Commercial Partnerships- Way Ahead

Commercial Partnerships are relation between business entities or parties to carry on a business as co-owners. It is a legally binding relationship which aims at building a framework of profit sharing, business model as well as for bearing losses among the coowners. They are seen in multi-national companies, newly founded start-ups and in Public-Private model of governance. A partnership in simple terms is a culmination of two or more parties together to run, function and work on a business with common aims and objectives.

Commercial Partnerships are regulated by commercial agreements among the parties, where the terms, conditions and duties of the parties are defined. In Indian law Partnership is defined under the Indian Partnership Act 1932 in Section 4. It says, “Partnership is a relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.” Commercial Partnership requires an agreement and a common motive to earn and share profit.

A Commercial Partnership Contract is the first step towards establishing a partnership among the parties or the co-owners. Based on the Contract the parties will perform their duties as per mentioned in the contractual clauses. The main clauses of a partnership are-

• Confidentiality- When two parties enter into a contract for business or partnership, they are entitled to not disclose the critical information outside the ambit of partnership under this clause.

• Force Majeure- This clause shields the parties from situations that are beyond their control.

• Termination Triggers- This clause includes the reason or the circumstances that may give rise to the termination of the contract.

• Jurisdiction- The clause of jurisdiction specifies under which court the disputes related to contract will be heard.

• Dispute Resolution- This clause specifies the method to be used for resolution of disputes. It may be Alternate dispute resolution or in Court.

• Damages- In case of violation of contract damages are given to the affected party in return of the monetary loss suffered by it.

Indian Courts and Commercial Contracts

In order to perform the contract, it is important to interpret and understand the contract well. In many cases the Indian courts have resolved this issue by interpreting the contract. In Novartis Vaccine Diagonostics vs. Aventis Pharma Limited, 2009 the petitioner invoked question over Section 9 of the Arbitration and Conciliation Act 1996. The Bombay High Court here pointed that interpretation of contract is very essential. The court must consider all of the terms and conditions of the contract while remaining within the bounds of law.

The parties to the partnership are entitled to perform their contractual duties. The sharing of profit and to set off the incurred loss are essential to any commercial relationship. However, the concerns related to non-performance are discussed and sought in many cases by the Indian Judiciary to give a comprehensive analysis about performance.

There may arises situations where the loss incurred is subjected to be set off by the person who has suffered and not others. In S. Parvathammal vs. Commissioner of Income Tax, 1984 the issue over Section 78(2) of Indian Partnership Act 1932, came in question. The Section 78(2) says, ‘Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, nothing in this chapter shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income.’ The underlying principle is the right of carry forward and set off of loss is only confined to the person who has actually suffered the loss and not others. Section 78(2) of the Act recognizes an exception. It enables the legal representative of the deceased by inheritance carrying on the business to claim the right of carry forward and set off of loss. It is necessary for the person claiming this right to prove the legal inheritance.

The duration of partnership is the deciding factor to determine the functioning of the partnership. If the agreement defines a particular duration the parties after the completion of contractual task may leave and then are not bounded legally to follow up the agreement. The duration of a partnership is mentioned under the Section 7 of Indian Partnership Act 1932. In M.O.H Aslam vs. M.O.H, 1988, the parties did not prescribe a particular time duration for the performance. The honorable court stated that the contract of partnership was for an unlimited period till the partners agreed to continue. In this case the parties mentioned that the partnership will continue till the time one of the parties agrees to retire from the contract.

Commercial Partnership and way ahead in India

The concept of Commercial Partnership has played and important role in the context of growing PPP model. The Public Private Partnership (PPP) model is the framework for sharing of duties, and profit among the public agencies and private entities. This model is formulated between

• Central Government and Private company- The central government and private organizations together collaborate for a commercial partnership. It is typically found in infrastructure, agriculture, transport etc. Projects like Atal Tunnel on Leh- Manali Highway where the National Highway Authority of India partnered with private companies Savronik (Turkish Company) and Piscesia (Indian Company) where the government has given the private companies the contract for construction and maintenance in return of funds.

• Central government, State government and private company- Here the Centre as well as the State government collaborate with the private company. The Rewa Solar Project in Madhya Pradesh is a successful example where the union government along with Madhya Pradesh government and Foreign Direct Investment is working on the solar project.

• State government and private companies- The state government and private companies work on ventures like electricity, water supply etc. Maharashtra Jeevan Pradhikaran in collaboration with Subhash Projects and Marketing Limited have actively worked on water supply in Latur water supply project in Maharashtra.

The public agencies provide the required funds and the private entities are responsible for the performance of duties. This model of commercial partnership has contributed to tremendous growth and developmental work.

India as a place of emerging start-ups has seen a growth in the paradigm of commercial partnerships. Start ups constitute commercial partnerships among the co-owners who are jointly responsible for the functioning of a company. It has led to a major change in the requirement of more and more of comprehensive laws for easier interpretation of the contractual clauses, the related statutes and landmark judgements.

The comprehensive analysis by the courts in term of Commercial Partnership, has established befitting mechanism to construct effective commercial agreements. Commercial agreements are one of the major types of agreements that are growing rapidly and are needed in fulfilling the objectives of profit sharing and set off for the losses incurred.

[1] Indian Partnership Act, 1932

[2] S. Parvathammal vs Commissioner of income tax, 1984

[3] MOH Aslam vs MOH, 1988

[4] Novartis Vaccine Diagonostics vs. Aventis Pharma Limited

This article is written by Ashi Sharma of Fairfield Institute of Management & Technology.

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