Common Legal Terminologies All Entrepreneurs Must Know
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As an entrepreneur there would be times when you would have to read legal drafts and even meet lawyers. A basic understanding of the law or even the understanding of a few basic legal words can help put you in a better position during negotiations. Here are a few legal terminologies that you should understand.
Due diligence: Due diligence is the investigation or care that a person or entity takes before entering a contract. For example, if you decide to buy a property, you would ensure that the seller owns the property, you would also inquire if that particular property has been mortgaged or has any litigation disputes over it. This process or investigation conducted by you to safeguard your interest is called due diligence.
Force Majeure: Force majeure, literally meaning ‘superior force’, is a common term used in contracts and refers to those events that are beyond the control of the contracting parties. They could be natural and/or man-made events, such as earthquakes, storms, wars, strikes and lockdowns, among others. These events could not have been predicted at the time of making the contract. Inserting such a clause would mean that if such an event were to take place then the parties would not be made liable to fulfill their obligations under the contract during the subsistence of the force majeure event. For example, if under a contract (with a force majeure clause present) you were to export 100 tonne of cotton to a purchaser in 30 days and if an earthquake occurs causing a delay in your delivery, then in such event you cannot be sued for non-timely delivery.
Injunction: An injunction is a court order directing a person or entity to do a certain activity or not do a certain activity. Let’s say, you write and decide to publish a fictional novel. A year later Mr X who has read your book decides to plagiarize your novel and publish the same story with minor changes. In such a case, you may seek an injunction before a court of law restraining Mr X and his publishers from publishing this plagiarized book on the grounds of copyright infringement.
Jurisdiction: Jurisdiction refers to the powers held by a court to enforce laws and/or pass orders in a case. For example, if you enter into a contract with another person from Mumbai, then you both would insert a clause in the contract stating that the courts of Mumbai shall have exclusive jurisdiction. In other words, if there were to be a dispute, then in such event only the courts of Mumbai shall have jurisdiction and have the authority to decide the matter. Every contract falls under a particular jurisdiction and you must be aware of what jurisdiction governs the contract that you are about to sign.
Affidavit: An affidavit is a document containing facts given under oath before an authority, for instance a court of law. The contents of an affidavit must be true and to the best of the knowledge of the person signing it. For example, you can file an affidavit stating that you have never used a particular product in your life. This affidavit can then be used as evidence before a court of law. Any false statements that you make under an affidavit would attract the provisions of the Indian Penal Code.
Lien: Lien is a legal right wherein one individual has a right over another individual’s property. This right is formed when the owner of a property decides to take a loan and in turn provides his own property as a security or collateral to the lender as a promise that he will repay the loan. This is called lien on the property. If the owner does not repay the loan, then the lender who has received the property as security may sell the property and keep the sale proceeds.
Arbitration: Arbitration is an alternate form of dispute resolution and does not involve going to court. Here the disputing parties go before an arbitrator to settle their legal issues. An arbitrator may either be mutually appointed by the parties or appointed by a court of law and conducts the arbitral proceedings at the end of which he/she passes an ‘award’ which is binding on the parties. Arbitration follows a less formal procedure and is more cost effective than filing a case before a court.
It is important that entrepreneurs know the meaning of all the legal terms in contracts that they sign. This avoids helps in negotiations and drafting of agreements.