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Here is everything you should know about trade secret law and some general questions answered about it.

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Here is everything you should know about trade secret law and some general questions answered about it.

Trade secrets are intellectual property (IP),Some Very Common FAQs on trade Secrets law Answered Articles consisting of any formula, pattern and ideas, or devices, a compilation of information. Unlike any form of IP like copyright and patent, even trademark for that matter, all of it requires registration.

Only then will it come into effect and will get protected at all costs. But, trade secrets laws are more of ‘DO-IT-YOURSELF.’ The trade secrets law speaks about:

It offers the owner of the information a competitive advantage in the market.
It is protected and treated in a way that prevents the public or the competitor from knowing, learning about it, or through theft.

Under the Uniform Trade Secrets Act (“UTSA”), the information derived from independent economic value is unknown, but the efforts are to maintain secrecy.

For the information to be kept secret and to keep the status protected, the holder should put reasonable efforts to preserve its confidentiality.

Unlike other forms of intellectual property, Trade Secrets Laws are not merely easily visible or in a physical form as it consists of processes, methods, or even specific ways of doing things.

Thus, it can be a bit intimidating to understand or grasp the actual concept of trade secrets. It is essential to know that you do not register with the government to protect your secret.

The information is most likely under the wrap; you are trying to cover it with your efforts. As long as the information is kept confidential and minimal people know about it, the secret lasts.

There is no such statutory period for the information to last; it all depends on secret confidentiality. However, as soon as the trade secret is available to the public, the protection ends.

Let’s discuss everything about trade secrets law, the examples, different advantages, and benefits. Also, learn how it differs from another type of IP and why its protection is crucial. Once you understand it, you will be able to make rational decisions to safeguard your information.

What are some examples of trade secrets law?

Information under the trade secrets law is formulas, patterns, compilations, even devices, methods, techniques, and more. Some examples include customer lists, manufacturing processes, the secret of a recipe, and more.

The economic value for such information can get considered as actual or sometimes potential. Like, if you have not started producing a particular device, even though you have the blueprint for the same.

You can still protect the blueprint under the trade secrets law based on its potential value. Sometimes, the information of certain things can also be protected as a secret and can be protectable as an invention under patent rights.

The entire process of converting raw materials into usable finished or other usable materials. Like for example:

Recipes for food or food products like KFC chicken ingredients
Methods or processes of manufacturing certain consumer products
Chemical or secret formulas for cleaning products
Any new invention
A computer algorithm
Marketing strategies
Technological processes too which includes device, machinery, or computer

Visit getlegal.com to know more about the usefulness of trade secrets law!

Are there any advantages of trade secrets law?

Unlike a patent, the best and the most interesting advantage it offers is the protection of abstract ideas.
While patents last for 20 years and copyright up to 100 years, trade secrets last potentially forever, as long as it is a secret.
Trade secrets law works effectively and immediately and does not require you to pay any upfront fee, typically associated with patent prosecution.
You don’t have to hire an attorney like you do when filing for a patent.
In which case, trade secrets law can be beneficial?

When the subject matter kept as a secret can not be patentable by any chance
When the likelihood of the information being a secret can last for a long time
If the trade secret is not declared to be worth patentable value, which is why it remains to be a trade secret only
When the secret gets based on a process, like a manufacturing process and not the end product, it is more like reverse engineering.
Can you prove a Trade Secret Claim?

You have to prove that the:

The subject matter that you are claiming is a trade secret
You made all possible efforts and responsibility to secure the information from being disclosed
and somebody else, who knew about the secret misappropriated the information

Trade Secrets Law state that the secret can get acquired improperly or occur due to confidentiality breach. A competitor can obtain the information through accidental disclosure or by doing unfair means. It’s essential to know the reason behind the infringement to file a claim.

When filing for a claim, you have to prove and show confidence that the information got revealed. If the information wasn’t revealed and it came out accidentally, the filing is not possible. It can only be possible when there is unfair or infringement of trade secrets taking place.

When the information is out to the public, it doesn’t become a secret anymore, and it is of no use. Therefore, you have to put all your efforts into protecting the trade secrets.

How are trade secrets protected?

Under the trade secrets law, the secrets get protected without the need for registration. That means it doesn’t require registration or going through formal procedures for protection.

It can be protected for an unlimited period unless there is a discovery that the information gets revealed. It can be discovered or even legally acquired by others and disclosed to the public.

For this very reason, the protection of trade secrets seems to look attractive for various companies. Visit getlegal.com to know in detail how trade secrets law protects trade secrets.

What rights do Trade Secrets confer?

A trade secret can protect the list of the below-mentioned group of people from using, copying, or even benefiting from the secrets. With that, it also protects from disclosure without permission.

The duty of confidentiality binds people and to not disclose or use trade secret information. It will include employees who contact the employer’s trade secret as a part of their job.
People who have acquired the secret through improper means like theft, industrial espionage, and even bribery.
People who have learned about the trade secret unintentionally, by accident, or by mistake. But, they had a reason to know about the information and trade secrets protected it.
People who sign nondisclosure agreements promising not to disclose any trade secrets without the authorization of the owner. It is one of the most effective ways of protecting or securing the information in the trade secrets law. It establishes a duty of confidentiality that needs to get attained at all costs.
What is the Uniform Trade Secret Act?

A uniform trade secret is a model law drafted by the National Conference of Commissioners on Uniform State Laws. These are laws that guide common law trade secret protection. The model is relatively short, includes a handful of provisions, and 49 states have enacted it to:

Define the types of information eligible for trade secret protection
Set out a private cause of action for trade secret misappropriation
Provides remedies for misappropriation, including injunctions, damages, and, in some instances, attorneys’ fees
How Defend Trade Secrets Law Works?

The Defend Trade Secrets Act passed in 2016 is a US federal law. It allows the owner of the trade secret to sue the court when the secret gets misappropriated. This trade secrets law aligns closely with the uniform trade secrets act and gets adopted in almost every state in the US.

President Obama signed the DTSA, and it came into effect on May 11, 2016. This new act created an action for trade secret infringement and provided remedies to cure it. Creating such a federal cause of action, the DTSA made it easier for people, the owners, to handle their dispute and resolve it in the federal court.

Before the law came into the picture, such misappropriation claims were a matter of state law. The defense trade secrets law came into the picture to create uniformity in all states, as a federal trade secret misappropriation law. It provides statutory damages and remedies to the owner when any sort of misappropriation occurs.

What Precautionary Measures to be taken by Businesses for trade secrets?

Trade secrets law came into existence to give the business owners relief for protecting their secrets! It gets widely used in business, and heavily large companies rely on it to protect their IP. Even though people know it is not legal protection or registered like other IPs, it is still a choice. Very known companies like the Coca-Cola formula were one example that practised trade secrets.

Business owners need to take necessary precautions to protect their secrets. It includes:

Considering whether their trade secrets can be patentable or not? If yes, will it be protected and secured through a patent?
Very few people in your business should know your secret since it is an asset to your organization. The lesser people know, the higher chances of it being confidential long enough.
Very few people should have access to building or documentation, IT security for the trade secret.
If the employee owes confidentiality to the employer without an agreement, a higher risk of threat gets involved. To maintain confidentiality, an employer must let the employee sign a contract for a limited time.
Also, your business can sign a confidentiality agreement with the business partner.
Is stealing a crime under trade secrets law?

Intentional theft of the trade secret can be considered a crime under both federal and state law. One of the most important federal laws dealing with trade secret theft is the Economic Espionage Act of 1996 (EEA).

It gives the attorneys the power to prosecute any person, individual, or even company involved in secret misappropriation. The punishment will get based on how severely they have affected the secret by stealing, copying, or receiving trade secrets. Penalties for such violations differ and are pretty severe, like hefty fines.

In some cases, the violators can also get imprisonment for up to 10 years. Here, the EEA gets applicable to theft happening within the US and outside the US. It is only when the thief is an American citizen or corporation.

Read more about stealing as a crime under trade secret law at getlegal.com.

Why is trade secrets law an essential consideration for protection?

In countries, both the developing and developed ones, fair competition has to be a thing. The competition between enterprises is said to be an appropriate means for satisfying the demand and supply of the economy. Consumers are happy when served rightly, and it speaks about the entire society as a whole.

Competition is the main force that drives the business to grow ahead, think out of the box, and do unique things. Through competition, innovation occurs, businesses tend to go beyond and give satisfaction to the consumer. Trade secrets law is an important way of protecting business secrets, so they succeed, and there is no copying.

What should I do to protect my trade secrets?

Protective measures can get adapted to protect the trade secret: physical security, digital security, and legal standards. It can include a confidentiality agreement, nondisclosure agreement, and non-compete agreement.

A division bench of Delhi High Court in J B Exports Ltd and another vs. BSES Rajdhani Power Ltd (2006 134 Comp cas 106 Del. decided on 3.3.2006) observed that “the concept that a company is a distinct legal entity apart from its shareholders, vide Salomon vs. Salomon & Co. (1897 AC 22 HL) had a historical purpose. Its main purpose was to encourage entrepreneurs to start new business ventures and, thus, help in the process of industrialisation.” This background is so important that it merits consideration in detail as follows.

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Index to Parawise Contents

1. Evolution of concept of legal entity

2. Effect of Incorporation: Company as a separate legal person

3. Limited Liability

4. General Powers of Board

5. Borrowing

6. Finances

7. Directors as agents

8. A member of an association registered as a company shall not be personally liable for any liabilities incurred in such business

9. A director shall not be personally responsible for any debts of the company unless the business of the company has been carried on for any fraudulent purpose and declared as such by the Tribunal under Section 339

10. Directors,Directors Personal Guarantee Articles Director’s Personal Guarantee – A Void Agreement -27.11.14 Dir Articles etc., with unlimited liability in limited company

11. Registration of charges

12. Director’s personal guarantee

13. What agreements are contracts

13.1 “Free consent” defined

13.2 Object is lawful

14. “Undue Influence”

14.1 Position of dominance necessary for presumption to arise

14.2 Inequality of bargaining power

14.3 Judicial intervention for rescuing parties from unreasonable terms

14.4 Agreement should be reasonable for the contract to be upheld legal

14.5 Serious terms of a contract must be specifically brought to the notice of the parties

15. What considerations and objects are lawful, and what not

15.1 Defeat any Law

15.2 Undercutting of Statutory Privileges

Conclusion

16. DRT Act, 1993 and SARFAESI Act, 2002

17. SARFAESI Act, 2002

18. Conclusion and Recommendations

19. DENA BANK – A CASE STUDY

1. Evolution of concept of legal entity

A division bench of Delhi High Court in J B Exports Ltd and another vs. BSES Rajdhani Power Ltd (2006 134 Comp cas 106 Del. decided on 3.3.2006) observed that “the concept that a company is a distinct legal entity apart from its shareholders, vide Salomon vs. Salomon & Co. (1897 AC 22 HL) had a historical purpose. Its main purpose was to encourage entrepreneurs to start new business ventures and, thus, help in the process of industrialisation.” This background is so important that it merits consideration in detail as follows.

1.1 Delhi High Court further observed that “In every business there is a risk that the business may fail due to recession, competition, etc. Hence, businessmen were reluctant to set up new industrial ventures out of fear that if it failed, recovery would be issued in respect of the loans they had taken and thereupon even their household and personal effects may be sold in connection with the recovery. Hence, businessmen were reluctant to take risks and start new industrial ventures. To get over this hurdle and to encourage industrialisation the legal principle was created that if a company is incorporated under the Act, the liability of the shareholders becomes limited because the shareholders, directors, etc., are legally treated as being different from the company. A company was held to be a distinct legal entity separate from its shareholders and directors. This legal principle gave protection to businessmen who were otherwise reluctant to start new industrial ventures due to the risk involved. Thus, this legal principle was of great help to industrialisation in Eurpoe (where industrialisation first began during the Industrial Revolution) and there after all over the world. “

2. Effect of Incorporation : Company as separate legal person

As per Section 9 of the Companies Act, 2013 (Section 34 of the Companies Act, 1956) one of the characteristics of a company is that it is an incorporated body of persons. It is constituted into a distinct and independent person in law and is endowed with special rights and privileges. Hon’ble Supreme Court in TELCO Vs. State of Bihar (1964) 34 Com Cases 458 : AIR 1965 SC 40 observed as follows :-

“ …..The Corporation in law is equal to a natural person and has a legal entity of its own. The entity of the corporation is entirely separate from that of its share holders; it bears its own name and has a seal of its own; its assets are separate and distinct from those of its members; it can sue and be sued exclusively for its own purpose; its creditors cannot obtain satisfaction from the assets of its members; the liability of the members or shareholders is limited to the capital invested by them; similarly the creditors or the members have no right to the assets of the corporation. This position is well established ever since the decision in case of Salomon V. Salomon & Co. 1897 AC 22 was pronounced in 1897 and indeed, it has always been the well recognized principle of common law…….”

3. Limited Liability

Section 4(1)(d)(i) the Companies Act, 2013 provides that “the memorandum of a company shall state, in the case of a company limited by shares, that liability of its members is limited to the amount unpaid, if any, on the shares held by them”. This means that no member can be called upon to pay anything more than the nominal value of the shares held by him, or so much thereof as remains unpaid; and if his shares be fully paid up his liability for business debts of the company is nil.

3.1 “The privilege of limited liability for business debts is one of the principal advantages of doing business under the corporate form of organization {Cadman, THE CORPORATION IN NEW JERSEY , 327 (1949)}. ” The company, being a separate person, is the owner of its assets and bound by its liabilities. Members, even as a whole, are neither the owners of the company’s undertaking, nor liable for its debts. Where the subscribers exercise the choice of registering the company with limited liability, the members’ liability becomes limited or restricted to the nominal values of the shares taken by them or the amount guaranteed by them. No member is bound to contribute anything more than the nominal value of the shares held by him {J.H. Rayner (Mincing Lane) Ltd V. Deptt. of Trade and Industry, (1989) 3 WLR 969 HL}. In a partnership, on the other hand, the liability of the partners for the debts of the business is unlimited. They are bound to meet, without any limit, all the business obligations of the firm. The whole fortune of a partner is at stake, as the creditors can levy execution even on his private property. Speaking of the advantage of trading with limited liability, BUCKLEY J observed {London & Globe Finance Corpn, Re (1903) 1 Ch 728, 731}:

“The statutes relating to limited liability have probably done more than any legislation of the last fifty years to further the commercial prosperity of the country. They have, to the advantage of the investor as well as of the public, allowed and encouraged aggregation of small sums into large capitals which have been employed in undertakings of great public utility largely increasing the wealth of the country.”

4. General Powers of Board

Sub Section (1) of Section 179 of the Companies Act, 2013 provides as follows:-

“The Board of Directors of a Company shall be entitled to exercise all such powers, and to do all such acts and things, as the Company is authorized to exercise and do ….”

5. Borrowing

Section 179 (3) (d) of the Companies Act, 2013 provides that “(3) The Board of directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board namely:-

(a)……………………… …………………… (b)……………………….

(c)………………………….. (d) to borrow moneys;

A company cannot borrow money unless it is so authorized by its memorandum. In the case of a trading company, it is not, however, necessary that the objects clause of its memorandum should expressly authorise it to borrow. As borrowing is incidental to trading, such a company has implied power to borrow. Other companies must have a borrowing power clearly specified in the memorandum.

6. Finances

The company is the only medium of organising business which is given the privilege of raising capital by public subscriptions either by way of shares or debentures. Further, public financial institutions lend their resources more willingly to companies than to other forms of business organisation. The facility of borrowing and giving security by way of a floating charge is also an exclusive privilege of companies. In New Horizons Ltd. v Union of India, (1997) 89 Comp Cas 785 at 802 (Delhi) the hon’ble Delhi high court has observed that “Capital in many cases is the life-blood of a concern, and it is always a great misfortune where the development of a business is arrested or restricted by want of capital.”

7. Directors as agents

It was clearly recognized as early as 1866 in Ferguson v Wilson (1866) LR 2 Ch LR 77: 36 LJ Ch 67 : 15 LT 230. that directors are in the eyes of law, agents of the company. The Court said:

“The company has no person; it can act only through directors and the case is, as regards those directors, merely the ordinary case of principal and agent.”

The general principles of agency, therefore, govern the relations of directors with the company and of persons dealing with the company through its directors. Where the directors contract in the name, and on behalf of the company, it is the company which is liable on it and not the directors.

8. A member of an association registered as a company shall not be personally liable for any liabilities incurred in such business

Section 464 of the Companies Act, 2013 provides as follows

“(1) No association or partnership consisting of more than such number of persons as may be prescribed shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company under this Act or is formed under any other law for the time being in force: Provided that the number of persons which may be prescribed under this sub-section shall not exceed one hundred.

(2) …….xxx…….xxx….

(3) Every member of an association or partnership carrying on business in contravention of sub-section (1) shall be punishable with fine which may extend to one lakh rupees and shall also be personally liable for all liabilities incurred in such business. “

By necessary implication it follows that a member of an association registered as a company under the Companies Act shall not be personally liable for any liabilities incurred in such business by the company.

9. A director shall not be personally responsible for any debts of the company unless the business of the company has been carried on for any fraudulent purpose and declared as such by the Tribunal under Section 339

Section 339 of the Companies Act, 2013 provides as follows

“(1) If in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct:”

By necessary implication it follows that a director, manager, or officer of the company shall not be personally responsible for any of the debts or other liabilities of the company incurred in such business by the company unless the business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose and declared as such by the Tribunal under Section 339 of the Companies Act, 2013.

10. Registration of charges

Section 77(1) of the Companies Act, 2013 (hereinafter referred to as ‘the Act’) is reproduced below for ready reference:

77. (1) It shall be the duty of every company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India, to register the particulars of the charge signed by the company and the charge-holder together with the instruments, if any, creating such charge in such form, on payment of such fees and in such manner as may be prescribed, with the Registrar within thirty days of its creation:

10.1 The lenders always insist on some security and the only security that a company can give is to charge its assets. Any charge or mortgage created on certain specified assets of a company must be registered with the Registrar of Companies under Section 77 of the Act.

10.2 Section 83 of the Act is reproduced below for ready reference:

83. Power of Registrar to make entries of satisfaction and release in absence of intimation from company. The Registrar may, on evidence being given to his satisfaction with respect to any registered charge, –

(a) that the debt for which the charge was given has been paid or satisfied in whole or in part; or

(b) that part of the property or undertaking charged has been released from the charge or has ceased to form part of the company’s property or undertaking;

enter in the register of charges a memorandum of satisfaction in whole or in part, or of the fact that part of the property or undertaking has been released from the charge or has ceased to form part of the company’s property or undertaking, as the case may be, notwithstanding the fact that no intimation has been received by him from the company.

By necessary implication it follows that any charge / mortgage created by the Banks on the Director’s personal property / property of a third party, even if unconsciously registered by ROC, is illegal being without the authority of the Act, and therefore unenforceable at law.

11. Director’s personal guarantee

Since long the banks and public financial institutions (hereinafter collectively referred to as ‘the Banks’) have unilaterally and arbitrarily developed a practice, without the authority of law, to execute personal guarantee agreements with the directors of a company to secure the debts of the company. This view is supported by the following latest judgment of the Supreme Court.

Recently, the Supreme Court in the case of Karnataka State Financial Corporation vs N. Narasimahaiah & Ors. (2008 AIOL 348 Civil Appeal No. 610-612 of 2004 Decided on 13/03/2008) has observed as follows (in para 18):

“18. Banking practice may enable a financial corporation to ask for a collateral security. Such security, we would assume, may be furnished by the Directors of a Company but furnishing of such security or guarantee is not confined to the Directors or employees or their close relatives. They may be outsiders also. The rights and liabilities of a surety and the principal borrower are different and distinct.” (emphasis supplied)

Therefore, it stands concluded, without any doubt, that the banks have developed the practice to execute personal guarantee agreements with the directors of a company to secure the debts of the company without the authority of law. This practice is against the principle of limited liability of the shareholders as well as directors of the company as provided in the Companies Act, 2013. Accordingly, it is clearly against the letter and spirit of the Companies Act and therefore unlawful.

12. What agreements are contracts

Section 10 of the Indian Contract Act, 1872 provides that – An agreement between two or more parties becomes a contract when the following conditions are satisfied:

(1) ……………………….

(2) ……………………….

(3) The parties’ consent is free.

(4) The parties’ object is lawful.

12.1 “Free consent” defined

“Consent is said to be free when it is not caused by:

(1) ……………………

(2) undue influence, as defined in Section 16, or

(3) ……………………

(4) ……………………

(5) ……………………

Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.”

12.2 Object is lawful

In P Ramanatha Aiyar’s The Law Lexicon 2nd Edition 2007 the term “Object” is defined “As a noun, the end aimed at; the thing sought to be accomplished (as) object aimed at; the aim or purpose (as) object not authorized by law; the thing sought to be attained (as) object of the law.”

The Hon’ble Supreme Court in the case of Gurmukh Singh v. Amar Singh (1991) 3 SCC 79 has held that the word “object” would mean the purpose and design which is the object of the contract. If it is opposed to public policy which tends to defeat any provision of law or purpose of law, it becomes unlawful and thereby it is void under Section 23 of the Contract Act.

Further, in P Ramanatha Aiyar’s The Law Lexicon 2nd Edition 2007 the term “lawful” is defined as “By lawful, it means not contrary to law, public policy or void ab-initio, or unlawful. (Order 23, Rule 3 C.P.C. S.G. Thimmappa v. T. Anantha, AIR 1986 Kant 1, 4)

13. “Undue Influence”

Section 16 of the Contract Act provides that-

“(1) A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.

(2) …………………………….

(3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of other.” (Italics supplied)

13.1 Position of dominance necessary for presumption to arise

The Privy Council in Raghunath Prasad v Sarju Prasad AIR 1924 PC 60 pointed out the conditions for presumption to arise. Referring to sub-section (3) of Section 16, which provides for presumption of undue influence, Lord SHAW observed as follows:

“By this sub-section three matters are dealt with. In the first place, the relations between the parities to each other must be such that one is in a position to dominate the will of the other. Once that position is substantiated the second stage has been reached, viz., the issue whether the contract has been induced by undue influence. Upon the determination of this issue a third point emerges, which is that of onus probandi. The burden of proving that the contract was not induced by the undue influence is to lie upon the person who was in a position to dominate the will of the other.

Error is almost sure to arise if the order of these propositions be changed. The unconscionableness of the bargain is not the first thing to be considered. The first thing to be considered is the relations of these parties. Were they such as to put one in a position to dominate the will of the other?” (Italics supplied)

13.2 Inequality of bargaining power

The presumption of undue influence may also arise from the fact that there is such an inequality of bargaining power between the parties that one can cause economic duress to the other. The decision of the Court of Appeal in Lloyds Bank v. Bundy (1975) 1 QB 326. is a remarkable illustration of the concept of inequality of bargaining power.

A contractor borrowed a sum of money from a bank. He could not pay back in time. The banker pressed for payment or for security. He suggested that his father might mortgage the family’s only residential house. The bank officer visited the father and obtained his signatures upon readymade papers. The contractor still could not pay and the banker sought to enforce the mortgage which might have meant throwing out of the family from its only residence. Accordingly, Mr Bundy relied upon the unfair character of the mortgage. He was allowed to set aside the mortgage.

13.3 Judicial intervention for rescuing parties from unreasonable terms

In Central Inland Water Transport Corpn vs. Brojo Nath Ganguly (1986 3 SCC 156, 206) the Supreme Court has noted that the word “unconscionable” means something as shows no regard for conscience and which is irreconcilable with what is right or reasonable. The matter before the court was a service contract. A clause in the contract empowered the employer (a Govt. undertaking) to remove an employee by three months’ notice or pay in lieu. The employee, who contested the validity of this clause, was removed by handing him over a three months’ pay packet. The Supreme Court regarded the clause to be constitutionally as well as contractually void. The court added that any term which is so unfair and unreasonable as to shock the conscience of the court would be opposed to public policy therefore also void under section 23 of the Contract Act. The contract was not based upon a real consent. It was rather an imposition upon a needy person. The term was unconstitutional because it was so absolute that any officer could be made a target irrespective of his conduct, good or bad. (Italics supplied)

13.4 Commenting upon this expanding power of the court to relieve a party from the consequences of his own contract, a learned writer J H Baker says that “freedom of contract turns out to be a misleading guide when so many contracts are not free in the economic sense. The notion of contract as private legislation appears less attractive when legislation is always drawn up one-sidedly. Judges are empowered to read in terms which are not there, or read out terms which are there. They are to impose reasonableness. Whatever is not reasonable is not law. If the parties have agreed to something unreasonable, they should be treated as if they have not agreed at all and released”. (Emphasis supplied) (J. H. Baker, From Sanctity of Contract to Reasonable Expectation, Current Legal Problems 1979).

13.5 Serious terms of a contract must be specifically brought to the notice of the parties

This is especially obvious with regards to worldwide business transactions. Contracts are closed between two parties sitting in two different parts of the world and without meeting each other vis-a-vis.

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In view of that,UAE Law: Choice of governing law and jurisdiction Articles more accentuation ought to be placed on the private international legal framework of the states, guaranteeing that they don’t stale and are up to international guidelines in managing issues that constantly emerge in International businesses.

As cross-border transactions constantly arise, a pertinent issue naming “choice of law” holds significant importance in the private international law applicable to international commercial agreements. Contracts are mere pieces of paper without any legitimate impact unless a specific reference to some private law is given which characterizes the commitments expected by the parties to the agreement and the recommends the way of redress through the appropriate court system in case of failure to perform contractual obligations.

A governing law provision in any commercial contract defines the law which will govern or regulate the contract in the event of a dispute, as opposed, jurisdiction clause specifies the courts or international institution that will have exclusive jurisdiction to try the matter or resolve disputes. These clauses are though equally important as that of the commercial arrangements between the parties; they are yet neglected amid drafting the general terms of the contract and are considered as standard boilerplates at the end of the contract.

It is vital that these conditions gain as much importance as the substantive arrangements of the agreement. Failure of parties to agree on the governing law can lead to expensive and massive suits deciding the relevant law and jurisdiction to be applied to the agreement. Corporate Lawyers of Dubai assist numerous multi-billionaire companies to have tailor-made commercial contracts prior to entering into an agreement which suits the requirements of both the parties.

Choice of Law Provision

The decision of governing law for the contract is one arrangement in the contract where the parties assign the law of a particular jurisdiction to oversee and regulate the disputes merging between the parties. A such, the parties indicate or stipulate that any claim arising out of the contract will be resolved by the law of a concerned jurisdiction. This decision generally becomes binding on the parties when the parties refer the matter to arbitration.

A significant number of parties, according to statistics of the International Chamber of Commerce, involves governing law in their contract. A standard governing law clause states that “this law of this country shall govern the agreement”. There are several preconditions which must be considered prior to choosing a particular which are detailed as below:

Worthiness of the Law for resolving dispute:

International law has authorized parties to adopt any law which might govern their contract, ergo, parties mustn’t focus on choosing their home country law for purpose of avoiding additional expenses, but must evaluate the worthiness of law in different jurisdiction which will be appropriate for their commercial arrangements. There are numerous jurisdictions which have an offer importance to case laws and precedents, whereas several jurisdiction are silent on such matters and they not even recognize certain notions of the contract.
Jurisdiction issuesParties generally consider the law of a particular jurisdiction wherein they wish to resolve the dispute. However, this standard can be amended as numerous courts are willing to apply foreign law for resolving the matter if the parties have specifically agreed. Yet, parties should be careful while drafting the contract, as it will often be burdensome for parties to decide what foreign law should be applicable, should the dispute arise. They must also be careful as certain jurisdiction does not apply the foreign choice of law and must also consider the manner in which the court will apply the foreign law. On the contrary, most international arbitration institution is readily acceptable on the foreign choice of law and have arbitrators who can easily understand the foreign law to ease the procedure.
Affinity to the lawGiven the vast cases, parties choose the law which they are familiar to rather than opting a more neutral law. Also, the latter can bring unaccepted surprises which parties are not aware of considering dissimilar procedural aspects.

Jurisdiction Provision

Another most common uncertain clause is to determine the jurisdiction where the word “may” and “shall” can bring unwanted confusion. Importantly, if parties which to have a non-exclusive jurisdiction the word “may” can be utilized, on the contrary for an exclusive jurisdiction the word “shall” should be used. An ideal jurisdiction clause states that “the parties shall/may submit their dispute emerging out of or in connection with the concerned agreement to (court /arbitration) of this country.”

A bare review of the foregoing standard jurisdiction clause we note that the first step is to determine which institution shall be given authority to resolve the dispute that is either courts or arbitration institute. Both the system have their pros and cons, hence parties should beforehand determine what should be appropriate for the said matter. It most certainly believed that arbitration offers wide variety of options and advantages over courts which are outlined as below:

Choice of arbitrators expert in such matter;
Private proceedings;
Binding decisions;
Choice of governing law;
Choice of enforcing judgments in different territory;
Common language of arbitration.
UAE Law and Choice of Law

In UAE international parties may face needless issues regarding the application of foreign law to govern the contract. As in certain cases, courts inherit the jurisdiction and governs it according to the UAE local laws such as Civil Transactions Law or Civil Procedure Code. In addition, the courts of UAE will not let go jurisdiction to another court over a matter where UAE courts will in all case have the jurisdiction. This is can be witnessed in the following disputes:

Disputes pertaining to real-estate situated in UAE;
Contract finalized in UAE;
Happening of an event in UAE;
Matters regarding the employment of a resident in UAE;
Issues regarding UAE Commercial agencies;
Property matters related to UAE.
In accordance with the above, if the UAE courts will inherit the jurisdiction, the governing law will be the law of UAE itself. Accordingly, the court will strike down the governing law and jurisdiction clause in the agreement.

What do we learn?

What if there is no governing law and jurisdiction clause in a particular contract? Before the parties get an opportunity to determine the dispute on merits, the parties will have to exclusively determine the courts or law that will govern the contract, which is an expensive and cumbersome decision. The non-presence of governing law and jurisdiction clause confuses the parties to determine if there is a dispute or not and leads to unfavourable decisions.