Answer 1(a):

A Contract consists of three key parts. They are the front part of the contract, body part of the
contract and the back part of the contract. The preamble is present in the first paragraph of the
front part of the contract. The very first sentence of an agreement forms a part of the
preamble. The preamble also states the name/title of the agreement, which specifies the type
of the agreement. If there are any abbreviations used in the title of the agreement, the
abbreviations are explained. For example, if the title of the agreement is ‘SPA,’ then the
abbreviation will be explained saying it is a share purchase agreement. The preamble also
consists of the following details related to the parties of the agreement, dates of validity of the
contract, the date on which the agreement is to be executed and the place at which the
agreement is to be executed.

Example of a preamble:

This sale agreement is executed by and between the party Mr. Suresh Chandra and the Party
Mr. Mukesh Raja on the 21st of June 2021 at Hyderabad.

Answer 1(b):

Recitals are also present in the front part of the agreement. A preamble is followed by
Recitals. The main aim of these recitals is to explain the background of the agreement. It aims
to explain the status of the agreement in context to the other agreements that the parties have
entered before, if any. For example, if there is case of an amending agreement, this recital
will provide details of the original agreement. All the details regarding the title of the original
agreement, the parties to it, the dates on which the original agreement was entered into will
also be mentioned in the amending agreement. Recital section will also provide a list of
skills, experiences and resources that one is more parties to the agreement are aiming to bring
forth to the new agreement. Recitals explain the agreement and give context to it. Recitals
also help in finding out the intent of the parties.

Example of recitals in a License Agreement:

WITHNESSETH THAT:

WHEREAS, RajaRam Steel has been engaged in the production and manufacturing of 2mm
steel, herein referred to as the licensed product as per certain trademarks in India,

WHEREAS, RajaRam Steel has acquired and possesses certain patents relating to the
Licensed product and has all rights to grant license under the same patent in the province of
India.

Answer 1(c):

The Purpose of the recitals is usually not intended to make them legally binding and it is
definitely not a good practice to draft binding obligations or include substantive provisions in
recitals. For example, including obligations on each party to the agreement, the covenants or
the undertakings is not going to create any legal obligation on the party. Therefore, including
them in the recitals is not going to be useful. However, a recital can have a legal impact in
some scenarios. For example, if one party A makes a statement in the recital clause, the other
party can make sure that party A does not deny the truth of the statement made in the later
stage. To elaborate further by taking an example of a service agreement. If there is a party A,
who is providing a service. The party A may state explicitly state in the recitals that they have
the required number of labors, skills, and expertise to carry out a service that is required by
the client party. Now the client party can make sure that party A does not go back on truth of
its words regarding the number of labors, skills, and expertise to do the job. Therefore, parties
need to be careful in drafting recitals.

Answer 1(d):

There are four types of Covenants:

I. Positive and Negative Covenants: Like the name itself suggests, positive covenants
are nothing, but positive undertakings given by one party to an other party. On the
other hand, negative covenants are negative undertakings. To further elaborate this let
us take an example of a bank loan. In a bank loan there are two parties, lenders and
borrowers and both parties will identify certain areas of importance to them. Looking
from the positive covenants perspective, they are the actions that the borrower agrees
to undertake regarding maintaining insurance, paying taxes and permitting lenders to
go through the books and accounts. Negative covenants are related to actions that the
borrower is not permitted to do without the consent of the lender, such as selling the
assets borrowed or paying dividends, etc.

Negative Covenants are very highly used in the area of a loan agreements. This is
because lenders are very concerned about influencing the future behavior of the
borrowers and if the borrowers want to act of either positive or negative covenants,
then they are supposed to negotiate carveouts.

II. Information covenants are agreements undertaken to share certain information. For
example, in the same context of a loan agreement. These covenants will aid the
lenders in monitoring the financial status of the borrowers. These covenants will
require the borrower to share financial statements, material change in the nature of the
business (if any), litigation with the lender.

III. Financial covenants are the covenants that impose an obligation on the borrower to
share data related to the financial health of the borrower. These are calculated based
on the assets and liabilities of the borrower, so that the lenders can make their credit
decisions. These covenants also monitor, net worth, leverage and coverage ratio,
EBITDA of the borrower.

Answer 1(e):

Language of obligation is used in the situation where a party intends to impose a duty on one
or more of the other parties. The key word that is used in framing a sentence to impose an
obligation is ‘SHALL’. The meaning was the word shall should mean “HAS A DUTY TO”.
Many courts have also ruled that the word ‘SHALL’ is not to be viewed as a discretionary
power but as an express obligation. The courts have also pointed out that shall is not to be
confused with the words ‘MAY’ or ‘SHOULD’. For example, there is a simple test to check
if the word ‘SHALL’ is apt in a particular clause of a contract. It is to check whether the word
shall is perfectly replacing the word ‘has’ or the phrase “have a duty to”. On the other hand,
language of discretion is used in a clause when a party wants to give discretionary powers to
the other party to take or not take a particular action. The word used in a clause to convey
discretion is ‘MAY’. The phrases that the word ‘May’ aims to replace is ‘is permitted to’ and
‘is authorized to’.

Example for language of obligation and Language of discretion:

Sneha may Shall sell her shares to Ron, if she wishes to sell her shares any time before 10 th of
June 2022. This is an obligation on Sneha to sell only to Ron during that period.

Further Sneha may sell her shares to Ron, if she wishes to sell her shares any time after 10 th
June 2022. This is at the discretion of Sneha. She can sell shares to Ron or any third party
also.

Answer 2(a):

The key purpose of force majeure clause is that, on the happening of a certain event, one
party or both the parties to the contract are typically excused from performance of their duties
as per the contract. This leave way is given to the parties keeping in mind the extenuating
circumstances that are not in the control of either party or both the parties, depending upon
the situation. The party is absolved from its liability as per the contract if it falls under the
exception of this clause. The basic intent is that, if a task becomes impossible to perform due
to a factor that is not in control of the party, then the party should not be held liable. This also
falls under the ambit of doctrine of frustration. The force majeure clause needs to outline the
circumstances under which the party is absolved from its liabilities. If force majure clause is
not mentioned, the contract will be governed under doctrine of frustration. However, the
importance of having this clause in a contact goes without saying. The regular practice is to
give a list of events that will be covered under this clause, if such list is not mentioned, then
the interpretation will be limited to general understanding of the circumstances that are
beyond the control of the parties. Few examples of list of events are war, terrorism, external
hostilities, fire, natural disasters, Acts of God, etc. Including list of events can cover a broad
area sometimes. There is an important rule in contract interpretation known as, “expressio
unius est exclusio alterius”. Using this rule, one might say that including a list of happening
of certain events under which a contract will be frustrated under the force majeure clause will
mean that all other events which could have otherwise led to frustration of contract in general
sense do not fall under the ambit of this force majeure clause. To prevent this, it is imperative
for the drafters to include a sweep-up language and say that the list of events mentioned
below is not to be treated as an exhaustive list. The burden of proof lies upon the party that
wants to invoke force majeure clause as an excuse for non-performance. The general rule of
test is that the performance of the contract by the party could not have been possible even
after exercising diligence, care, and prudence due to the happening of such external
uncontrollable event.

Can economic difficulties faced by one of the parties be included in the force majeure clause?
this one of the challenging concerns. Under various cases in English common law like,
“Thames Valley Power Ltd v Total Gas & Power Ltd [2005] EWHC 2208 (Comm); Tandrin
Aviation Holdings Ltd and Aero Toy Store LLC and others [2010] EWHC 40 (Comm)” the
courts have not regarded economic meltdowns to fall under the ambit of force majeure
clause. To go into the details of the Tandrin case, the court held that there needs to be a
causal link between the economic meltdown and the inability to perform by the party, mere
economic collapse cannot be regarded as an event that falls under the preview of this clause.
The courts have noticed that parties are using economic collapse as an excuse to escape from
performing the contract that results in party incurring more expenses to perform it, something
that is not commercially viable to the party. Further, in the case, “Seadrill Ghana Operations
Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm)” the court held that, the force majeure
event should solely be the reason for the non-performance of the contract by the party. If
economic meltdown is one of the two reasons stated by the party for non-performance of the
contract and economic collapse is not the sole reason for non-performance, then it can’t be
used as an excuse under the clause.

Let us look at the example of Brexit. Could Brexit fall under the ambit of force majeure
clause? If we ask a question, will economic impact of Brexit come under the force majeure
clause of all contracts in that region? The answer to that question will be no. This is because
having such clause is not a guarantee for termination of contract. This is because it depends
on a case-by-case basis, to be exact how remotely the contract is connected to Brexit and if
the contract is becoming non-performable only due to Brexit. These clauses should be
carefully mentioned and more than the clause itself, the party needs to prove that there is a
causal link with Brexit events, and that causal link is the sole reason for non-performance by
the party. If Brexit has directly impacted the performance of a party to the contract, then, it is
covered under force majeure clause, but not as a general rule of exception. Best example is to
use the situation of a pandemic. In a pandemic, if a party claiming non-performance due to
economic difficulties, then the court will not allow it under force majeure clause. But if the
party is claiming that, due to pandemic the movement of the party is restricted completely by
the government, then that can be listed under force majeure clause. That does not mean
economic difficulties are directly overlooked, it varies on a case-by-case basis and if the
economic difficulty faced by a party in a pandemic is directly preventing them from non-
performing, then the party is absolved from its liabilities under the force majeure clause.

Answering the central question, economic difficulties cannot be used as an excuse by the
party for non-performance, merely because it is not financially viable. If the economic
meltdown is the sole reason for non-performance by the party, then it can be brought under
the ambit of force majeure clause. The instances of economic difficulties are and can be
included in the force majeure clause to gain certain bargaining power, but that does not give a
direct right to the party, the enforceability varies on a case-by-case basis as discussed in this
answer.