Thursday, January 20, 2011

Rights or Duties

Each clause should address who is responsible for the act, what they are responsible for, where they must perform the act, when the act must be done and how it must be done. In specifying acts, you also need to distinguish whether its a right or a duty. A party who has a right does not need to exercise the right.  For example, either party may terminate the agreement as a result of a “Material Breach” by the other party. The right, expressed by “may” means it is permissive and can be exercised at that party’s sole option. If they elect not to exercise their right, they will be deemed to have waived that right for that instance. To ensure that a single waiver of a right does not waive the right to exercise that option on the future, contracts will normally require that for a right to be waived, it must be waived in writing by the parties to the agreement. That is to prevent a single waiver from constituting a waiver of that right for all future occurrences.

Duties are mandatory and the language used to describe duties needs to affirm that the action is mandatory.  For example for future acts will or shall are used. “Shall” states a future obligation. “Will” states a future fact that must exist.  For example:
  • Supplier shall provide repair or replaced Product returned under warranty within ten (10) calendar days from receipt.
  • Supplier will continue to make spare parts and repairs for the Product available for five (5) years after the last Product purchase.

A variation of this when the duty requires another action to occur in advance. That other action is called a condition precedent. The duty only will exist if the condition precedent has occurred.  For example:
“If Buyer purchases 100 machines prior to December 31, 2012, Supplier shall pay Buyer a ten percent (10%) rebate on the purchase price of all machines”. 

The duty is to pay the 10% rebate on the purchase price. The condition precedent to that duty is the required level of purchases must have been made by the specified date.

Rights or duties may be ended by what is called a condition subsequent. 

Buyer may procure  X Product for a term of 2 years at ten dollars (US$10.00) provided that the exchange rate between the U.S. Dollar and Japanese Yen is between 88 and 98 yen to a dollar.” 

The exchange rate band would be a condition subsequent and if the actual exchange rate were to move outside of the agreed band, as a condition subsequent, it would end the right to purchase the product for $10.00.

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