Fixed versus Ongoing/Evergreen

• Termination with cause

• Cure Period

• Immediate

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• Immediate

• Termination without cause

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Settlement of Disputes• Mediation and Conciliation

• Arbitration

• Applicable law to arbitration,

• Venue of arbitration,

• number of arbitrators and their appointment,

• Interim measures / provisional remedies,

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• Interim measures / provisional remedies,

• privacy, rules applicable, appeal and enforcement,

• Survival after termination of the main agreement.

• Governing Law

• Jurisdiction28


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MISCELLANEOUS DRAFTING ISSUES

Section IV

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Use of ‘Not known’ & ‘Known not’

“Confidential Information shall not include any information which has been

obtained lawfully by the recipient from a third party who is known not to have

obtained such information directly or indirectly from the disclosing party.”

“Confidential Information shall not include any information which has been

obtained lawfully by the recipient from a third party who is not known to have

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obtained lawfully by the recipient from a third party who is not known to have

obtained such information directly or indirectly from the disclosing party.”

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Use of ‘comma’

• Indian Income Tax Act provides “….secret formula, process…..”

• Indo-US Treaty provides “….. Secret formula or process……..”

• Company A, faced a tax liability of Rs. 200 crore as the comma in the Indian

Income Tax Act altered the definition of royalty. At the same time, the

absence of a comma in the Indo-US Treaty saved Company B from a liability of

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absence of a comma in the Indo-US Treaty saved Company B from a liability of

Rs. 77 crore.

• As per Indian Income Tax Act even if process is not secret, it is classified as a

royalty and thus taxable. Whereas as per Indo-US Treaty , formula and process

both must be secret in order to be classified as royalty. If not. It is not taxable .

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Some other drafting tips

• Clarity on scope.

• Identification of specific exclusions.

• Inclusive versus definitive definitions.

• Cautious use of ‘indemnification’ language.

• Inclusion of limitation of liability clause, if appropriate

• Avoidance of use of expression such as “proper”, “reasonable”, as far

as possible.

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as possible.

• Incorporation of an acceptance clause.

• Avoidance of use of long sentences or creative wording.

• Customization of the contract for a particular transaction.

• Proof reading of the contract carefully.

• Execution of a duly signed and dated contract.

• Consultation with a legal counsel.32


Thank You!

For more details contact

Sanjeev Vasdev Kapil Dev Sapra

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Sanjeev Vasdev Kapil Dev Sapra

Managing Director Founder & Managing Partner

Flash Electronics (India) Pvt. Ltd. Kapil Sapra & Associates

A- 4, MIDC Chakan Industrial Area, M-34, Saket

Mahalunge, Chakan, Pune 410 501. New Delhi-110017

Email: [email protected] Email: [email protected]

Phone: +91-2135-666000 Phone:+91-11-2956-5201/ 02/ 03

Fax: +91-2135 - 666109 Fax:+91-11-2956-5204 33
