Venture Capitalists, Entrepreneurs – the tests courts will put your Agreement into
(Article is written with an Intellectual Curiosity purposes and healthy discussion; do not use the knowledge for any Legal purpose. Writer bears no legal responsibility; you must contact a ‘Lawyer’ for any legal purposes).
Indian Contract Act is the most popular law, and everyone seems having a good hand at it. And, this is the biggest problem, very few have actually understood Indian Contract Act, in the perspective it was drafted.
Across democracies, Contract Act is conceptually similar (excluding few special Nations which are not fully democratised).
‘When I say an ‘APPLE’ I mean an ‘APPLE’.
Most of the people entering into an agreement, understood this, and thought that it’s quite fool-proof if we put it in writing.
Also, we have drafted and re-drafted the document, before putting a final pen on it before some respected Lawyers/Arbitrators.
Some more educated lot put their ‘better’ knowledge into it and instead of ‘making an offer’ they started the practice of ‘invitation to make an offer’, it was presumed that in this way the point, that ‘power of other party was lesser’ could be removed.
Here in our case, we all know the ‘tenacity’ of relationship between VCs and Entrepreneurs.
This special relationship need not be proved by any party be it VCs or Entrepreneur.
Entrepreneurs have invested their huge skills, time, commitment and ‘special’ opportunity which erstwhile (not now) could have been utilised elsewhere. VCs have invested their huge money which has huge opportunity cost.
Considering all this if such agreement is taken to ‘Arbitrator’ / Courts the ‘test’ they will put it into is:
1. Process – Courts will look into ‘that entire process’ which gave birth to this ‘Agreement’. This entire process would be observed from the first day itself when VCs or Entrepreneur advertised themselves.
2. Consent – Courts will look into whether ‘consent’ or ‘invitation to make an offer’ was in any manner ‘TAINTED’?
3. Larger good – Courts will look into the ‘larger good’ which we derive out of doing such businesses and not the immediate benefit/greed one or more party might have.
4. Save the ‘befallen’ and not ‘compensate’ – If any party thinks that they are the ‘sufferer’, courts will try to save the ‘befallen’ and not uselessly look onto the ‘compensation’ side.
FIFTH Point – ‘Conscience’.
We all know that, how special the relationship is between VCs and Entrepreneur. That’s why the courts will rise above all level and reach the level of ‘God’ to test your ‘agreement’ on the basis of ‘conscience’.
Courts will not let you kill your own ‘conscience’.
Bentham summarises it beautifully and quite lyrically:
I ought to keep my Promise.
Because my conscience prescribes it.
How do you know that your conscience prescribes it?
Because I have an internal feeling of it.
Why ought to obey your conscience.
Because God is the author of my nature; and to obey my conscience, is to obey my God.
Why ought you to obey God?
Because it is my first duty.
How do you know this?
Because my conscience tells me so.
Sixth Point: Your ‘Agreement’ must stand the test of ‘Morality’.
Most Important Question – Will the courts look into the ‘Financial’ part of the agreement’, because in many agreements, Courts do not look into the ‘Financial Part’.
Here, in our case, Courts will surely look into the ‘Financial Part’ to understand the reason-ability part of it, also to understand the entire story, and equally to measure ‘where does the power vests’.
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