The governing terms and conditions of commercial contracts, and more particularly the meticulous and intricate drafting of clauses has become critical for the effective implementation and protection of rights between two consenting parties that engage in any sort of an arrangement or understanding in furtherance of a business purpose. The successful execution and overall health of a business concern is tremendously dependent upon the successful forging of ties and arrangements which adequately protects their interests and seeks to minimise the scope and exposure to disputes & also provides for the specified means of redressal in case of any breach.
The framework of contractual law is regulated by the provisions under the Specific Relief Act, 1963 and the Indian Contract Act, 1872. Any agreement between parties which is executed for a valid consideration which is otherwise not barred under law, is a contract.
Vitiating Factors Leading to Non-enfoceability of Contracts
A contract becomes unenforceable under law if it is hit by any of the vitiating factors under law, such as coercion, undue influence, fraud, misrepresentation, concealment. Such factors strike at the root of consent which is a critical element for any agreement to hold force under law.
Discharge of Contracts
A contract may be rendered as concluded or rescinded, as the case may be on account of several instances, such as breach of contract, efflux of time, discharge on account of operation of law which renders the performance of the obligations impossible.
Crucial Clauses in A Commercial Contract
The backbone of all financial and commercial dealing is dependent upon the soundness of the contractually enforceable terms and conditions that are negotiated and settled between the parties. Therefore, it is vital that the contract is drafted with attention to detail and vigilance.
- Specified scope of work/services & consideration
For removal of any uncertainty and dispute, it is critical that the scope of work or services that form part of the underlying transaction is specified in express terms. In addition to the aforesaid, the specific representation & warranties made by each of the parties must be clearly enumerated. In case of contracts involving assets, the specific recitals qua the ownership & statutory approval shall also be mentioned.
- Confidentiality & Usage of IPR
The parties should remain cognizant of the potential confidential information as well as IPR that may be exchanged as a consequence of the transaction and therefore it is advisable to necessarily include specific clauses that prohibit the other contracting party from any usage or dissemination or claiming ownership of any such information or property which is not expressly agreed and contemplated.
- Breach of Contract & Consequences
The specific instances/action/inactions that may amount to a material breach of the terms of the contract, such as the time period for conclusion of a particular task/ quality controls & checks, etc must be categorically enumerated along with the agreed consequential penalties and/ or remediation which ought to be followed upon such instance of breach of contract being established.
The parties must enumerate the instances, if any, under which they each seek to hold harmless the other from any losses or injury or damages and make good the costs, expenses or damages including any consequential or incidental damage that may incur as a consequence of any violation of the contractual obligations.
The alternate dispute resolution processes must be adequately considered by the parties, particularly in contracts which involve highly technical specifications, since it would be prudent to have any disputes arising out of such contracts be adjudicated by an independent expert in the matter as the presiding arbitrator, apart from having the disputes resolved in a time bound manner.
Note: The seat of the arbitration & the appointment of arbitrator must be categorically specified in order to avoid conflict on such aspects that may cause the time & cost of resolution increase significantly.
The instances or the time frame within which the contract shall stand rescinded and terminated must be specifically provided in unequivocal terms. Further the procedure for such termination along with incidental costs involved in the process must also be categorically laid down.
Redressal in Cases of Breach
In case of violation of the terms and conditions which results in a serious breach of contract, either of the contracting parties is liable to a variety of legalremedies and, depending upon the nature of the default.
Initiating Alternative Dispute Resolution Processes
It is often useful for a business, regardless of their capital and market size to seek and negotiate mutually agreeable terms of settlement through the process of mediation, or in the alternate contest the disputes and seek adjudication by the an appointment of the Arbitral Tribunal which materially proves to be a more effective avenue of resolution.
In cases wherein the parties have an arbitration agreement in place, either party may seek to initiate the arbitration process by issuing a notice in writing stipulating the disputes which are sought to be adjudicated. In case the other part is not agreeable to the initiation of arbitration, the aggrieved party may approach the concerned High Court and move an application seeking appointment of an arbitrator in terms of the arbitration agreement.
While the alternative disputes resolution mechanism has become increasingly popular, it is critical to note the shortcomings of such processes. Arbitration in particular limits the parties and bounds them by the Arbitral Award with very limited and restricted grounds on which such decision may be challenged, therefore parties must be cognizant before including an arbitration clause in their commercial contracts, since the decision cannot be overturned on merits.
Commercial Courts
With the enactment of the Commercial Courts Act, 2015, another mechanism has been introduced by the Government for the speedy, effective and time-bound conclusion of commercial disputes relating to exportation/aircrafts/carriage of goods, construction & infrastructure contracts, /joint venture agreements, franchising agreements, shareholders agreements, / technology transfer agreements, insurance, etc.
Parties may seek to move the commercial Courts in case the dispute pertains to any of the stipulated categories. While the commercial suit shall continue to be governed by the provisions of the Code of Civil Procedure as amended, the timelines for the entire process to be concluded have been significantly restricted. An aggrieved party is required to file an appropriate suit before the commercial Court depending upon the value of the suit.
Compensation on Grounds of Damage
Parties to a commercial contract can seek for the specific performance of the agreed terms and conditions, however, in cases where there is a demonstrable loss or damage which has been suffered by the aggrieved party, they may seek to file an additional claim for special, exemplary or nominal damages.
Interpretation of Commercial Contracts By Courts
While it must remain the endeavour of every contracting party to ensure that the contract is drafted in a manner that leaves little room for ambiguity, often times the Courts have been called upon to interpret the terms of a contract. Courts in India have maintained that there ought to be limited interference by the judiciary in business transactions between two consenting parties which are essentially commercial in nature. However, some of the factors which are taken into consideration by the Courts are enlisted as under:
(a) Intention of the parties – The terms are construed in congruence with the entire scope and objective of the Contract, and derive the intention of the parties in cases where either a material clause is absent or has been left ambiguous by the parties.
(b) Efficacy to the contract – It is a settled position of law that Courts must always lean towards an interpretation of the contract which lends it efficacy in its execution and not seek to frustrate or invalidate its provisions.
(c) Complete document – The Courts have often laid down that in case of ambiguity the terms of the contract must be read as a whole and understood in the wider context of the scope sought to be achieved.
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