Negotiating Agreements

Issues around negotiating agreements, what are the terms one needs to consider carefully, etc. are presented in this chapter.

1. What is a legally binding agreement?
2. What are the various terms in agreement that must be included?
3. What are the mistakes that must be avoided while drafting a negotiating agreement?
4. Is it necessary to consult an expert while drafting a negotiating agreement?

1. What is a legally binding agreement?

As per Indian contract law an agreement between parties becomes an enforceable contract when the following conditions are satisfied

a. There is some consideration for it (could be provided in cash or kind);

b. The parties are competent to contract (that is the parties have attained age of majority according to law, are of sound mind and are not disqualified by any law to which they are subject);

c. Their consent is free (consent is free when it is not caused by coercion, undue influence; fraud, misrepresentation, or mistake); and

d. Their object is lawful (should not be forbidden by law; should not defeat provision of any law; should not be fraudulent, should not involve or imply injury to any person or property of another, should not be immoral or against public policy).

Further, depending on the subject matter of the contract, it may have to be compulsorily registered and the duly stamped.

2. What are the various terms in agreement that must be included?

At the time of drafting and negotiating an agreement, in addition to Indian Contract Act, 1872 (Contract Act) in some cases, guidance may be drawn from the specific statute itself, such as the Limited Liability Partnership Act, 2008, which lays down the basic  prerequisites to be included in a LLP agreement such as the eligibility, relationship, liability, etc. of the partners of the LLP.  .However, there are certain terms that are common to every agreement such as:

a. Title and name of the Document: The title and name of the document provides a brief introduction to the nature of the agreement;

b. Place: Under the Indian law, enforceability and admissibility of a document depends upon whether the agreement is adequately stamped/registered or not. The stamp rate and registration fees vary from place to place. Mentioning the date and place helps in ascertaining the applicable rate of stamp duty, and also helps in determining the territorial and legal jurisdiction of the sub-registrar office where the agreement can be registered if required under applicable law. It is not mandatory to register all agreements.

c. Date: The date of the contract may have no reference to the date on which the contact may come into effect, but if no other date is given it will be presumed that the date of execution is the date on which the contract will come into force. The date of a document is relevant for determining the competence of the party to enter into the contract, such as whether a person is a minor on that date, or is otherwise disqualified to enter into the agreement. It also has a bearing for the purpose of limitation. As per the extant law, for a claim under/relating to an agreement to be valid, it is required to be raised within the limitation period prescribed under the law.

d. Parties: This clause helps in identifying the parties who have agreed to be bound by the terms of the agreement. Therefore the parties have to be correctly and sufficiently described (name, age, parentage and residence) so that they are identifiable at any future date.

e. Recitals: Recitals contain a brief history or in a short form the objective of the contract by providing details on the surrounding circumstances in which the transaction is taking place.

f. Testatum: Testatum is the witnessing clause, which refers to the introductory recitals of the agreement (if any) and states the consideration acknowledgement thereof.

g. Consideration and Receipt: An agreement without any lawful consideration is not valid in law, unless the same pertains to (i) gift made on account of natural love and affection between the parties, standing in near relation to each other; (ii) a promise to compensate for past services; or (iii) a promise to pay time-barred debts.  For example a promise not to initiate legal proceedings, an agreement to defraud revenue, would be considered unlawful consideration under the Contract Act. Further, the amount of consideration being paid also helps in determining the rate of stamp duty, based on the documents. A receipt is the acknowledgment of the consideration by the transferee.

h. Operative Provision: Operative provisions provide the obligations of each of the parties, as well as any conditions precedent or subsequent, which directly affect the contractual relationship between the parties.

i. Representations and Warranties: Representation is a statement as to the existence of a fact aimed at inducing a party to enter into the bargain or contract. On the other hand, warranty implies a statement as to the existence of a fact aimed at inducing a party to enter into the bargain or contract. Used interchangeably, this provision lays down the various representations and warranties provided by either party, based on which the other party agrees to enter into the agreement.

j. Covenants: Covenants are promises by a party to take or not to take certain actions.

k. Indemnity and Limitation of Liability: This clause protects the non-defaulting party against any losses arising due to any act or omission by the defaulting party. If parties so agree, the liability can be limited to a fixed amount.

l. Termination: The termination clause indicates the situations, occurrence or non-occurrence of which would determine the relationship between the parties.

m. Boilerplate: Dispute resolution, choice of law, notice to the parties, right to assignment, severability, amendment and modification, relationship between parties, waiver, force majeure clause etc. constitute boilerplate clauses and are generally included at the end of the contract.

n. Testimonium: This clause forms the last part of the agreement, which signifies that the parties to the agreement have signed and executed the document, and ends with signatures of executants and of attesting witnesses, if necessary.

o. Annexure or Schedules: After the main agreement, the annexures contain the supplemental documents, formats of documents and such other information, as may be described in the main agreement. be compulsorily registered and the duly stamped.

3. What are the mistakes that must be avoided while drafting a negotiating agreement?

There are certain points which are relevant and if not drafted properly in the agreement can create trouble at later stages. In order to avoid any sort of problems it is very important to draft the agreement and avoid the following mistakes:

a. Proper identification of the parties to the contract is essential for the verification of the capacity in which a party is executing the contract, i.e., whether as a principal or a representative;

b. The contract should clearly state whether each contractual obligation is absolute or conditional with the occurrence of some event;

c. The determination of a definite consideration and the mechanism for payment of the same, is necessary;

d. All the understandings, covenants and obligations of the parties should be properly spelt out, and there should not be anything left for assumption;

e. Choice of law and dispute resolution mechanism should be carefully negotiated for preventing future challenges in this regard;

f. Well delineated events of default and other grounds of termination would help in avoiding the whole process of litigation. Further, obligations post termination or any payment for any early termination should also be mentioned.

g. Proper attention to the details while drafting the boilerplate terms, such as responsibility of a party for cost sharing; assignment without other partys consent, to name a few.

4. Is it necessary to consult an expert while drafting a negotiating agreement?

While incorporating any sort of entity whether for-profit or not-for-profit, it is very important to draft a faultless agreement in order to avoid any sort of legal issues that may crop up at later stage. Hence, one should always take assistance from experts while drafting any agreement.