This article has been written by Akanksha Shukla pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
This article has been edited and published by Shashwat Kaushik.
Table of Contents
Definition of contract
A contract is an agreement between two or more parties, either oral or written, to perform certain obligations and is enforceable by law.
Salmond defines a contract as “A contract is an agreement creating and defining obligation between two or more persons by which rights are acquired by one or more to acts or forbearance on the part of others”.
Oral contracts are a thing of the past. In today’s competitive world, each party wants to protect its rights. What if one party fails to perform its part, the relationship between parties sours, there is some unforeseen event or one party dies? We need a legal expert to straighten things out. Sometimes, things may escalate to the courts. Without a written contract, the judge will have a tough time determining the issues relating to the case.
It becomes really crucial for legal professionals to carefully draft a contract. The agreement should be drafted in such a manner that it covers all aspects of the relationship between parties and provides remedies that do justice to both parties. The goal is to avoid court proceedings.
Nature of a well drafted contract
- Provides clarity: It will clearly mention the role each party will play during the course of business. There can be multiple discussions between the parties regarding business plan, financial terms and management. A well drafted contract will be non-ambiguous and cover all such aspects in clear language.
- Confidentiality: A well drafted contract will contain provisions relating to non-disclosure and confidentiality, protecting classified information. It also contains legal recourse if confidential provisions are breached.
- Potential disputes and their resolution: A good drafter must foresee all the events that may lead to a dispute in future and their resolution. For example, in a software licencing agreement for exclusive rights to use software, if the licensee sells the software to a third party, the licensee may cancel the agreement and be liable for compensation.
- Protection of intellectual property: A written contract provides credibility that all rights, including the IPRs of the parties, are safe.
Important clauses in a contract
Key clauses in a contract:
- Parties’ names and addresses:
This clause identifies the parties entering into the contract, including their full legal names and registered addresses. It ensures clarity and helps prevent confusion or disputes regarding the identities of the contracting parties. - Terms and conditions:
The terms and conditions clause outlines the specific obligations, deliverables, and expectations of each party. It includes details such as the scope of work, timeline, payment terms, and any specific requirements or deliverables. - Representations and warranties:
This clause outlines the representations and warranties made by each party regarding their respective abilities, qualifications, and compliance with applicable laws and regulations. It provides a level of assurance and protection for both parties. - Indemnification:
The indemnification clause specifies the extent to which one party agrees to protect and reimburse the other party for any losses, damages, or liabilities arising from the contract. It defines the circumstances under which indemnification is applicable and the limits of such protection. - Payments:
The payments clause outlines the agreed-upon payment terms, including the amount, method of payment, and schedule of payments. It also addresses any potential late payment penalties or interest charges. - Renewal:
This clause governs the potential renewal of the contract upon its expiration. It outlines the conditions and procedures for renewal, including the notice period required and any changes to the terms and conditions, if applicable. - Limitation of liability:
The limitation of liability clause limits the extent of financial responsibility each party bears for damages or losses incurred as a result of the contract. It sets a cap or limit on the amount of liability and may also specify exclusions or exceptions. - Confidentiality:
The confidentiality clause protects sensitive information exchanged or created during the course of the contract. It outlines the parties’ obligations to maintain confidentiality and prevent unauthorised disclosure of such information. - Term and termination:
This clause defines the duration of the contract and the circumstances under which it can be terminated. It includes the notice period required for termination and any potential consequences or penalties associated with early termination. - Dispute resolution:
The dispute resolution clause outlines the process for resolving any disputes or disagreements that may arise between the parties. It may specify the preferred method of dispute resolution, such as negotiation, mediation, or arbitration, and the governing laws and jurisdiction applicable to such disputes. - Boilerplate clauses:
Boilerplate clauses are standardised provisions that are commonly found in many contracts. They address various routine matters, such as governing law, force majeure events, entire agreements, notices, no waiver, assignment, and subcontracting. These clauses aim to provide clarity and consistency in handling common contract-related scenarios.
In this article, we are going to delve into notice clauses in a contract. Notice clauses play a crucial role in defining the communication and procedures to be followed when one or more parties need to inform each other about specific events, changes, or actions related to the contract. These clauses establish the framework for timely and effective communication, ensuring that all parties are kept informed and their rights and obligations are protected.
Notice clauses typically outline several key elements:
- Notice period: The notice period specifies the duration within which a party must provide notice to the other party or parties. This period can vary depending on the nature of the contract and the significance of the event or change being communicated.
- Method of notice: The clause stipulates the preferred method of providing notice. This can include written notice (e.g., via registered mail or email), verbal notice (e.g., telephone call or in-person meeting), or electronic notice (e.g., through a secure online platform).
- Notice content: The clause often outlines the specific information that must be included in the notice. This may encompass details such as the event or change being communicated, the effective date, any supporting documentation or evidence, and any actions required in response to the notice.
- Recipient of notice: The clause identifies the specific party or parties who must receive the notice. This may include all signatories to the contract, specific individuals within an organisation, or legal representatives.
- Consequences of failure to provide notice: The clause often outlines the potential consequences of failing to provide proper and timely notice. These consequences may range from the inability to exercise certain rights under the contract to the imposition of penalties or damages.
Understanding and complying with notice clauses are essential for all parties involved in a contract. By adhering to the specified notice procedures, parties can ensure that communication is clear, transparent, and in accordance with the terms of the agreement. This can help prevent misunderstandings, disputes, and potential legal complications, ultimately contributing to the smooth functioning and success of the contractual relationship.
What are notice clauses
Notice refers to the formal notification given by one party to another in a specified event contained in the Contract. Notice provisions set out the means by which one party can bring attention to another party’s matters, which must be disclosed, by giving ‘notice’.
The Notice clause often appears under the Miscellaneous Section at the end of most Contracts. It is often underestimated, but it can have serious consequences. It becomes important to draft a comprehensive notice provision, negotiate it and fairly protect the rights of both parties.
Provisions which must contain a notice clause
There are some common situations where communication with other parties becomes crucial, as it may affect the nature and conduct of business.
- Amending or assigning the contract: In case of any amendment or assigning any work to a third party, the written consent of both parties is required. Notice provision will govern how the information is conveyed and consent is obtained. Its purpose is to avoid any confusion regarding the basic structure of the contract.
- Breach of contract: If one or more parties to a contract fail to perform their obligations, the default strongly relies on notice. Such notice often provides for curing the situation and time period for such resolution. The breach may also lead to termination of contract. The notice provision for such cases must be clear, unambiguous and detailed.
- Term renewals: Commercial contracts often contain a provision that the contract will be automatically renewed unless one party delivers a termination notice before a specified date or the contract may be automatically terminated if not renewed by proper communication. In such cases, carefully negotiating the notice provisions becomes important.
- Termination of contract: Generally, the process of termination requires giving written notice to the other party within a specified date.
Mode of delivery of notices
- Electronic mail: As modern day businesses are conducted via email, the notice provisions should include an electronic mode of communication, including any emerging technological method. The email will be updated and regularly checked.
- Postal mail: the notice provision should always include a method to communicate through postal mail, provided the method is verified, tracked and reliable.
- Facsimile: Many business communications are still done through fax so including them will provide comprehensiveness and inclusivity.
Sample notice clause
A comprehensive notice provision should require that all notices be in writing and all methods of delivery be acceptable. A sample can be as follows-
Any notices required to be given under this Agreement must be in writing and shall be deemed to be conclusively given if transmitted to the other party in person or at the given address, telecopy number, fascimile number, electronic communication or at such address as may be given hereunder. Each party shall have the right to change the place to which notice shall be sent or delivered to the other party.
The effective date of any notice pursuant to this agreement shall be-
- the addressee’s receipt of notice; and
- the date three (3) days after such notice was sent to proper address, registered or certified mail
- the day on which such notice is faxed or sent through electronic mail, provided the sender has received confirmation of such fax or electronic transmission
To [Party 1]: [Company Name] [Address] [Attention]: [Name of responsible person]
Telephone: (__) ____
Fax: (__) ____
Email: [_______@____]
To [Party 2]: [Company Name] [Address] [Attention]: [Name of responsible person]
Telephone: (__) ____
Fax: (__) ____
Email: [_______@____]”
This format of notice contains all information in clear language and answers questions like the mode of delivery of notice, effectiveness of notice, addresses and change of address. Here, provisions like what constitutes delivery, effectiveness or mode of delivery can be negotiated by parties as per their convenience.
Goldman Sachs vs. Videocon- Understanding the interpretation of notice clause
Goldman Sachs International vs. Videocon Global Limited and Anr., (2014) decided by the English High Court, will help in understanding the importance of drafting a futuristic notice clause.
The facts of the case were that an agreement between Goldman Sachs and Videocon was terminated due to the inability of Videocon to perform its part. Goldman Sachs issued notice on December 14, 2011, setting out the calculations it claimed from Videocon. Thereafter, the case went into litigation and the judge held that Goldman Sachs had failed to provide the manner in which it reached the calculations. Later, on March 7, 2014, Goldman Sachs provided the details.
The issue that arose before the Court was ‘Whether the Notice provided in two stages was fulfilling the criteria set out under the relevant clause of the Agreement?’
Ruling by the court:
- The judge interpreted the term ‘on or as soon as reasonably practicable’ and held that the intention of the agreement was not just to provide the calculations but also to provide the details of calculations so the time period of two years for providing the second notice constitutes the delay.
- The judge held that the lateness of notice doesn’t render it ineffective. The purpose of the notice shall be kept in mind. So, the claim of Goldman Sachs is effective but Videocon can claim damages due to lateness of notice.
The key takeaway from this judgement is that while drafting the notice clause, a clear time period shall be provided in case of any claim, communication or termination. The careful drafting of notice clauses becomes extremely crucial, considering all practical scenarios. This case is a clear example of drafting vague terms in notice clauses can cost a lot of time and finances for parties.
Notice provisions in construction contracts
Notice provisions in construction contracts play a crucial role in ensuring clear communication, safeguarding the interests of both parties, and facilitating efficient dispute resolution. These provisions typically outline the procedures and requirements for providing formal notifications regarding various events or circumstances that may arise during the course of a construction project.
One of the key reasons for including notice provisions in construction contracts is to establish a formal mechanism for submitting claims for damages. These provisions outline the specific steps and timelines that must be followed when a party believes they have suffered financial losses or damages due to the actions or negligence of the other party. By promptly providing notice of a claim, the affected party can preserve their rights and ensure that the claim is handled in a timely and fair manner.
Another important aspect of notice provisions is the establishment of procedures in case the construction work is stopped or suspended. Delays and disruptions can occur due to various reasons such as weather conditions, unforeseen site conditions, or disputes between the parties. Notice provisions set out the steps that must be taken by both parties in the event of a work stoppage, including the documentation of the reasons for the suspension, the allocation of responsibilities, and any potential impact on the project schedule.
Payment failure is another common issue addressed in notice provisions. These provisions often require the party responsible for making payments (typically the owner) to provide timely and accurate payment for work completed. In the event of a payment failure, the notice provision outlines the steps that the contractor can take to seek remedies, such as issuing a formal notice of default or suspending work until payment is received.
Force majeure events, such as natural disasters, wars, or pandemics, can significantly disrupt construction projects. Notice provisions typically address how force majeure events should be handled, including the allocation of risks and responsibilities, the extension of project timelines, and any potential adjustments to the contract terms.
Finally, notice provisions often address the termination of the contract. They specify the grounds for termination, such as material breach of contract or insolvency, and outline the procedures that must be followed when terminating the contract. These provisions help ensure that the termination process is conducted in a fair and orderly manner, protecting the rights and interests of both parties.
By including clear and comprehensive notice provisions in construction contracts, parties can enhance communication, minimise disputes, and create a framework for resolving issues efficiently and amicably. These provisions serve as a foundation for maintaining a collaborative and productive working relationship throughout the construction process.
Case laws
Kajima Construction vs. Children’s Ark Partnership
In the 2023 case of Kajima Construction vs. Children’s Ark Partnership, a legal dispute arose between the two parties. The contract between Kajima Construction and Children’s Ark Partnership included a provision addressing dispute resolution. This provision required that any disagreements between the parties should first be referred to the Liaison Committee before initiating court proceedings.
The Court analysed this clause and classified it as a condition precedent. A condition precedent is a term in a contract that must be fulfilled before other obligations can be triggered. In this specific case, the parties were required to follow a clear chronological order in the event of a dispute: they had to refer the matter to the Liaison Committee before resorting to court proceedings.
However, the Court noted a crucial limitation of this clause: the lack of meaningful details. While the clause established the need for referring disputes to the Liaison Committee, it did not provide sufficient information about the process itself. The Court emphasised the importance of drafting such pre-conditions in detail to ensure enforceability.
The key takeaway from this case is that pre-conditions in contracts should include specific and detailed information. Each step that the parties are required to take in resolving a dispute should be carefully outlined in the contract itself. This level of detail enhances the enforceability of the clause and prevents ambiguity or confusion in the event of a disagreement.
By providing clear guidelines for dispute resolution, contracts can promote efficient and timely resolution of conflicts, minimising the need for lengthy and costly court proceedings.
Heritage Oil and Gas Limited vs. Tullow Uganda Limited, EWCA (2014)
The parties entered into a Sale and Purchase Agreement where Heritage sold two petroleum exploration fields to Tullow. Tullow made the payment towards the Government and claimed the entire amount as indemnity from Heritage. The contract stated that the indemnified party has to give notice of tax claim to the indemnifying party within 20 working days.
The Court held that the notice provision doesn’t constitute a condition precedent so the indemnification claim by Tullow is valid.
The key takeaway from this judgement is that mere mention of a notice clause doesn’t qualify for condition precedent. The contract has to clearly set out the order of events.
Conclusion
A well drafted document serves dual purpose, firstly, it helps in the smooth conduct of business and secondly, it avoids litigation to a great extent. Each provision of the contract must be drafted after understanding the business requirements, objectives of the organisation, market outreach and individual’s requirements.
Each contract is unique, so a standard format of drafting might not become a general rule. Notice clauses in a contract become very general and repetitive; hence, they are often overlooked. But, as discussed in the above case laws, a loosely drafted notice clause can lead to huge financial losses for corporations. The burden becomes huge if the parties involved are startups, as each penny counts.
As held in the case of Goldman Sachs v. Videocon, the notice clause shall not be open to interpretation. It is best practice to set a time period for each notice. The reasonable period clause shall be followed by a ‘not later than a specified time period’ clause.
It is equally important not just to give notice within the specified date but also to provide the details of the reason for notice in line with the spirit of the contract. Without reasonable details, the objective of the notice can be questioned before a court of law. However, the courts have taken a liberal approach while interpreting the notice clause. As per the view of the courts, a technical error in the notice clause shall not restrict the enforcement of commercial contracts.
To summarise, any legal professional drafting a contract shall keep the notice clause airtight so that even before signing the contract, the expectations from each party become clear.
References
- https://www.casemine.com/judgement/uk/5b2897fc2c94e06b9e19ea4b
- https://www.keatingchambers.com/case-report/kajima-construction-europe-uk-ltd-v-childrens-ark-partnership-ltd/
- https://www.casemine.com/judgement/uk/5b46f2152c94e0775e7f208b
- https://medium.com/the-contract-drafting-blog/how-to-draft-a-good-notice-clause-2b681433c8eb
- https://www.pinsentmasons.com/out-law/analysis/construction-terms-contractual-notices-and-condition-precedent-notices
- https://www.nolo.com/legal-encyclopedia/why-your-contract-s-notices-provision-is-vitally-important.html
