TiEcon Delhi Oct 2011 - Legal commercial contracts

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TiEcon Delhi Oct 2011 - Legal commercial contracts

  1. 1. Legal Essentials in Business Contracting Understanding the fine print Sanjeev Vasdev, Managing Director Kapil Dev SapraFlash Electronics (India) Pvt. Ltd. Founder & Managing Partner
  2. 2. Table of contents September 30, 2011Section I: Business Contracts • Business Contracts - Their Significance • Business Contracts - Their Objectives Section II: Structuring of • Essential elements/ingredients of a contract business contracts • Outline of Standard Business Contract • Non-compete, Non-solicitation, ConfidentialitySection III: Key provisions of • Intellectual Property Rights business contracts • Damages • Boilerplates clauses • Use of ‘Not known’ & ‘Known not’Section IV: Illustrations and • Use of ‘comma’ tips • Some other drafting tips 2 Flash Electronics and Kapil Sapra & Associates
  3. 3. September 30, 2011Section IBUSINESS CONTRACTS 3 Flash Electronics and Kapil Sapra & Associates
  4. 4. Business Contracts- Their Significance September 30, 2011• Being a business owner means that you will have to sign many commercial contracts, with vendors, customers, employees and others.• Agreement versus Contract• Written versus Oral• Complex and heavily regulated business environment.• Ensure competitive advantages.• Comply with sectoral regulatory and legal requirements.• Interpretation by a Court/Arbitral Tribunal. 4 Flash Electronics and Kapil Sapra & Associates
  5. 5. Business Contracts- Their Objective September 30, 2011 Legally binding Clarity of Privity of scope Contract Objectives of contract structuring Certainty of Ease of rights and implement obligations ation 5 Flash Electronics and Kapil Sapra & Associates
  6. 6. September 30, 2011 Section IISTRUCTURING OF BUSINESS CONTRACTS 6 Flash Electronics and Kapil Sapra & Associates
  7. 7. Essential elements/ingredients of acontract September 30, 2011OfferAcceptanceConsiderationObject 7 Flash Electronics and Kapil Sapra & Associates
  8. 8. Essential elements/ingredients of acontract September 30, 2011consensus ad idem: i.e., meeting of the mindsclear and comprehensive termsconsistency in expression and terminologycoherent flowintention of the parties explicitly laid downsimple language-words used in same sense as understood by 8men of commerce and business Flash Electronics and Kapil Sapra & Associates
  9. 9. Outline of Standard Business Contract September 30, 2011S. NO MAIN HEADS1 Place and Date of execution2 Parties3 Recitals4 Definitions5 Interpretations6 Purpose/ Scope of the Agreement (i.e. of Appointment/ Engagement)7 Rights and obligations of the Parties, which should include: • Regulatory approvals; • Licenses; • Personnel; • Penalties, etc.8 Consideration and payment terms 9 Flash Electronics and Kapil Sapra & Associates
  10. 10. Contd.9 Taxes September 30, 201110 Term (including Renewal) and Termination - Termination with Cause - Termination without Cause11 Consequences of Termination12 Confidentiality13 Intellectual Property Rights14 Representation and Warranties of the Parties15 Indemnity (one way or both ways)16 Limitation of liability (one way or both ways)17 Co-operation between the Parties18 Assignment and sub-contracting19 Compliance of relevant laws20 Non-Compete/ Exclusivity21 Non-Solicitation 10 Flash Electronics and Kapil Sapra & Associates
  11. 11. Contd.22 Waiver September 30, 201123 Severability24 Relationship of/ between the Parties25 Entire Agreement/ modifications26 Precedence Clause27 Cumulative of Remedies28 Right to set off29 Notice30 Survival Clause31 Force Majeure32 Arbitration and Dispute Resolution Procedure33 Governing Law and Jurisdiction34 Execution35 Witnesses36 Schedules/ Annexures 11 Flash Electronics and Kapil Sapra & Associates
  12. 12. September 30, 2011Section IIIKEY PROVISIONS OF BUSINESS CONTRACTS 12 Flash Electronics and Kapil Sapra & Associates
  13. 13. Non-Compete, Non-solicitation &Confidentiality September 30, 2011• Non-Compete • Agreements in restraint of trade are void – Section 27 of the Indian Contract Act, 1872 • Exception – Sale of Goodwill of a business. Buyer / person deriving title from buyer may restrict seller from carrying on competing business provided restrictions are reasonable on: • Scope • Time • Geographic area in context of business • Common law → Reasonableness 13 • Indian Law → Sale of Goodwill + Reasonableness Flash Electronics and Kapil Sapra & Associates
  14. 14. Applicability of Non-Compete September 30, 2011• In Term or Post Term• Qua employees in employment contracts: • Service bonds – enforceability• Qua vendors, suppliers, agents, etc.• Qua shareholders in shareholders agreements• Qua buyers and sellers of business 14 Flash Electronics and Kapil Sapra & Associates
  15. 15. Non-solicitation September 30, 2011• Meaning: An obligation not to take away customers, venders, employees, etc.• Scope: • In Terms • Post Term• Work Around & Its mitigation• Enforceability • Burden of Proof • Evidence 15 Flash Electronics and Kapil Sapra & Associates
  16. 16. Confidentiality• Meaning: Protection of trade secrets & proprietary information• Contract must specify as to how a party can classify an oral information as being September 30, 2011 “Confidential”.• Exceptions • information that can be demonstrated to have been in the public domain at the time it was disclosed; • information that can be demonstrated to have been known to the Receiving Party at the time of disclosure with no obligation of confidence; • information that becomes known to the Receiving Party from a source other than the Disclosing Party without breach of any obligation of confidence by the Receiving Party; etc.• Scope: • In Terms • Post Term• Enforceability - Burden of Proof and Evidence 16 Flash Electronics and Kapil Sapra & Associates
  17. 17. Intellectual Property Rights• Means – Trademark, copyrights, Design, Patents and other proprietary rights. September 30, 2011• License versus Assignment• Scope: • In Terms • Post Term• an ideal contract should contain: • define what constitutes IPR • declare ownership on all IPR on the subject matter • provide for accessibility and authority and conditions for use by the other party • provide for the protection of IPR • provide for indemnification in case of infringement 17 Flash Electronics and Kapil Sapra & Associates
  18. 18. Damages September 30, 2011• Means: Compensation for loss or damaged caused to one party due to breach of terms and conditions of the Contract, misrepresentation, negligence, etc. of other party.• Law of Damages • Direct Damages versus Indirect Damages • Actual Damages versus liquidated Damages• Enforceability - Burden of Proof and Evidence 18 Flash Electronics and Kapil Sapra & Associates
  19. 19. Boilerplate clauses September 30, 2011• Means: any text that is or can be reused in new contexts or applications without being changed much from the original. In most negotiations, the parties spend little or no time focusing on or re-writing these clauses.• In most standard contracts, roughly the last part of the contract consists of such, most standard, little-noticed boilerplates such as assignment, waiver, notices, etc.• Boilerplate clauses are also important because they affect the legal rights of the parties under the contract as much as any other important clauses. 19 Flash Electronics and Kapil Sapra & Associates
  20. 20. Boilerplate Clauses for Discussion September 30, 2011• Force majeure• Entire Agreement• Precedence• Notice• Waiver• Term and Termination• Clauses on settlement of disputes 20 Flash Electronics and Kapil Sapra & Associates
  21. 21. Force Majeure• ‘Forcemajeure’- a French phrase meaning superior force or overwhelming September 30, 2011 circumstances.• Normally events of ‘force majeure’ are interpreted to mean events over which a party has no control and in some cases to mean events in the nature of ‘Acts of God’ e.g. flood, earthquake, fire, etc.• Through careful drafting, the scope and kind of events that would constitute ‘force majeure’ event can be limited or expanded.• Inclusion of the words “beyond the control of the parties” expands the scope of a ‘force majeure’ clause by encompassing events covered beyond the traditional ‘Acts of God’ like extreme cold weather which may not be considered as an ‘Act of God’ as it cannot be regarded as ‘catastrophic’.• Act of government• Labour unrest – Affecting party or affecting industry as a whole 21 Flash Electronics and Kapil Sapra & Associates
  22. 22. • Specific force majeure events or catchall category or both• End result of the force majeure events: September 30, 2011 • termination of the contract; or • extension of time.• Obligation of the Parties 22 Flash Electronics and Kapil Sapra & Associates
  23. 23. Entire Agreement• The entire agreement clause (also called an integration clause) is typical September 30, 2011 language included in many contracts, which: • limits the terms of a written agreement • creates clarity and certainty• Suggested Clause “This Agreement constitutes the whole and entire agreement among the parties in connection with the transactions contemplated herein and cancels and supersedes any prior agreements, undertakings, declarations, commitments, representations, written or oral, in respect thereof, and there are no express or implied terms, conditions, agreements, undertakings, declarations, commitments, representations or warranties or other duties (legal, equitable, fiduciary or in tort) whatsoever among the parties not 23 expressly provided for in this Agreement.” Flash Electronics and Kapil Sapra & Associates
  24. 24. Precedence• When there is more than one agreements, then in case of contradiction September 30, 2011 which agreement will prevail over the other agreement.• Suggested clause “The following documents shall be deemed to form, and be read and construed, as part of the Contract in the following order of precedence to resolve any conflict between the documents: a. This Contract; b. Special conditions of contract, annexed as Annexure “A”; c. General conditions of contract, annexed as Annexure “B”; d. Purchase Order, annexed as Annexure “C”; e. LOI, annexed as Annexure “D”; f. Technical Specifications of Work, collectively annexed as Annexure “E”; g. Price Schedule of Quantities/ BOQ, annexed as Annexure “F”; and 24 h. Any other documents forming part of this Contract.” Flash Electronics and Kapil Sapra & Associates
  25. 25. Notice• Typically applies to all communication that is required or permitted to be September 30, 2011 delivered to any party pursuant to the Contract.• Needs to be drafted carefully, as disputes can arise regarding whether effective notice was delivered or not.• The notice provision include: (i) the method by which notice should be given; (ii) when notice is considered to be delivered and received; (iii)what, if any, is the effect of a disruption in delivery; (iv) the nature of the notice provision, including whether the notice provision is mandatory or permissive; and (v) the individual to whom notice must be delivered when notice is required to be delivered to a corporation, partnership or trust.• Advisable to avoid identifying an individual by name, since people move around and change positions. It is best to indicate an office, such as Manager, 25 Chief Executive Officer. Flash Electronics and Kapil Sapra & Associates
  26. 26. Waiver• Limits and clarifies a party’s ability to avoid certain contractual obligations. September 30, 2011• Failure by a party to enforce any provision of a contract shall not be treated as a waiver of that provision, nor shall it affect the right of that party subsequently to enforce that provision.• Express or inferred from conduct which is inconsistent with the right.• Delay or failure to exercise a right may, in certain circumstances, constitute a waiver of that right. It is therefore common for parties to include in their agreement a provision providing that no waiver of any clause in the agreement is binding unless it is made in writing and signed by all the parties entitled, as pursuant to the agreement, to grant the waiver.• Any waiver must be made in writing.• Distinguished from Estoppel. 26 Flash Electronics and Kapil Sapra & Associates
  27. 27. Term & Termination/Expiry September 30, 2011• Fixed versus Ongoing/Evergreen• Termination with cause • Cure Period • Immediate• Termination without cause 27 Flash Electronics and Kapil Sapra & Associates
  28. 28. Settlement of Disputes• Mediation and Conciliation September 30, 2011• Arbitration • Applicable law to arbitration, • Venue of arbitration, • number of arbitrators and their appointment, • Interim measures / provisional remedies, • privacy, rules applicable, appeal and enforcement, • Survival after termination of the main agreement.• Governing Law• Jurisdiction 28 Flash Electronics and Kapil Sapra & Associates
  29. 29. September 30, 2011Section IVMISCELLANEOUS DRAFTING ISSUES 29 Flash Electronics and Kapil Sapra & Associates
  30. 30. Use of ‘Not known’ & ‘Known not’ September 30, 2011“Confidential Information shall not include any information which has beenobtained lawfully by the recipient from a third party who is known not to haveobtained such information directly or indirectly from the disclosing party.”“Confidential Information shall not include any information which has beenobtained lawfully by the recipient from a third party who is not known to haveobtained such information directly or indirectly from the disclosing party.” 30 Flash Electronics and Kapil Sapra & Associates
  31. 31. Use of ‘comma’• Indian Income Tax Act provides “….secret formula, process…..” September 30, 2011• Indo-US Treaty provides “….. Secret formula or process……..”• Company A, faced a tax liability of Rs. 200 crore as the comma in the Indian Income Tax Act altered the definition of royalty. At the same time, the absence of a comma in the Indo-US Treaty saved Company B from a liability of Rs. 77 crore.• As per Indian Income Tax Act even if process is not secret, it is classified as a royalty and thus taxable. Whereas as per Indo-US Treaty , formula and process both must be secret in order to be classified as royalty. If not. It is not taxable . 31 Flash Electronics and Kapil Sapra & Associates
  32. 32. Some other drafting tips Clarity on scope. September 30, 2011•• Identification of specific exclusions.• Inclusive versus definitive definitions.• Cautious use of ‘indemnification’ language.• Inclusion of limitation of liability clause, if appropriate• Avoidance of use of expression such as “proper”, “reasonable”, as far as possible.• Incorporation of an acceptance clause.• Avoidance of use of long sentences or creative wording.• Customization of the contract for a particular transaction.• Proof reading of the contract carefully.• Execution of a duly signed and dated contract.• Consultation with a legal counsel. 32 Flash Electronics and Kapil Sapra & Associates
  33. 33. September 30, 2011 Thank You! For more details contactSanjeev Vasdev Kapil Dev SapraManaging Director Founder & Managing PartnerFlash Electronics (India) Pvt. Ltd. Kapil Sapra & AssociatesA- 4, MIDC Chakan Industrial Area, M-34, SaketMahalunge, Chakan, Pune 410 501. New Delhi-110017Email: sv.md@flashgroup.in Email: kapil@ksalegal.comPhone: +91-2135-666000 Phone:+91-11-2956-5201/ 02/ 03Fax: +91-2135 - 666109 Fax:+91-11-2956-5204 33 Flash Electronics and Kapil Sapra & Associates

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