Name of Author- Lalidhambha.S, Government Law College, Dharmapuri
Edited by – Sulesh Choudhary
INTRODUCTION
According to the Indian Contract Act 1872, section 2(h) the agreement which is enforceable by law is a contract. All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. A contract is a consensual act and the parties are free to settle any terms as they please. This freedom lies in choosing the party with whom to contract, in the freedom to fix the terms of the contract, in excluding or limiting the liability for damages or limiting the remedies available for the breach etc. However, this freedom is subject to many exceptions. The theory of formation of contract is generally the analysis of the formation into offer and acceptance is however a “working method” which enables us, in doubtful cases, to ascertain whether a contract has been concluded and as such is a useful tool in the common law.[1]
Keywords
- Privity of contract
- Doctrine of Consideration
- Theory of formation of contract
- Proposal and Promise
- Legal drafting
PRIVITY OF CONTRACT
The general rule in common law is that no one but the parties to a contract can be entitled under it, or bound by it. This also seems to be the import of section 2(a), (b), (c), and (e) which contemplates only the two parties to an agreement.[2] This principle that only the parties to a contract are entitled to sue or be sued upon it is known as the “privity of contract”. It lies at the heart of the difference between rights under contract which are in personam and proprietary rights which are in rem.[3]
Organizing the Contract Structure:
The structure of our contract plays a prominent role in the propagation of a predetermined meaning and in to description of the key sections. Typically, a business contract includes the following:
Definitions and Interpretations:
First of all, it is very essential to define any key terms or phrases that are used throughout the contract. As it prevents confusion and ensures that everyone acts in the same manner.
Scope of their work:
Following that, we have to make sure that each party’s obligations, utility and timelines must be made in detail to avoid the misunderstandings in future.
Terms and Conditions:
Includes certain clauses such as terms of payments, rights of termination, mechanisms regarding dispute resolution, the burden of confidentiality, and other terms related to the business arrangement.
Miscellaneous Provisions:
Cover additional topics such as governing law, force majeure events, amendments, and waivers. These provisions provide further guidance and protect the parties’ interests in unforeseen circumstances.
Generally, Business Contracts are considered to be an adhesive from which business transactions are retained together by ensuring clarity and legal enforceability. It is an agreement bound to pursue the rights, obligations and expectations of all the parties.
CRITICAL ELEMENTS OF A BUSINESS CONTRACT:
Offer and Acceptance:
A person may ask for some information or supply some information and invite the other to make an offer or make a definite offer. To ascertain whether a particular statement amounts to an offer or an invitation to offer, the test would be the intention with which such statement is made.[4]
Consideration:
Usually, each party enters into a contract to obtain consideration promised by the other (the seller wanting to realize the price of his goods and the buyer desiring to get goods of value) but that may not always be the case. Here detriment to the promise suffices even if the promisor does not benefit.[5]
Mutual consent:
Where there is no consent or no real and certain object of consent there can be no contract at all. The consent must fulfil and accept the rights and obligations mentioned in the contract.[6]
Legally competent parties:
Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.
Legal purpose:
Contracts forbidden by regulations under the Defence of India Act are illegal. Agreements in contravention of the Jute Control Order and the Oil Seeds Order are void, as the contract must bear a legal purpose and should not be immoral or against public policy.
ACCEPTANCE BY PERFORMING CONDITIONS OR RECEIVING CONSIDERATION:
The acceptance of an offer by conduct would be effective only when such act is done with the “intention of accepting the offer”. The nature of acceptance required in such cases was considered by the English Court of Appeal in Carlill v. Carbolic Smoke Ball Co.[7] The only previous definition of acceptance in the act is that a proposal is said to be accepted when the person to whom it is made “signifies his assent thereto” [s.2(b)]. This has to be read with the provisions as to communication in sections 4 and 7. The present section appears, in its first branch, to recognise the fact that in the cases in which the offeror invites acceptance by the doing of an act.[8]
PROOFREADING AND EDITING FOR CLARITY & ACCURACY:
Once the contract has been drafted, it’s time to rephrase and copyedit it punctiliously. Errors or discrepancies can undermine the validity and enforceability of the contract. Consider the following steps:
Read it aloud:
By reading the contract aloud it may help us to avoid inept phrasing, fused sentences, and grammatical errors.
Check for clarity:
Assures that every provision is manifest, evident and amply illustrated with the betrothed meaning. If any sections are in upheaval or need further clarification may revise them accordingly.
Review for accuracy:
Usually by examining it again all information such as names, dates, and amounts, is accurate and consistent throughout the contract.
TYPES OF CONTRACTS IN BUSINESS LAW
In a broad sense, the type of contract in business law can be divided into three categories. They are:
- Contracts are made based on the mode of formation
- Contracts are made based on performance
- Contracts are made based on enforcement/validity
Based on the mode of formation
- Express contract
- Implied contract
- Quasi-contract
- E- contracts
Based on Performance
- Executed contracts
- Executory contract
- Partly Executed and partly executory contract
- Unilateral contract
- Bilateral contract
Based on Enforceability/ validity
- Valid contract
- Void contract
- Voidable contract
- Illegal contract
- Unenforceable contract
LEGAL DRAFTING OF BUSINESS CONTRACTS
Drafting a business contract requires caution thought of the particular agreements that should be incorporated to safeguard the interests of all gatherings included. Here is an overall rule for the lawful drafting of a business contract:
Title and Presentation:
Start with a unique title expressing the date of the agreement. Alao befitting with the legitimate names and other necessary details.
Definitions:
Mark the characters & terms utilized through the agreement to stay away from errors.
Statement of Agreement:
Expresses the reason for the agreement and the shared arrangement of the gatherings. For instance, “This understanding is placed into by and between [Party A] and [Party B].”
Terms and conditions:
Includes the particular agreements that frame the freedoms as well as certain limitations of each party. It may cover:
- Payment terms (such as estimating, invoicing and payment plan)
- Expectations or administrations to be given
- Deadlines and execution plans
- Termination clauses
- Query plan systems
- Privacy and non-revelation plans
- Protected innovation freedoms
- Reimbursement and responsibility arrangements
- Force majeure provisos (for unanticipated occasions)
- Overseeing regulation and purview
Descriptions and Guarantees:
Include any promises or guarantees made by either party concerning the administrations or products being given.
Obligations and Commitments:
Include any promises or guarantees made by either party concerning the administrations or products being given.
Payment terms:
Describe the payment structure, including the sum, due dates and any late instalment punishments or interest.
Terms and Extinction:
Determine the contract’s length and the circumstances under which it tends to be ended, for example, for a break of agreement or shared arrangement.
Confidentiality:
Address the treatment of classified data, and lay out the commitments of the two players to safeguard delicate information.
Question goal:
Portray how debates will be settled, whether through exchange, intervention, assertion or suit.
Administering Regulation:
Recognize the purview whose regulations will administer the contract.
Entire Understanding and Changes:
Express that the contract addresses the whole arrangement between the gatherings and that any corrections should be made recorded as a hard copy and endorsed by the two players.
Signatures:
Give space to the marks of approved agents from each party, alongside the date of execution.
Notarization:
Contingent upon the purview and the idea of the agreement, it could be prudent to have the contract authorized.
Lawful Survey:
It is energetically prescribed to have the contract checked on by legitimate guidance to guarantee that it follows applicable regulations and safeguards the interests, everything being equal.
IMPORTANT LEGAL PROVISIONS OF CONTRACTS REQUIRED TO BE IN WRITING
The following Acts require contracts to be in writing:
- The Apprentices Act 1961, as of section 4
- The Arbitration and Conciliation Act 1996, as of section 7; arbitration agreements Indian Contract Act 1872, section 25(1) agreement without consideration between near relations
- The Companies Act 1956
- The Income Tax Act 1961
- The Limitation Act 1963, section 18, acknowledgement to pay a debt
- The Transfer of Property Act, 1882
Interpretations / Explanations
As of the law related to the Registration, Section 17 of the Indian Registration Act XVI of 1908 specifics documents which are required to be registered and Section 49 of the same act provides that no document is required by S.17 to be registered by the provisions of that act. Such document shall also not be received as evidence of the transaction. However, under S.49 it can be admitted in evidence for certain other purposes. Registration of a document may also be required under other statutes.
DOCTRINES
Doctrine of Consideration
The doctrine of consideration limits the freedom of individuals to make binding promises only those promises which are supported by consideration are legally binding, others are not even if the promisor intends to bind himself to the promise. This requirement is unique to the common law as it is not a requirement in the civil law systems and its utility has been called into question by scholars. It is however so firmly entrenched in the common law (combe v. combe)[9] that despite sporadic attacks, it does not appear that its position as the most fundamental limitation on the enforcement of promises is likely to be disturbed.[10]
Doctrine of Accord and Satisfaction
Accord and satisfaction refer to the agreement (accord) between two contracting parties to accept alternate performance to discharge a pre-existing duty between them and the subsequent performance (satisfaction) of that agreement. The new performance is called accord. According to the doctrine of accord and satisfaction, the two parties who were in contract further agreed that they could make further changes (addition or deletion) to the existing contract. These changes are agreed upon by both parties. In this instance, the non-offending party has the right to sue under either the original contract or the accord agreement. (P.K. Ramaiah and Company v. Chairman and Managing Director, National Thermal Power Corporation (1944) where the creditor accepted the final measurements of the work completed and issued a receipt stating that the amount had been received in the full and final settlement, there was accord and satisfaction and the creditor was not entitled to claim the balance.[11]
Doctrine of Waiver
A waiver is a legally binding provision where either party in a contract agrees to voluntarily forfeit a claim without the other party being liable, Waivers are commonly seen during settlement talks, when one party may be willing to pay out a slightly higher award as long as the other person, often a claimant, agrees to sign a waiver relinquishing their right to further legal action.
PRINCIPLES
Principles of Business Efficacy
The principle of business efficacy is normally invoked to read a term in an agreement or contract to achieve the result or the consequence intended by the parties acting as prudent businessmen. Business efficacy means the power to produce intended results.[12] (Satya Jain v. Anis Ahmed Rushdie)
Principle of Indemnification clauses
The indemnification clause is one of the most important parts of your business contract. Sometimes, it can be extracted into its contract, the indemnity agreement. It shows what the indemnified party is for certain expenses and costs. As such, you should consider our tips for successful contract negotiation before writing your business agreement.
Principle of force majeure clause
Force majeure removes liability for unavoidable and unexpected events that are beyond either party’s control. These include
- Acts of God like hurricanes, tsunamis, typhoons, explosions
- War, explosions, strikes, lockdown, lockups
- Government actions limiting or prohibiting any party from performing its contractual obligations
Principle of confidentiality
Confidentiality also known as a non-disclosure clause, is vital to protecting your trade secrets, clients’ confidential information, sales strategies and anything else that you want to keep from the public. Sometimes this is expanded upon further in an NDA.
Principle of Termination
A termination clause defines how the parties can terminate their agreement and establishes how each party can terminate within a specified notice period. It’s included in every business contract template and generally doesn’t require too much customization.
CONCLUSION
To draft an effective and enforceable business contracts, you need to include several contract clauses without using these important clauses in your business contracts, you may find yourself facing exorbitant legal fees, legal battles that could last for years, and intellectual property theft. A very drafted contract can forestall false impressions, safeguard interests, and add to a straightforward and proficient business environment.
REFERENCES
Books / Commentaries / Journals Referred
- The Indian Contract Act – Sir Dinshaw Fardunji Mulla
- The Law of a Contract – Avatar Singh
- Law of Contracts – Krishna Nair
- Contracts – Pollock and Mulla
Online Articles / Sources Referred
- https://www.toprankers.com/how-to-draft-abusiness-contract
- https://ironcladapp.com/journal/contracts/important-contract-clauses
- https://blog.ipleaders.in/contracts-and-the-doctrines-
- https://www.ezylegal.in/blog/different-types-of-contracts-in-business-law
- https://legal251.com/resources/legal-drafting-in-business-contracts
- https://blog.ipleaders.in/drafting-of-a-contract-what-makes-it-necessity/
Cases Referred
- Kepong Prospecting Ltd. V. Schmidt, (1968) AC 810.
- Sudhanshu Mohan Koley v. Mohan Adak (1975) ILR 1Cal 182
- Spencer v. Harding, (1870) 5 CP 561
- Carlill v. Carbolic Smoke Ball Co., (1893) 1 QB 256
- combe v. combe [1951] 1 All ER 767
- Pillans v. Van Mierop [1765] 3 Burr, 1664per MANSFIELD C
- K. Ramaiah and Company v. Chairman and Managing Director, National Thermal Power Corporation (1944)
- Satya Jain v. Anis Ahmed Rushdie, (2013) 8 SCC
Statutes Referred
- The Apprentices Act 1961, as of section 4
- The Arbitration and Conciliation Act 1996, as of section 7; arbitration agreements
- The Indian Contract Act 1872, section 25(1) agreement without consideration between near relations
- The Companies Act 1956
- The Income Tax Act 1961
- The Limitation Act 1963, section 18, acknowledgement to pay a debt
- The Transfer of Property Act, 1882
ENDNOTES
[1] The Indian Contract Act – Sir Dinshaw Fardunji Mulla
[2] Kepong Prospecting Ltd. V. Schmidt, (1968) AC 810
[3] The Indian Contract Act – Sir Dinshaw Fardunji Mulla
[4] Spencer v. Harding, (1870) 5CP 561
[5] Sudhanshu Mohan Koley v. Mathura Mohan Adak. (1975) ILR 1 Cal 182
[6] Kessowji Tulsidas v. Harijivan Mulji, (1887) ILR 11 Bom 566.
[7] Carlill v. Carbolic Smoke Ball Co., (1893) 1QB 256.
[8] The Law of a Contract – Avatar Singh
[9] combe v. combe [1951] 1 All ER 767
[10] Pillans v. Van Mierop [1765] 3 Burr 1664, per MANSFIELD C
[11] P.K. Ramaiah and Company v. Chairman and Managing Director, National Thermal Power Corporation (1944)
[12] Satya Jain v. Anis Ahmed Rushdie, (2013) 8 SCC
