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Sunset Clause: Their relevance in contracts and regulations

Sunset Clause or Sunset Provision


A ‘sunset clause’ or ‘sunset provision’ is a measure within a law, regulation, statute or contract that provides that the law, or certain obligations therein, shall cease to have effect after a specific date, unless the law is extended by legislative action. In other words, it is a clause, or a provision contained in a contract or in a regulation that makes the latter automatically expire on a specific date.


Sunset Clause had its beginning as a concept in public policy. Most statutes and regulations do not have this clause and hence, they are generally timeless. The only way to end their applicability is by repealing the law. But a ‘sunset clause’ is like a ‘periodic review’ of an enactment or statute. They are generally part of all major international treaties and agreements because there is an assumption that temporary validity of such treaties and agreements have many benefits, the greatest of which is the safeguarding of the sovereignty of states. International investment agreements also contain sunset clauses, but generally the same should not stretch for too long a duration.


The construction of sunset clauses varies from regulation to regulation and contract to contract, and there is no specific format for it.


Sunset date


When relating to a regulation, it is the date on which the law or provision thereof automatically expires, and when relating to a contract, it is the date on which the legal obligations of a party(ies) to a contract will cease to have legal effect. A sunset date is thus like an ‘expiry date’ or ‘termination date’. After this date, a contract will no longer be enforceable.


Sunset Laws


These are the laws, regulations or statutes that have a sunset clause and are liable to automatically get repealed on a certain date or within a certain time. Ideally such laws are enacted by the government when a quick action (like in an urgent situation) is required and the appropriateness for such law for a longer time is still under study. In urgent situations a law with a sunset clause is more likely to get votes as such clause makes it the much-needed temporary solution. Most of the time-bound legislations and notifications released during the COVID-19 pandemic are examples of sunset laws.


The rationale behind


The idea behind allowing inclusion of a ‘sunset clause’ in any law is ideally to enable the lawmakers to make a law for a limited period of time when government action is required for a limited time or when the long-term consequences of such law is difficult to foresee. If every law was to be compulsorily timeless, the impossibility to foresee every future happening while drafting such law or regulations would make it a fruitless exercise. We all know, and agree, that “the only constant in life is change”, and we must also ensure that every regulation is made with this in the back of the mind.


Sunset Clause in contracts


Worldwide, and even in India, sunset clauses are rather common in contracts and agreements. Such clause imposes a contractual obligation affecting one party or more parties that will expire automatically after a certain period of time or a specified ‘sunset date’. The contract termination can also be linked to the occurrence or non-occurrence of an event. Thus, the objective of a sunset clause in a contract is to define the duration of the legal obligation of the contracting parties prior to entering into a contract. However, the contracting parties can mutually agree to modify the contract to either extend the sunset date or eliminate it altogether from the contract.


Examples of sunset clause


An easy example would be a software license agreement that comes with the sunset clause that a particular software version will no longer be supported after a specific date. This indicates that the software company will not have any obligation with respect that particular software after that ‘sunset’ date. Another example is an insurance contract wherein the parties can include a sunset date on reaching which certain coverages to the insured person will automatically expire. Yet another example may be taken from the real estate industry wherein a clause in a contract may require the property developer to finish the project by a certain date and the failure to comply with the same would render the contract void.


Types of Sunset Clause


Sunset clauses may be of the following types:


(i) Entire vs. sectional : The clause may apply to the entire regulation/contract or only to certain rights and obligations under it.

(ii) Direct vs. indirect : The clause may be explicitly mentioned and named so or may be implied by the provisions.

(iii) Conditional vs. unconditional : Sunset may be made applicable based on certain conditions or may also be unconditional.

(iv) Time-linked vs. Event-linked : Termination of a contract or cessation of a regulation may be linked to a specific time or the occurrence or non-occurrence of an event.

(v) Expiration vs. Reauthorisation : The termination may be absolute or subject to a review and reauthorisation after a certain time period.


Advantages


1. Social circumstances and legal requirements change over time necessitating the revision of laws

2. With the sunset clause in a contract, one party can compel the other party to act

3. The obligations of one or both party(ies) automatically expires on a specific date. The parties do not have to take any steps to terminate the contract, to invoke rights under the contract or to not be legally bound by the provisions etc.

4. In many cases the sunset clause becomes a starting point of periodic review and renewal


Disadvantages


1. In many situations, a party to a contract may use a sunset clause to abuse another party.

2. In most cases parties to a contract often forget the existence of a sunset clause in a contract, and that certain rights expire or that certain obligations are to be performed by a specific date. This will result in them losing certain contractual rights.

3. Sometimes the sunsets come with arbitrary time frame in which the whole idea loses the charm.


While drafting such contracts or agreements the parties must be very careful about the clauses and must properly understand the rights, duties and obligations a sunset clause brings and negotiate it before making it a part of the agreement.


Sunset Clause in India


In India sunset clauses are common in tax and fiscal laws. Examples are tax exemptions, tax holidays etc. A recent amendment in the SEBI (ICDR) Regulations have also brought in sunset clauses in corporate law. We will know more about these in the following paragraphs.


Sunset clause share conversion


Companies may use a sunset clause to convert certain classes of shares to another class and make the same time-linked or event-linked. The Securities & Exchange Board of India (SEBI) amended the ICDR Regulations in 2019 to introduce superior voting rights (SR) framework specifically for technology intensive issuer companies. I will not go into the rationale behind doing so and would rather prefer to keep it for a future detailed article. The long-debated shares with differential voting rights (DVR) so introduced by SEBI are internationally known as dual class shares (DCS). They come with two types of shares, one with superior voting rights and the other with inferior voting rights. The SR shares have disproportionate voting to their economic ownership and the SR Shareholders get more than one vote per share on a poll. The amendment introduced a framework with many checks and balances including a sunset clause i.e. the duration during which such an SR shareholder shall enjoy superior voting rights. The sunset clauses were inserted to set the date for the conversion of a DVR into shares with equal voting rights. This new framework has two types of sunset clauses: time-linked and event-linked. Under the time-linked sunset, the SR Shares will automatically convert to ordinary shares after 5 years from listing, subject to a one-time extension of further 5 years through a resolution in which the SR shareholders cannot vote. Under the event-linked sunset certain events have been identified on the occurrence of which, the DVR framework would lose its value and therefore, conversion to ordinary shares would be triggered. These events are: (a) Demise of the promoters holding SR shares; (b) Resignation of the SR shareholder from the executive position and (c) Merger or acquisition of the company having SR shareholder where the control would be no longer with SR shareholder.


Doctrine of promissory estoppel & validity of sunset clause


The doctrine of promissory estoppel is an equitable doctrine that seeks to prevent injustice. It prevents a promisor to retract from his promise where while acting on such promise of the promisor, the promisee has already altered their position. There are many judgments that have held that this doctrine is applicable even against the Government.


The issue of withdrawing exemptions, with or without time limit attached to them, has been the subject of judicial decisions several times before the Indian courts. More than 90% such exemptions in India are timeless when issued. The government has the power to terminate the notification at any time, which usually, is done at the time of the annual Finance Budget. Such withdrawal of exemptions are generally not challenged and this is the accepted way in our country. There have been several judgments in the past which state that the government cannot withdraw exemptions as it will hurt the principle of promissory estoppel [Hindustan Spinning and Weaving Mills v Union of India, 1984 (17) ELT 281 (Bom)]. However, in a more recent case, Mind Tree Ltd vs Union of India, 2013 (295) ELT 641 (Kar), the legislative competence of the government to impose a sunset clause in a notification was challenged on the ground that it was against the doctrine of promissory estoppel. The Karnataka High Court rejected the contention and observed that the government is competent to change a notification by imposing a sunset clause and that it does not hurt the doctrine of promissory estoppel. It further observed that it is a settled position of law that every tax exemption and incentive shall have a sunset clause and that every fiscal legislation providing for tax exemption must have a life span fixed in the enactment. The Karnataka High Court even went on to observe that not having a sunset clause is a flaw and the same has been corrected by imposing a sunset clause. This goes on to conclude that the government has legislative competence to issue both time-bound and timeless notifications and withdraw exemptions granted earlier and the same would not amount to violation of the doctrine of promissory estoppel.

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