Understanding the implications of an agreement is critical for any business operations. There are various features and parameters in an agreement which makes it a viable and tenable document to avoid lengthy and cumbersome court battles later on in the event of a breach. This module is designed to equip the takers of this course to make such a decision. This module will impart the skills both for drafting simple agreements as well to interpret the likely legal effect of various provisions mentioned in an agreement drafted by the other party.
Objectives of drafting an agreement
An agreement can be verbal or in written form. However, most of the business understandings are always noted down in black and white in the form of an agreement. This helps in minimizing the possibilities of disagreement on what exactly the parties’ intention was at the time of entering into the business relationship. From this perspective, the objectives of drafting an agreement are:
- to precisely reflect the “meeting of the minds” in a way that will be understood exactly in the same meaning as was intended to be communicated by all readers and stake-holders
- To create legally enforceable rights and obligations
- To act as a roadmap for business relationships
Information required before drafting an agreement
Though each agreement is unique in itself, it is necessary to gather certain information from the proposed parties to the agreement in order to appropriately document the understanding between them. Some of such queries are enumerated below. Answer to these queries would help in meeting the documentation objective.
- What does the drafter hope to achieve?
- Who are the parties to the agreement?
- What is the subject matter and nature of the agreement?
- From when will the agreement take effect?
- What does the other party reasonably hope to have included in the agreement?
- What are the issues and concerns of the parties to the agreement?
Legal issues to be ensured
There are certain contractual legal concepts which need to be kept in mind while drafting or reviewing any agreement. These concepts, although already covered in the Indian Contract Act, 1872, are presented here in a capsule.
- Offer and acceptance: one of the parties to the agreement makes an offer to do or not to do certain thing and the other party accepts the offer for a valid agreement to exist. There cannot be an agreement without an offer and its acceptance by the other party.
- Consideration: for a binding and enforceable agreement it is necessary that for the services or goods to be supplied by a party to the agreement, the other party shall compensate the first party.
- Capacity to contract: the parties to the agreement must have the legal capacity to bind each other to the terms of the agreement. This means a minor, a lunatic or an insolvent cannot enter into an agreement. For a legal entity to be bound by an agreement, it shall be executed by someone who is authorized to execute it.
- Certainty of subject matter and terms: the subject matter of negotiation and the terms and conditions governing that subject matter should have certainty.
Main provisions of an agreement
Like any other document an agreement has various parts. Each of these parts must be there in an agreement to impart and ensure surety to the understanding that the parties propose to document through an agreement.
- Title: this signifies the nature of the agreement between the parties.
- Date of execution and effective date: the date of execution is one on which parties agree to execute or sign the agreement. The effective date is the day from which the terms and conditions of the agreement are mutually applicable vis-à-vis the parties to the agreement start complying with them . Date of execution and effective date may or may not be the same in an agreement. An agreement which has a different effective date from the date on which it has been executed will specifically indicate the effective date.
- Parties: Names and address of the parties. This helps in clearly identifying who is binding itself with the provisions of the agreement.
- Recitals: This provides a background to the agreement i.e. under what circumstances the parties decided to come together to enter into the agreement. Recitals usually start with the term ‘WHEREAS’.
- Consideration: this clause specifically identifies the goods or services offered and the amount to be paid for the same, the mode of payment and time of making payment.
- Definitions: Any agreement will be using capitalized words whose meaning need to be clearly defined.
- Body of the agreement: these clauses capture the details of the goods or services to be provided being the subject matter of the agreement.
- Boilerplate clauses: irrespective of the nature of the agreement, each agreement should have some standard clauses in order to make the understanding of the parties complete. The content of these clauses may vary from agreement to agreement and require customization depending on what exactly the parties’ expectations are from each other. E.g. Dispute resolution, arbitration, governing law, entire agreement clause, etc. For example, in a boilerplate arbitration clause, venue of arbitration, number of arbitrators, and procedural rules of arbitration can vary depending on the circumstances of the parties.
- Schedules: Certain details of the agreement can be put in a schedule and they continue to remain binding on the parties. For example, in a service level agreement (known as an SLA), the various parameters for measurement of the service quality and the standard at which the service must be maintained is specified in a separate schedule.
- Signatures: The agreement shall be signed by the parties or authorized representative of the parties to the agreement.
Other issues – Besides the provisions stated above, there are certain statutory provisions which need to be complied with while entering into an agreement. These are:
- Attestation/ Witnesses: Certain agreements must be attested by two witnesses under Indian law. For example, a sale deed which transfers immovable property.
- Notarization: In India, notarization of an agreement refers to attestation by an officer called a Notary Public.
- Stamping: All agreements need to be made on a stamp paper. Stamp Duty applicable on different types of agreement vary from state to state.
- Registration: Although registration of the agreements is not mandatory under the law, it is advisable to register the agreement to give it legal validity and enforceability in a court of law.
- Foreign agreements – Apostille. An agreement executed in a country other than India needs to be legalized by a process known as apostille where the agreement is attested and verified by the Indian Embassy/consulate in that country.
How do smart businessmen or good commercial lawyers approach drafting?
- Understand the type and the commercial intent of the transaction – e.g. whether it is a licensing agreement (where some intellectual property is licensed) or simply a marketing agreement, whether an agreement is a joint venture agreement or a private equity investment agreement.
- Locate a template which resembles the transaction as closely as possible – If you are doing an investment document which has a foreign investor, try and get a precedent (template of another transaction) which had a foreign investor. Don’t use a template which has a domestic investor. If you have a strategic investor who is interested in integrating a start-up with his own company, do not use a template for a financial investor who is simply interested in making a financial return.
- If possible, speak to the client about various commercial possibilities that could arise
- Check any changes in law (substantive and procedural) from time to time – e.g. guidelines and procedure for valuation of shares may change, which may alter the way you arrive at the price for subscription to the shares of a company.