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Clause and effect

Articles of Law

By BHAG SINGH

Changing circumstances may render favourable clauses, unfavourable.

CONTRACTS that are signed and entered into are not mere pieces of paper to be stamped and embellished to look impressive. They contain important and crucial terms that can have a serious impact on the rights and obligations of a party to the arrangement involved.

Sometimes these clauses may be deliberately requested by one party through sheer foresight. On other occasions, it may be inserted by the person preparing the agreement while relying on another agreement without specific attention on such clause.

Whenever a dispute arises or is about to arise, one party or both parties may scrutinise the contract document to see if there is a clause that it can exploit to its advantage or a clause that will expose it to greater danger or liability. Who asked for the clause to be put in is of little importance at this stage.

What is involved might not be a clause which the parties were seriously concerned with at the time the contract was drawn up and the clause inserted. It may have appeared, at that time, to be of little significance and hence was given little thought.

An example is the situation of Manchester United striker Dimitar Berbatov.

It was generally thought that the striker would be a free agent in the coming summer and he would be looking at which Club he could actively play in. However, Manchester United have put paid to his plans by proposing to exercise their right to activate a clause in his contract and extend it for one year.

Such a clause gives one party a right which he can exercise unilaterally if such exercise is considered an advantage. Here it would be the option exercised by Manchester United. If they do not need him, they need not exercise the right and he could go.

Option clauses in everyday life are common in many agreements. One example is tenancy agreements. Often a tenant may want the right to stay for a longer period. The landlord may only want to sign for one or two years. However, an option clause can make the tenancy last longer at the behest of the tenant. A typical clause of this nature could read as follows.

“Three months prior to the expiration of the tenancy, the tenant may by giving a notice in writing, extend the tenancy for a further term of two years upon the same terms and conditions except this clause for renewal.”

This clause is, of course, perfectly worded from the point of view of the tenant. So long as he gives three months’ notice in writing, he is assured of staying on for a further period at the same rental. The landlord will not be able to ask for any increase.

However, not all landlords may agree to option clauses being worded in such terms. They may insist that the renewed or extended term of the tenancy shall be at a rental to be negotiated. However, such a clause would have the potential of negating the option.

This is because if the parties cannot agree on the new rental, there would be no agreement. In such circumstances, failure to agree on the new rental would mean no further tenancy and the tenant would have to vacate the premises.

On a different note, one may think that if there is a breach in the contract by one party, then any damage suffered can be recouped from the delinquent party. This may not always be so.

This is because one of the parties may have ensured that there is an exemption clause limiting its liability. If there is such a clause, then the liability of the party in breach will be limited to that amount even though the damage suffered by the aggrieved party is much more.

In some cases, a party in a superior bargaining position may go further and exclude all liability. It may not agree to provide goods or services if such exclusion of liability is not provided for.

In a company limited by shares or in a partnership, it is possible to have a buy back provision. There may, for example, be a clause in the agreement that one partner or shareholder can buy out the shares of the other at a fixed price at a time chosen by the particular partner or on the occurrence of an event. This purchase may be at cost or at the par value of shares.

Where the value of the shares has gone up, it may appear to be unfair that one partner is able to buy out the other at cost or par value even though the value of such shareholding is much greater. If this is what has been agreed to in advance, then this is what will happen. This is what contracts are all about so long as the guiding principles of the law are not breached.

Many people involved in business may sometimes provide services or goods in which they may depend on other parties for their source of supply. If the price of such goods or services remains unchanged, then the forecast of profit may not be affected in the absence of other circumstances.

Prices of goods can increase and costs of labour can go up. If this is anticipated, the supplier of such goods or services could protect himself by incorporating a price escalation clause to cover the increase that has occurred over a certain period. Of course, this will have to be strictly on the basis of proven data.

However, if this is not done and the supplier has not earlier secured the goods and services at the existing contract prices, any increase will have to be borne by him. This may result in a loss of profits or even end up at a loss.

Thus any party involved in a transaction which is governed by a contract must pay close attention to all its terms.

THE STAR : 14 February 2012

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