Drafting Contracts and Agreements
Carefully drafted agreements and contracts are extremely necessary for the success of any kind of business, business relations and business transactions. It does not matter how cordial and friendly the relation is between the parties, future is always uncertain and so is the relations between the party. Disputes might arise at any time. Carefully and clearly drafted agreements also go a long way to keep the business out of harm’s way due to unwanted differences and discord by clearly laying out the actions and reactions, rights and corresponding duties, cause and their probable effects and eliminate grey areas.
It is often felt that in cases where there are friendly and coordinal relation between the parties any kind of written agreement only acts as a cause for discomfort and distrust between the parties. However, this kind of notion is completely false. On the contrary it is utmost essential to have clear, comprehensive and precise written terms and agreement between the parties as the same brings clarity in the dealings and of the parties as they are clear beforehand what are their mutual rights and obligations to each other and what are the restrictions places upon their freedom there are very less chances of any kind of disagreement or dispute at a later stage. A written contract generally restricts the freedom of the parties to the contract and make each of them bound in the manner to each other as laid down in the contract.
Business to business agreement and Business to Consumer Agreement
Generally speaking all agreements whether of personal nature or transactional nature can be broadly categorized into two, i.e. Business to business agreements and Business to Consumer Agreements. Business to business agreements are agreements at parallel, horizontal levels of relationship where the contract is between two entities, companies or persons where both the parties have equal bargaining power and are capable of determining the terms of the agreement and fine tuning them by mutual deliberation and agreement. Business to Consumer Agreements are agreements between parties at vertical levels of relationship. One party has greater bargaining power than the other. Some examples of such type of agreements are loan agreements entered into between a retail borrower and a bank, employment agreement between employer and employees, insurance agreement between an insurance company and a retail investor and builder and buyer agreement for purchase of residential or commercial properties in projects and townships.
In case of business to business agreements the terms of the agreements generally govern the transactions and the rights and obligations generated from it and courts do not usually go into the question of validity of the contract and the same is questioned only in certain unusual circumstances where there is some kind of fraud, misrepresentation or such similar element or event in the transaction that may render the agreement void or voidable i.e. giving one party right to rescind the contract. In cases of business to consumer agreements courts might go into the validity of the terms of the agreement as there is a fiduciary relationship between the customer and the business and the business has an upper hand and even complete control in framing the terms of the agreement and the consumer usually has no say in changing or modifying any of the terms and only have an option to accept or reject the agreement in totality. Thus any kind of unreasonable and one sided condition is liable to be questioned in the courts of law as the courts especially the consumer and labour courts must protect the rights of the consumers.
The principle of caveat emptor ‘buyer beware’ does puts an obligation on the consumers to secure their interest and perform necessary due diligence before entering into a contract. But still there is a standing presumption that since, in these kinds of contracts one party has all the power to set the terms of the agreement the courts must protect the interest of the weaker party in case of unreasonable and one sided terms of contract.
Due to the reason stated above it is extremely important to take care of the existing laws before drafting a contract of such a nature and to ensure the contract does not contain arbitrary and one sided provisions so as to render the validity of the entire contract in question. Fine balance is needed to be maintained while drafting the terms protecting the interest of the business so that it does not appears to be completely arbitrary, unreasonable or one sided affair.
STRUCTURING THE AGREEMENT
Essentials to be kept in mind before drafting an agreement
It is necessary to understand that the agreement should be drafted in a manner as to comprehensively and precisely deal with all the issues that might arise between the parties today or tomorrow. When the legal counsel drafts an agreement his primary objective is to close all the gaps in the contact and to ensure that the agreement is air tight as regards any kind of dispute or disagreement between the parties today or that might arise tomorrow. The primary objective to be kept in mind before drafting an agreement is that no leeway is given for a possibility of litigation due to any ambiguity or an opening as regards the obligation or rights of any party. Every possible action, response, issue, solution, right or obligations is needed to be dealt with in the agreement leaving no issue to be ambiguous or to be left to be questioned in the court of law in a litigation between the parties.
Whenever, any kind of dispute arises between parties to an agreement or a contract the first thing the counsels of both the parties do is to go through the entire contents of the agreement and to find out loopholes that might peak out from small gaps in the letters of the agreement that might be helpful to their respective party or parties in the court of law.
Thereby, there are some completely crucial things that have to be borne in mind before drafting a contract and they are laid down below;
1. Applicable Laws – What is the law that governs the kind of transaction, even or contract? What are the latest additions to the law? What are the latest deletions, repeals and reenactments? Latest ratios relevant to the same as laid down by the courts?
2. Clarity of Purpose – It is of utmost importance that the purpose of the agreement is clear an unambiguous and is capable to be made out by reading the starting of the contract. For instance its good to title the agreement according to its object and purpose like Share Purchase Agreement, Memorandum of Understanding, Purchase Agreement, Settlement of Claims, etc., etc. The agreement must define and set forth the obligation of each party clearly and precisely
3. Precision and comprehensiveness – The agreement needs to be precise and unambiguous and should be thorough as regards the rights and obligations of the parties and all possible actions, responses, issues, solution, and every single minutes detail that might be a cause of action for litigation between the parties in the court of law.
4. Customized terms i.e. start with open mind rather than directly following a precedent – It is completely essential, while drafting an agreement, to understand the business of the parties and the nature and detailed aspects of the transactions and customize the agreement accordingly. An agreement drafted by two different parties governing the transaction and relation between themselves cannot be adopted blindly and applied to another set of parties however, similar or ditto the transaction between these parties may be. The need of the parties, trust and relationship between the parties, extent and area of operation, and many other aspects are there which are always needed to be considered before drafting a contract. Directly adopting or copying from a pre-existing contract is not prudent and generally seen to create difficulties in the future as the same either falls short to tackle the problems existing in the relation between the parties or fails to cater to the unique problem between the parties at hand. There is nothing like a standard contract or standard terms in a contract. Every contract is a masterpiece and one of customized and tweaked to the minutest details to be as airtight as possible. Everything in the contract and every single detail of a contract is negotiable.
Understand the business and transaction between the parties
a) Be sure the terms of the agreement are clear and complete as regards the transaction between the parties and are what your party need in the
b) Ask questions, and a lot of them to make sure that the agreement completely covers all important and ancillary issues of today and those that might arise between the parties in future
c) Price must be decided at the end of the negotiation process and as per the terms that a party was allowed to keep and to forego.
Thus before starting to draw the agreement following essentials steps need to be taken to ensure a clear, precise and comprehensive agreement;
5. Excluding liability – Clauses that excludes liability of the parities under certain circumstances is needed to be incorporated into the agreement for instance in case of force majeure, non-performance by the other party, etc.
6. Boiler Plate Clauses – There are numerous boiler plate clauses that are incorporated into an agreement and it is extremely necessary to customize the same as per the needs of the parties and not to simply copy them from any pre-existing contract. It is also essential to decide which of the boiler plate terms are needed to be incorporated in the contract and which need not be added.
PARTS OF AN AGREEMENT
Entire contents of the contract can be divided into following categories and every single letter of an agreement fall under one of the eight categories given below.
1. Representations – Representations are statements of facts stated by the parties to the agreement. Unlike warranties representations generally are not greatly material to the transaction and performance and non-performance of a promise.
2. Warranties – Warranties are also statements of facts stated to be true by the parties to the contract. But, the same is legally binding on the party making the warranty and the other party has the right to rescind the contract and also claim damages if the warranty proves at a later stage to be false. For instance Company A represents and warrants that the machinery that is being sold to Company B is in working condition and there exists no material defect in it so as to decrease its working and performance. Here in this case if the machinery does have a defect contrary to the warranty given by Company A, then in that case the Company B has the right to rescind the contract and also to claim damages from Company B for the said misrepresentation which induced Company B to buy the concerned machinery.
To make a fact essential to the agreement it is prudent to word it as a warranty. For instance, “A Ltd. represents and warrants that the machinery is in working condition and can run for straight 8 hours with production capacity between 1000 to 1050 units per hour.”
3. Covenants – Covenants are obligations of the parties incorporated in the agreement. They are the basis and reason of formulating the agreement. An agreement consists of numerous covenants. Covenants are the most essential parts of any agreement. It includes promise of timely performance by one party and timely payments by another party. Non-disclosure, non-compete, force majeure etc. are also necessary covenants incorporated into the agreement.
4. Rights – Rights are exact reciprocals of covenants. When one party has an obligation to perform his part of the agreement the other has the right to demand and receive the performance. Mostly, the terms of the agreements are in the form of a covenant and every covenant in the contract is capable of being reciprocated by itself as a right in case of a dispute. However, there are certain terms that may be expressed in the form of rights itself.
5. Conditions – There are numerous conditions incorporated in a contract. Conditions can also be corresponding to obligations, rights, discretionary authority and declarations. For instance a condition that ‘party A can withdraw from further construction with 60 days notice before the start date of phase 2 of construction and only on completion of the phase 1 of construction’
6. Discretionary Authority – Generally in a contract discretionary authority is given to one of the parties regarding certain aspect of the transaction or business. For instance, ‘buyer can reject the delivery of the goods and send them back if not satisfied with the quality and not particularly but not exclusively, if the quality of the goods do not match the sample shown to buyer earlier by the seller’. This term in the agreement is conferring discretionary authority on the buyer.
7. Declaration – Generally, facts etc. and other remaining things not falling under any of the above categories are declarations. Important aspects of an agreement like date, parties name, place, object etc. are in the form of a declaration.
ENEMIES OF GOOD DRAFTING
1. Ambiguity – Ambiguity means a sentence or phrase or part of contract being capable of two or more different interpretations. Ambiguity might result due to various reasons and mostly due to the use of such words that might mean different things without clarifying the context in which they are being used. Ambiguity also creeps up often due to ill use of pronouns.
2. Use of unnecessary words – It is always best to keep the agreement short and precise and not to have unwanted repetition of various parts, terms or lengthy names etc. Further it is advisable not to use unnecessary words like hereunder, herein above etc. its better simply to say ‘in this agreement’
3. Vagueness – Vagueness is different from ambiguity. Ambiguity is confusion due to ill use of words, phrases and sentences whereas vagueness is not catering to or not including certain clarifying aspects in the agreement. It is important to include certain things in the agreement which clarifies intrinsic aspects of the transaction in the business so as to prevent discord and disagreement but sometimes while drafting vagueness as regards certain material aspects creeps in which in certain cases makes the entire agreement redundant. Thereby, it is extremely important to remove all kinds of vagueness that appears in the agreement and make it air tight as regards the transaction, even or the subject matter at hand to cover, present and future rights, obligations, actions and reactions of the parties.
4. Inconsistency – Use of words and phrases in the agreement must be consistent in an agreement. Synonyms of a word must be avoided and a single word should be used in the entire agreement. Names of parties, places, subject matters etc., must be uniformly used in an agreement to cure any kind of inconsistency.