India: Well-Drafted Agreement Curbs Possibility Of Disputes In Future

Last Updated: 15 October 2015
Article by Zerick Dastur

Litigation is a legal phenomenon which ensures that every corporation spends at least a decade in court. The time taken for disposing matters, the procedural objections, jurisdictional challenges and maintainability issues which very often form part of a court proceeding, re-emphasize the need to take effective steps to minimize the possibility of contracts being brought before a court for interpretation of their true meaning.

It is often said that there is no better way to exercise your imagination than the study of law. No artist can interpret nature more freely than how a litigation lawyer can interpret a contract. It is in this context that drafting of commercial agreements and the facets to be borne in mind during the process are relevant. This is where the concept of careful, clear and unambiguous drafting of commercial agreements takes centre stage leaving little to interpretation. The principle being simple, prevention is better than cure.

The apex court has rightly held that when persons express their agreements in writing, it is for the purpose of getting rid of any indefiniteness and to put their ideas in such shape that there can be no misunderstanding, which so often occurs when reliance is placed upon oral statements. Effective drafting also embodies the principle of Ubi jus IbiRemedium, i.e. where there is a right, a remedy will follow. A legal right may be a right conferred by law or which may devolve upon a party under a contract. It is, therefore, important to clearly spell out the rights, remedies, obligations and the enforcement mechanism for implementation of those rights within the contract itself.

In a dynamic regulatory environment with constant changes in the applicable rules and regulations, it is important to be cognizant of the latest developments in the field. Ignorance of law is not an excuse. With proactive statutory regulators like the Securities & Exchange Board of India and the Competition Commission of India, one needs to ensure while drafting an agreement that the document is compliant with the applicable regulations including regulations prevailing in the domain where the industry functions.

For instance, the Competition Act 2002 provides for agreements which are anti-competitive and that any agreement, either horizontal or vertical, which has an appreciable adverse effect on competition in India would be void. It may be necessary at times, to prescribe within the document, the commercial rationale for entering into the transaction in order to improve the chances of an agreement surviving regulatory scrutiny.

In connection with resolution of disputes arising out of commercial agreements, time is very often of the essence. Keeping in mind the requirement of early resolution of disputes, precedence is given to alternate dispute resolution mechanism like arbitration. The Supreme Court has, time and again, interpreted arbitration clauses widely to cover all disputes arising under an agreement unless specifically excluded by the parties.

Further, in an effort to widen the scope of disputes which can be resolved by arbitration, a seven-judge bench of the Supreme Court in SBP & Co. vs Patel Engineering Ltd. has held that an arbitration agreement could stand independent of the main agreement and did not necessarily become otiose even if the main agreement, of which it is a part, is declared void.

The jurisprudence in this regard was further expanded by the recent Supreme Court judgment in the matter of Swiss Timing vs Commonwealth Games Organising Committee where it was held that a reference to arbitration may be declined only where the Court can reach the conclusion that the contract is void on a meaningful reading of the contract document itself, without requirement of any further proof.

While drafting an arbitration clause, which could stand independent of the main agreement, it is important to bear in mind certain essential facets. With the landmark judgement of the Supreme Court in the matter Bharat Aluminium v. Kaiser Aluminium, selection of the seat of arbitration would be decisive in determining the jurisdiction of courts for the purpose of issues arising out of the arbitration. Similarly, it is important to understand the difference between the seat of arbitration and the venue for conducting arbitration proceedings. The venue of the arbitral proceedings may be changed as per the convenience of the parties, but this act does not shift the seat of arbitration.

An arbitration agreement is an agreement in writing and binds parties to the said agreement. A third party or a non-signatory cannot be proceeded against in arbitration. The exception to this general rule was laid down by the Supreme Court judgement in the matter of Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. where it was held that in international commercial arbitrations non-signatories to arbitration agreements can be referred to arbitration especially in the cases of composite transactions.

Courts have acknowledged that a commercial document should be construed in accordance with sound commercial principles and good business sense. A well-drafted agreement could preempt possibility of disputes in the future or maximise chances of success for a party whose rights and liabilities have been clearly spelled out within the four corners of the agreement. As the saying goes death is not the end, litigation continues against your estate. Any positive act which prevents possible misunderstandings or misinterpretation is a step in the right direction.

Originally Published In Business Today Online Edition October 27, 2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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