Thursday, 18 December 2014

Draft a fair agreement or you could be in trouble

Do you have a standard form, take it or leave it lease agreement, that you usually have the other side execute? Not that these are unlawful, but you should be aware that these agreements may be read against you. This is known as the doctrine of contra proferentem. Contra proferentem is a Latin term and literally translates to mean ‘against the offerer’. The doctrine encourages parties to negotiate fair contracts, to avoid ambiguities, to avoid interpretations that flout common commercial sense or rival interpretations. Parties, at the designing stage must carefully read through the lease agreements, not use their power and position to get the other side with lower or no bargaining power to enter into one-sided agreements.

When there is an ambiguity in the meaning of terms of the contract or in its interpretation, the contract will be read against the party that drafted it and the benefit will be given to the other party. The courts, generally, frown upon standard form agreements and view them from a point of view of inequitable bargaining power.

The doctrine has its origins in insurance law, however, over time, the courts recognizing it significance have applied to other areas of contracting law. In the leading Indian case on the doctrine, the Supreme Court in the Bank of India vs K Mohandas & Ors case in 2009, said, “The fundamental position is that it is the banks who are responsible for formulation of the terms in the contractual scheme, they bear the risk of lack of clarity, if any. It is a well-known principle of construction of contract that if the terms applied by one party are unclear, an interpretation against that party is preferred”.

The law prefers a meeting of minds between the parties at the time of the contract execution. There must be consensus between the parties engaging in an agreement, in legal terms known as consensus-ad-idem. In the United States, in the matter of Anthony Kidney and Ronan McNamee vs Julian Charlton and Edward Charlton, the Court, in 2009, in dealing with a lease agreement held, “When parties to a written contract fall out over the effect of a particular clause, a number of different scenarios may develop. The court will first determine, as a first order interpretative exercise, whether the clause as signed up to, is clear and unambiguous. Occasionally, both parties agree that it should be rectified to reflect their common understanding of the bargain. If one party contends for rectification along lines which the other cannot accept, the court must hear evidence to determine the intention of the parties or indeed, whether the parties were ever ‘ad idem’, because if not, there may never have been meeting of minds which is the basis of contract and the supposed contract may have to be declared null and void.

As a general principle, the bargain between the lessor and lessee is one of long-term mutuality and rent review clauses must be viewed in that light. There is no presumption in favor of construing a clause so as to make it upwards only”.

In granting its judgement, the court relied on McCabe Builders (Dublin) Limited vs Sagamu Developments Ltd. and another, where Justice Charleton, in 2007, held, “Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”

Where both parties have been involved with the negotiation and drafting of the agreement, the doctrine of contra proferentem, will have no application.

Source: HT Estates, Dec 13, 2014, Page 05

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