Incorporating rights and obligations of parties under Commercial Agreements – by Bhumesh Verma

Incorporating rights and obligations of parties under Commercial Agreements

Author – Bhumesh Verma, Founder & Managing Partner, Corp Comm Legal

A commercial agreement is a set of promises between the parties – such promises are intended be binding in law. These  promises made by the parties define the respective rights and obligations of the parties under an agreement which are either enforced or fulfilled respectively. A contract is like a private law of the parties which allows the parties to define their relationship by demarcating the boundaries of acceptable conduct.

If there is no fulfilment of obligations by a party or a party’s right is violated, the parties have to approach appropriate courts for enforcement. The courts may compel the defaulting parties to perform their respective obligations under the agreement and / or award damages for breach of their obligations.

Contractual rights are the set of rights committed or guaranteed when parties enter into a commercial relationship with each other. These rights invariably involve business matters, including the provision of products and services.

Few examples of contractual rights:

(i)        Rights to be sold products or service

(ii)      Right of first refusal

(iii)      Right to appoint majority directors

(iv)      Right to repair and maintenance

(v)       Rights to receive timely payment

(vi)      Right to receive notice of any intended change in terms of the agreement

(vii)     Rights to exclusivity

(viii)    Right to seek compensation for non-performance

(ix)      Right to terminate the agreement

These contractual rights can be express or implied. In addition to the rights expressly incorporated in an agreement, there could also be certain implied rights based on the law of contract and other legal provisions (say, consumer laws). There may not be a legal requirement to incorporate such rights in each agreement explicitly, as they are implied by specific laws on the subject laws. These include:

Good faith. Each party should operate according to good faith, must not act deceptively and should disclose all relevant information regarding the transaction.

Free will, No duress: Contracts should only be formed out of the free, informed decision of each party. A contract that is formed under duress (i.e., forcing one party to sign) is invalid.

No misrepresentation: Likewise, the parties have a right to be free from fraudulent misrepresentation of information.

If a party’s contractual rights are violated, it can enforce such rights or take legal action for damages caused by the breach. Such non-breaching party may also be entitled to multiple remedies, for example:

(1) damages;

(2) specific performance;

(3) termination of the agreement;

(4) restitution for any benefit arising to the breaching party.

An obligation works in the other end in the matrix of rights and obligations. A party’s right is invariably the other’s party’s obligation.

The difference between rights and contract obligations is that the former is a benefit you derive from a contract; the other is a duty or responsibility that is cast upon a party or what a party promises to perform under the contract. Contractual obligations are those duties which a party is accountable for and responsible to perform under an agreement.

These obligations can be in terms of payments, performance of certain services, supply of goods, adherence to timelines or quality standards, cooperation in pursuing some common objective or any other promise made to the other party. If any party fails to perform its obligations under an agreement, it is deemed a breach on its part and the non-breaching party can take action against such breach.

An agreement must clearly describe the respective rights and responsibilities of the parties. It should describe the activities supposed to be performed by a party towards fulfilment of its obligations, timeframes for fulfilment of the obligations, etc. the agreement should also incorporate terms confirming whether the assignment of any obligations of a party is permitted. It is better to incorporate the obligations as much as possible in details to set acceptable standards of fulfilment of obligations.

Once the parties enter into an agreement, each party is expected to deliver on its obligations. Each party needs to fulfil its contractual obligations with regard to its performance for a valid discharge of the agreement. If a party fails in its obligations, the other party has multiple options and it would really boils down to the reasons and circumstances that the defaulting party failed to deliver performance. Sometimes, if an agreement has been substantially performed, then payment for any completed work done is payable with a deduction for the uncompleted work. This is the simplest way to deal with such a situation.

To sum up, the duties and obligations provisions are a detailed description of the duties and obligations of the parties and the deadlines for performance. The rights and obligations of the parties are determined by terms of an agreement, subject to limits imposed by relevant statutes.

Therefore, the parties must judiciously incorporate respective rights and obligations of each party in clear and detailed terms to avoid any confusion later between themselves.

The process and procedure to adhere to and enforce these rights and obligations should also be clearly mentioned. The agreement should provide as to how a party will exercise its rights or seek fulfilment of the other party’s obligations within the framework of the agreement.

The enforcement mechanism could lie within the parties or a party may have to seek outside support (industry body, court, mediators, arbitration, etc.).

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