Commercial Contract Drafting in India
How to Draft Commercial Contract?
What does it mean to enter into a contract?
When you sign the
contract, you write down the terms of the contract. A contract is a legally
binding agreement between the parties. The document describes the rights and
obligations governed by the contract. Although you can enter into a contract
through written or oral agreements, contract drafting usually refers to written
contracts. The parties may go through various proposals and negotiate several
times before concluding a contract. The purpose of creating a contract is to
create a legally binding document that is as close as possible to all
interested parties, so that the document is concise and clear.
Terms and Conditions
While the details of
each individual contract vary, when drafting a contract it must include some
important information in order to be valid and legally binding. First, any
contract must have competent parties as part of the agreement with a mentally
retarded person or a minor who cannot legally sign a valid contract. The document
itself must then have:
·
Lawful Object
·
Consideration
·
Offer
· Acceptance
A contract must include a valid offer and
acceptance between the parties to be legally binding. E.g. a machine sale
includes one party selling the machine and the other party agreeing to buy it,
and hence mutual assent.
Consideration
A
contract must include adequate consideration to be enforceable. E.g. In employment
contracts, one party agrees to complete job duties while the other agrees to
pay a specified amount.
Consideration
is a bargained-for promise. The promise cannot be illegal, nor can it be
something a party is legally obligated to do already. Instances of
consideration include:
- Action
- Money
- Property,
including intellectual property
Legality
You
also must consider legality when you draft a contract. Legality is whether a
contract meets all jurisdictional requirements. For instance, a provision of a
contract may be legal in one state and not another.
What is a Draft Contract / Contract Draft?
A
draft contract is just draft of an agreement that has not final yet. The
parties have not yet agreed on the exact terms and wording used in the draft.
How to Draft a Contract?
Creating an effective
contract requires a multi-step process. The most important steps include:
1.
Determine if all
parties can participate: All parties to the agreement must be considered capable of
making the contract valid. You cannot force or coerce anyone to sign a
contract. In most situations, the parties must be over 18 years of age to enter
into a contract. The parties to the contract must always be mentally healthy
when signing the contract, even under the influence of alcohol or drugs.
2.
Establish the terms of
the contract: The terms of the contract should ensure that both parties
achieve the desired outcome of the agreement. You should make an agreement in
good faith, not attempt a scam. It is best to put the terms of the contract in
writing, not verbally. Having a written record of the contract can make it
easier to enforce that contract.
3.
Specify consideration: For a contract to be
effective, you must clearly state the elements of consideration. Remember that
consideration is the exchange of an item such as intellectual property,
services, goods, or a promise to exchange compensation. A contract cannot exist
without consideration.
4.
Decide if you want to
use a confidentiality clause: Confidentiality agreements are useful if
your contract contains trade secrets or other confidential information. By
including a confidentiality clause, you can ensure that sensitive information
remains secure. Anyone who violates a nondisclosure agreement is considered a
breach of contract.
5.
Include a Dispute
Resolution Clause: A dispute resolution clause describes how the parties will
deal with a breach of contract. This may include the party responsible for
paying attorneys' fees and whether the parties resort to arbitration or
litigation. If the parties choose to litigate, this clause must also include
the jurisdiction in which the breach is to be resolved.
6.
Include a termination
clause:
When signing the contract, state the length of the contract. Your contract
should also include any steps either party can take that lead to early
termination. Contracts for ongoing services may also contain a provision that
allows prior notice without reason. Thirty days notice as usual.
7.
Ensure that the
contract complies with all applicable laws: You must ensure that your contract is
drafted in accordance with all applicable laws. If you don't, your contract
will end up being unenforceable. You can include the jurisdiction your contract
should be interpreted in to make this clear.
Ensure the contract follows industry and other
specific requirements: Many contracts also require additional clauses
pertaining to the specific business or personal situations the contract covers.
8.
Offer the contract for
acceptance:
After you write the contract, you need to offer it to the other party for
consideration. The other party can accept the contract as is and proceed to the
final step of signing. If they don't accept the contract, they can make a
counter offer instead.
9.
Negotiate the terms of
the contract: If the other party makes a counteroffer to your original
proposal, you can accept that counteroffer or provide your own counteroffer in
return. These exchanges of offers can go on and on until both parties agree on everything.
Be sure to review the contract after each counteroffer to make sure you
understand any changes made.
10.
Signing the contract: Once both parties
have agreed on the final offer, the parties must sign and date the document.
The contract can only be legally binding at this point. Both parties must
obtain a copy of the contract to keep for their records.
Remember that when
drafting the contract, you must reserve the last page of the contract for
signature and date.
The contract is not
considered effective unless signed and dated by both parties. In addition, both
parties must understand all the details before signing the contract.
If either party does
not understand a part of the contract, they should consult an attorney before
signing.
Contracts usually
contain specific legal terms, so it is also important to include all relevant
clauses and required verbatim.
Other common terms
& conditions include:
- Force
majeure
- Indemnification
- Warranties
- Liquidated
damages clauses
- Time
is of the essence clauses
- Choice
of law and forum selection
Why Should You Draft a Contract?
Even if you enter into a simple agreement, it
is usually in your best interest to have a written contract. Although an oral
technical agreement is as enforceable as a written contract, it is more
difficult (and therefore more expensive) to prove that an oral contract exists.
Thus, a written agreement is less risky than an oral agreement because it
creates a document that clearly specifies the obligations and rights of both
parties in the event of a mistake or a crime.
Requirements for written contracts may vary depending on the state in which you live or do business, and different types of contracts also require different formalities.
Working with a qualified attorney
before drafting a contract will help ensure that your contract contains all the
necessary clauses, terms, and details required by your jurisdiction, industry,
etc.
Why should I register a contract?
Currently, in many countries around the world, laws do not explicitly state that all contracts must be registered in order to be legally enforceable and identifiable; however, if one party is the victim of default by the other party/parties, it may be more tedious for the victim to prove the legality, binding and validity of the contract.
In addition, there
are also applications of different laws on the same subject, which can cause
confusion if contracts need to be registered differently.
For example, in India, the Indian Contract Act
1872 states that all agreements, oral or written, are valid if and when:
created with the free consent of the parties
to such contract;
the consideration in question has a legal
nature
concerns a legal matter.
The Indian Contract Act, 1872 mentions the registration or stamping of any contract. However, the provisions of the Registration Act 1908 list the documents that must be registered in order to be legally identifiable and enforceable by a court. These include: deeds relating to immovable property (deed of sale, lease, deed of gift). certificate etc.), movable property instruments worth Rs. 100 or more and so on.
Moreover, the Indian Stamp Act, 1899 clearly states that documents like power of attorney (other than power of attorney to sell immovable property), development agreement etc. must be executed on a paper stamp but not registered for it. be legally enforceable.
Such a provision creates a kind of ambiguity as to what types of contracts require mandatory registration or are not required to be legally enforceable in the eyes of the law. It is therefore recommended that the parties register their contracts if they are to avoid ambiguous and unnecessary difficulties and/or losses and/or costs of litigation that may arise in the long run.
The person reviewing the contract must also
understand the importance of contract registration. If the review of the
contract is done by pre-registration, then one needs to understand the
importance of each clause and how changing/altering undesirable terms can save the
parties a lot of inconvenience and expense.
If the
review occurs after registration, it will help the reviewer understand the
weight of the clauses attached to the contract and how the clauses will affect
both parties, especially under situation of dispute.
What is the Basic Process of Contract Drafting?
Firstly, the person drafting/reviewing the
contract must attain the knowledge of the purpose of making the contract.
One must understand what the subject and
object of the contract is and what is the role played by the parties in
achieving the desired subject/object.
The contract must include the right and duties
that the parties to the contract have in relation to one another. Each of the
parties is there to fulfill a particular purpose and such purpose and role must
be easily and clearly understood while drafting as well as reviewing the
contract.
Secondly, the feasibility of the contract must
be kept in mind - whether the terms and conditions given in the contract are
capable of being carried out; whether the parties to the contract are capable
of executing their rights and duties; which party/parties gain most and which
one takes upon most of the liability during the tenure of the contract; et
cetera. Such questions need to be answered in order to determine the
feasibility of a contract.
Thirdly, one must be able to predict the issues and/or problems and/or disputes that may arise out of the contract in future scenarios. The person drafting as well as the person reviewing the contract must be able to understand what terms and clauses may give rise to a risk which may cause disputes and/or losses between the parties in the future.
t must also be understood which clauses hold the loopholes in the contract and
the possible permutation of ways in which such loopholes may later be exploited
by the parties to the contract (Boilerplate clauses are often used to cleverly
create and cover such loopholes).
What are the Terms and Clauses in Contract?
There are certain
basic terms and clauses that are very general and basic in nature. Such clauses
form a part of every type of contract document.
The following are a few of such clauses:
1. Subject and its Legality: The 1st and foremost point to begin the
drafting of an agreement is to determine the subject of the contract is. The
subject of the contract will determine its nature. The subject will also
determine if the contract will be legally enforceable or not.
While reviewing an
agreement, this is the first point that one must look at. Many cases are lost
and won simply by stating that the subject to a contract is not considered to
be legal in the eyes of the prevalent laws.
2. Definition Clause: Each and every contract must copntain
definition clause. Such clause contains all the definitions to various words
that are used throughout the contract, aka
glossary. Certain words holding a general meaning may be usable throughout the
contract, but the contract may contain a definition of such word which might
describe the meaning of such word specifically in relation to the specific contract.
In such case, no different meaning of the word will be accepted as the word has
been specifically stated and agreed upon by the parties to the contract and, as
such, and binding on them.
3. Tenure of the Contract: Contracts are generally made for a specific
time period, no matter how long the time frame it is. The term consists of a
specifically stated time period during which the relationship between the
parties will be governed by the terms of such contract. Once the time period
expires, the contract also automatically expires.
In many cases, the duration of contract also
depends on the achieving of a certain goal for which the contract is being
entered into.
For e.g.:
A and B enter into a contract that will last for such time as it takes for them
to reach place X, once they will reach the place X the contract between them
will expire.
4. Clause for Renewal of the Contract: Such clauses are
inserted to relinquish the need to make different contracts from time to time.
If the nature of the work and the terms stipulated in the contract is not
required to be changed for a long period of time. A renewal clause can be
inserted to ensure continual binding effect of the contract without incurring
the expenses of drafting and registering different contracts over and over
again. This also eliminates the time lag that may be caused due to waiting
period until the fresh contract document is created. Such clauses are often
included in the clause describing the term of the contract.
5. Consideration Amount and Legality: Another important
clause in a contract is the clause stating the amount or the type of
consideration. It states the consideration amount that one or more parties must
pay to the other party / parties for services rendered done or goods produced
by the latter ones.
6. Such consideration must always be legal in nature: The consideration
must be paid through an instrument or object that is legally recognized by the
law in force. A consideration paid through an illegal object will render the
entire contract to be void and have no legal enforceability.
7. Inspection of products and goods: This clause helps
the parties to safeguard themselves from cases of fraud or misrepresentation
which may arise due to insufficient quality of products and goods so delivered.
This allows the purchaser to inspect every good so as to be sure that the good
so received are of such quality as had been agreed between them.
On the other hand, it
also provides a safety net to the selling party because once the quality of the
good is inspected and accepted, the purchaser cannot hold the seller liable for
any quality-related issues in the future.
8. Return/refund: This clause describes all the circumstances
and scenarios in which the parties are entitled to return of the product and/or
receive refund of the consideration paid for such product. This is generally
used in contracts of sale of movable properties.
9. Terms related to cancellation of the contract: These are clauses
which record the circumstances under which the contract shall stand cancelled.
It generally includes certain acts that the parties are barred from and in
violation of such a term, the cancellation clause will be invoked and the
contract will be cancelled. It also includes the rights and liabilities that
the parties of the contract will be entitled to when the contract stands
cancelled.
10.
Rights and duties of
the parties: Every contract must mandatorily include the clauses that
enumerate the rights and duties of the parties in respect to one another. These
clauses form the crux of every contract and violation of these clauses
generally forms the core to the disputes that arise between the parties to the
contract.
Each and every right
and obligation of the parties must be specifically stated with as much detail
as possible to avoid any ambiguity or vagueness whatsoever.
11.
Force majeure: Under the Contract laws, force majeure
refers to all such unforeseeable and unpredictable scenarios and circumstances
which may stop one from executing his/her duty, thereby leaving the contract
unfulfilled. Force majeure clauses talk about various contingencies, including
but not limited to the acts of God, and what shall be the role of such parties
when such a situation may arise during the tenure of the contract.
This clause is often
overlooked during the process of drafting and reviewing, nevertheless, it is as
important a clause as any other as it details the sharing of expenses and costs
that are incurred during the time of contingencies.
12.
Delegation and liability: This clause is
mostly found in contracts and agreements related to manufacture and sale of
movable products. The clause states what kind of work can be delegated by the
parties to other third and/or unknown parties to the contract and who may be
held liable for any dispute that may arise due to insufficiency or inefficiency
of products and/or services provided by such third party.
13.
Payments of expenses: This clause states
how the expenses incurred by virtue of the contract and throughout the tenure
of the contract, shall be paid for. It states in what proportion the parties to
the contract may share the expenses so incurred and what may be the mode of
such payments.
14.
Compensation: The compensation
clause states the amount with which one must compensate another for the
actions/omissions/defaults done by the former which has resulted in some sort
of loss (financial, physical or mental) to the latter.
15.
Profit sharing: Once the expenses
are paid for, it is time for sharing of the profit that has been gained by
virtue of the contract. The profit sharing clause states the proportion in
which the profit will be shared by the parties and how a part of such profit
may be used for other purposes as agreed between the parties.
16.
Dispute settlement and
jurisdiction: This is also an important clause that one must never forget to
draft and review. This clause decides as to what mode of dispute resolution or
what legal recourse will be taken by the parties to the contract when a dispute
arises in between the parties. In the current world almost every contract
contains this clause and most of them opt for alternative dispute resolution
system like arbitration, mediation, etc. to solve disputes.
Another clause which
is generally included in the dispute settlement clause is the clause describing
the jurisdiction in which any dispute will be resolved.
For example, many multi-national companies include a jurisdiction clause stating that any case which involves litigation may only be filed against the company in a specific city, town or area.
This clause is not seen so often in contracts
that had been drafted up until a few decades ago. However, in the current
system we will find compensation clauses in most of the contracts that come to
us. Consumers of services and products often invoke the compensation clause on
various grounds and are often awarded large sums as compensation amounts by the
Courts and/or tribunal, whatever the case may be.
Conclusion
These are small areas that are important to creating a good contract. The inclusion of the above terms will give the reader a detailed idea of what is to be achieved in the contract and what the relationship between the parties is.
In addition, any dispute between the parties can be effectively resolved if the provisions set forth herein are included in the contract. The result of all these efforts is a contract that saves a lot of time, effort and expense that would otherwise be possible.
In addition, reviewing drafted contracts is
just as important as writing them. If the contract is not reviewed, the
signatory party or parties may be exposed to the risk of proving terms and
conditions that may be disadvantageous to them and may cause financial or
emotional harm in the future.
