Tripartite Agreement: The Ultimate Guide

Two legamart lawyer discussing about the tripartite Agreement

Introduction

Consider the following frequent agreements or understandings: One person agrees with another to do something in exchange for something of considerable value (referred to as “consideration” in contract law). An employee covenant or agreement is one of the most well-known covenants. In any case, you may need to coordinate an agreement between three unique persons, or “parties,” occasionally. A three-sided, or “tripartite,” configuration may be helpful here.

Generally, all agreements have two gatherings, but there are a few occasions when a three-sided agreement is required. The primary authoritative legal report includes the purchaser, bank, and dealer in a three-sided arrangement. It is a crucial legal instrument when a buyer seeks home credit to acquire a house in a construction project. Three-sided collections have been put in place to assist purchasers in obtaining advances for properties against a planned property purchase. This article will provide basic information on a three-sided arrangement, often a tripartite agreement.

What is a tripartite agreement?

Mr. Justice Clarke, Chief Judge of the Supreme Court of Ireland, for example, has this to say regarding tripartite employment agreements:

Yet, the law has acknowledged the existence and permissibility of these agreements with three persons or “parties.” They are referred to as tripartite agreements, literally “three-party” agreements.

A tri-party agreement is a business transaction between three different parties. A tri-party or tripartite agreement is frequently used in the mortgage business during the development phase of a new house or condominium complex to arrange so-called “bridging loans” for the construction itself. In such instances, the loan contract includes the buyer, the lender, and the builder.

Parties involved in tripartite agreements

Banks are accepting applications for house loans. The parties involved in this case would be the lender, the owner/borrower, and the developer. The developer and the buyer sign a formal agreement to sell a house/flat, and the bank is also involved because of the home loan granted by it. Agreements and contracts are often signed for the acquisition of unfinished project units.

When a property is resold, a tripartite agreement is also made between the developer, the buyer (to whom the resale is done), and the housing society, where the housing corporation becomes a third party because it has no objection to the selling of the property in the name of the new purchaser.

When a Project is built by the Contractor in which a single entity is responsible for its construction, design, and delivery then, in that case, a design-built contract is made between the contractor and the party interested in that Project; however the same can be a tripartite agreement wherein the entity interested have financed the same through some loan agreement or finance document by any bank or other entity.

Benefits of including a third party in the agreement

By including a third party which is indirectly related to your transaction within the tripartite agreement, you can make use of the following benefits:

  • The third party cannot later claim to be unaware of the transaction. 
  • The legal heirs of the third party cannot challenge the transaction at a later point. 
  • It helps convince the bank about the genuineness of the transaction and hence, assists the buyer in securing a home loan for the planned purchase of the property. 
  • While the buyer might not be willing to pay the builder until the entire construction work is completed per the quality standards, the builder will still have to pay the subcontractors, architects, electricians, etc. For circumstances like this, the builder is expected to have a safety net to claim the costs and money he owes to the subcontractors. The tripartite agreement acts as a safety net in such a case, wherein the builder can still claim a construction lien on the property in the event of a non-payment. 

Specific area where tripartite agreement works

According to experts, it assists a buyer applying for a home loan in purchasing a property still under construction. Tripartite agreements were reached to assist purchasers in obtaining property loans against their intended acquisitions. Because the home/apartment still needs to be in the customer’s name, the builder will be involved in the agreement with the bank.

Tripartite contracts can be drafted between lenders, owners, and renters in the leasing market. In these situations, the owner/borrower is often forced to become the new property owner in breach of a loan agreement’s non-payment clause. Also, renters must recognize the mortgager/lender as their new owner.

The experts also agreed on tripartite agreements to assist purchasers in receiving money from banks from the developer’s intended house buyers. The arrangement is founded on three separate contracts.

Miscellaneous

These agreements define all parties’ rights and responsibilities, making them accountable for non-performance. The third-party must acknowledge the transactions after entering into this agreement.

When a third party is a person, their descendants cannot dispute the completed transaction in court.

These agreements provide banks or other financial organizations with a sense of uniqueness, which aids in the creation of loans.

An essential advantage is that they are a no-fault agreement, which means that the parties must examine their faults, and the other parties are not held guilty.

These documents present the current status of all parties involved. Due to the verification, entering into such agreements has been considered helpful for purchasers.

These arrangements may contain intricate terms and conditions that are difficult to understand. It is recommended that the purchasers obtain legal experts’ assistance and review the paper. This will not lead to problems or project delays, particularly in the case of an argument.

How does a tripartite agreement work?

A tripartite agreement is one of the most effective strategies to protect the interests of all three parties in a commercial transaction. A tri-party agreement outlines the rights and responsibilities of each party involved. It defines each party’s obligations throughout the various stages of the business/transaction. A tri-party agreement’s most significant portion is determining the legal repercussions of non-compliant behaviour. If one party breaches the agreement, the contract protects the interests and investments of the other two parties.

Tripartite agreements have been formed to assist purchasers in securing bank financing against a developer’s plan to purchase a property. The agreement outlines the position of all parties engaged in real estate transactions and keeps track of all papers. It outlines the borrower’s, lender’s, and builder’s rights and remedies. It specifies the building stages or phases, the ultimate sale price, agreed-upon common area amenities, the date of possession, the equal monthly instalment (EMI) parameters, the interest rate, the penalty terms if the booking is cancelled, and the loan payment schedule.

It also describes the legal procedure known as subordination, which determines who, how, and when certain property agreements between the parties are transferred. This should reassure the developer or seller that the property is liens-free. Furthermore, the developer has not entered into new contracts for selling property with any other party. The tripartite agreement should specify the developer’s obligations to build the building in accordance with the designs and specifications authorized by the local authorities.

When should a tripartite agreement be used?

Simply put, a tripartite agreement is required when three parties are grouped where each has interests and duties. Below are a few scenarios in which a tri-party deal could be necessary.

  • Intra-group transfers: An intra-group transfer occurs when an employee of a multinational corporation shifts to a subsidiary of the parent firm in another country. In this situation, the overseas subsidiary is a new employer, and the documentation for this transfer may be difficult and time-consuming. In this instance, the employee, the parent business, and the subsidiary can engage in a tri-party agreement to ensure a seamless transfer procedure while adhering to all labour rules.
  • Employee onboarding using an EOR service: An agreement between a company, an employee, and an EOR service is another example of a tripartite agreement. When it comes to worldwide hiring, one of the greatest options is to use an EOR service since it eliminates the need to deal with compliance difficulties and local labour regulations. In this situation, the organization will collaborate with an EOR service to hire individuals from several nations. A solid tri-party agreement between itself, the EOR service, and the employees will be established.

It would be best to grasp the agreement’s provisions after deciding that a tripartite agreement is the way to go.

What should a tripartite agreement include?

The specific details of a tripartite agreement significantly depend on the business/transaction in question. In terms of employment, the contract must include specifics such as duration of service (if any), termination provisions and grounds, an indemnity clause, and so on. Nevertheless, the general topics that must be included in a tri-party agreement are listed below.

  • Name of the parties involved 
  • Objectives of the agreement
  • Perspectives of all three parties 
  • Obligations and responsibilities of every party  
  • Consequences of non-compliance 

Additionally, the tripartite agreement should include the following essential clauses:

  1. The agreement should include references to the three parties’ points of view: the borrower, loan specialist, and developer.
  2. The developer is responsible for constructing the structure following the agreement’s endorsement, decisions, and guidelines.
  3. It should be stated that the designer has not sold or entered into any agreement with the other party.
  4. The agreement specifies that the engineer claims to have a clear title to the land.
  5. A three-sided agreement should include the purchase price, date of ownership, phases of development, advance reimbursement plan, home credit financing cost, regular territorial conveniences, penalty nuances, and development progress.

Why are tripartite agreement necessary?

  1. To avoid future conflicts – Having a third gathering to act as an affirming party avoids potential future disputes.
  2. Removes challenges – The outsider who was implicitly associated with the understanding and is now participating in the arrangement would not be able to claim that he is unaware of any such transaction.
  3. Exchange clarity and validity – This agreement might include provisions for the levy and exchanges between the dealer and the outsider. Even financial foundations are more inclined to propel advancements in the event of genuine arrangements.

List of situations in which a tripartite agreement might be useful

Make it a point to include in your tripartite agreement if facing the situations listed below.

  1. There is a real need to develop a three-sided agreement containing the purchaser, society head persons, and the dealer when selling a residence under an enrolled society.
  2. If a house was purchased directly from an authorized developer and no resale data was available to the general public, the merchant, purchaser, and manufacturer should sign a three-sided agreement.
  3. If all of the property you intend to acquire is under contracts like a home advance or individual credit, creating a three-sided type of covenant becomes critical.
  4.  Although forming a three-sided agreement is not required by law, you should do so nonetheless for your good and to avoid future disputes.

Benefits of a strong tripartite agreement

Some of the benefits of a tri-party agreement are as follows:

  • Transparency: A contract specifies the roles and duties of all three parties participating in the arrangement. It decodes each party’s interests and responsibilities in an organized manner.
  • Eliminates fraudulent practices: When the three parties reach an agreement, each becomes liable for the other two. As a result, any fraudulent or non-compliant activity will have legal ramifications. These repercussions will only apply to the fraudulent party, as the agreement protects the other two parties.
  • Increases ease of doing business: When the parties sign a solid, comprehensive contract, it establishes a safety net for all three parties and guarantees that all transactions are thoroughly monitored.

Why is the absence of a tripartite agreement risky?

A tri-party agreement may not be required in many situations, but it is always good to have one in place to avoid a few risks. Some of the risk points that can come up by not having a tripartite agreement are

  • Confusion over the role of each party: Without an agreement, the parts of each party in the business transactions. This may lead to further misalignment in the output initially expected from the three-party collaboration.
  • Little to no security: Without a contract in place, if one of the members of a three-party association engages in some fraudulent activity, the other two parties will also have to bear the consequences.

What should be included in a workforce tripartite agreement?

In a workforce tripartite agreement, usually, the parties agree that the original employment relationship would continue with any new employer as well. At the same time, the original employment contract shall be terminated with no severance or other benefits. Some important matters that are expected to be included in a tripartite agreement are:

  • The length of service. This is particularly relevant to obtain employee benefits. 
  • Continuation of key terms in the original contract. In cases where the new employer is also a party to the agreement. 
  • Terms of the original contract. This specifies how the consent to transfer rights or obligations under the contract shall be obtained. 
  • A formal release from liability for both parties. Necessary for the contract with the old employer to be terminated and the rights and responsibilities to continue with the new employer. 
  • Indemnification. This ensures that each party pays damages to the other in case of any alleged breach of the original contract. 

When the tripartite agreement operates across international borders, the agreement must also have a jurisdiction clause specifying the laws which govern the contract. In the case of Chunilal v. Merrill Lynch [2010] EWCH 1467 (Comm), it was stated that since the tripartite agreement did not specify the country whose laws shall apply to the contract, the employee’s claim (under English law) that an implied term of his contract had been breached through a ‘perverse’ reduction of his bonus payment, did not hold any merit

Top Tripartite Agreement Tips

While entering a tripartite agreement, you must ensure that all the parties involved have the required protection. The following are some essential steps that can help you achieve this:

  1. Understand the purpose of the agreement. This must be done before signing the tripartite agreement. Each party involved in the agreement has their specific roles and responsibilities. Therefore, become familiar with your role and the purpose for which the agreement is being entered. 
  2. Check for legality. Ensure that the agreement entered into is legally binding and is being drafted in compliance with Indian laws. You can also take advantage of LegaMart’s services to verify the legality of your tripartite agreement. 
  3. Review the confidentiality agreement. Check and review the confidentiality clause that exists within the tripartite agreement. This clause shall ensure that all parties involved have an obligation to keep the terms and conditions of the agreement confidential. In certain cases, the confidentiality clause exists beyond the term of the agreement, and hence, the same must be negotiated before the signing of the agreement itself. 
  4. Review the terms and conditions. Ensure that you have the terms and conditions of the tripartite agreement at your fingertips, and ensure that all parties involved have consented to the terms and conditions to not have any future problems with the agreement. 
  5. Look for dispute resolution mechanisms. Ensure that the tripartite agreement has a dispute settlement/resolution mechanism. This shall help protect you from any possible legal disputes. 

Ensure that this is adequately followed irrespective of whether the tripartite agreement is being entered into for the sale of a mortgaged property, a tripartite lease, or a tripartite agreement for a home loan. Adequately following these tips can help you suitably protect yourself. 

Is there an alternative to tripartite agreements?

In a situation where the third party involved does not wish to become the third party to the agreement and hence, does not wish to enter into a tripartite agreement, it becomes necessary to obtain a non-objection certificate (NOC) from them, which shall help prove the party’s stand in the ongoing transaction. 

After the signing of the NOC, you can deduct the name of the third party from the agreement, simply submit the NOC to the legal office, and then simply enter into a two-party agreement for transferring the title of the piece of land from the name of the seller to the name of the buyer.

Ensure that the NOC includes the relevant details, such as the name of the third party, their position in the transaction, and the reason behind signing the NOC.

Conclusion

A three-sided agreement is an authorized form that binds three parties to the contract and establishes all parties’ obligations, rights, and duties. This type of agreement settles potential problems or confrontations by clearly outlining the terms at stake regardless of aim, representations, views, etc.

Making an outsider engaged with the contract serves various purposes in situations when common understanding is necessary, for example, house loans, charges, or any arrangement incorporating encumbrances, administration execution, and so on. This agreement establishes the title and topic of the contract between each of the three parties, and all parties’ perspectives on the endorsement, decisions and selected attributes are conveyed.

Suppose you, as an individual or your business, have been facing issues with the tripartite agreement. In that case, LegaMart team of experienced lawyers is here to help you with all your queries and to ensure legal compliance. You can learn about LegaMart services on our homepage.

Frequently Asked Questions (FAQs)

When do you require a tripartite agreement in property deals?

Tripartite agreements are necessary for under-construction projects to ensure that the rights of the builder and the sub-contractor are included within the terms and conditions of the agreements. 

Is a tripartite agreement mandatory?

No, a tripartite agreement is not mandatory. The main aim of the tripartite agreement is for the third party only; hence, it is not mandatory if the third party doesn’t wish to enter into a tripartite agreement. 

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