The foundation for every legal relationship between two or more parties is established on a basis of a contract. A contract is a document containing a set of terms and clauses framed by the individuals, companies and/or other legal entities that specifically dictates the relationship between such individuals in the future. Once the contract is drafted, affirmed and signed by the parties, it must be registered. Please note that registration of a contract is a very important task that must be completed by the parties to the contract (refer to why register a contract in this article for more on this).
Drafting of a contract is the step-by-step inclusion of specific clauses, terms and conditions that are expressed as per the needs and wants of the party/parties to the contract. While making a draft one must consider various issues including the subject of the contract, goods to be manufactured, amount of consideration, indemnity, dispute resolution, et cetera.
Once a draft is complete, it must be reviewed. In my personal opinion, every person should ideally get a contract reviewed before signing the contract and entering into agreement with the other parties to such contract. This type of reviewing can be called pre-contract review; although post contract reviewing is the practice which we see most often in our experiences.
To put it simply, contract review is the thorough analysis of the terms, clauses and conditions that are inscribed in the contract. It is an attempt to understand each clause along with the purpose behind framing of such clause. Every person can review the contract himself/herself thoroughly or seek professional assistance from attorneys and advocates to do the review for them. We must keep in mind that contract review can solve many problems and issues at an early stage thereby avoiding losses or harassment in the long run. In this article, we will look into a few areas that we all must consider while drafting and reviewing a contract. Please note that this is not a subject that most of us were taught in our years in law school; this is a skill that many of us have developed over years of experience. Thus, even though this article only describes briefly how one can draft and review a contract, this article itself is an attempt to bridge the gap between the theory and the practical between the study of the documents and laws and their practical applicability and relationship.
Importance of a written a contract:
This is a topic that has been in debate for a very long time. Contracts are basically of two types: oral and written. Oral contracts can be seen as a system of understanding between the parties whereby they agree to certain terms that are orally made and to act on such term. Written contracts are contracts wherein the party/parties to the contract express and record each and every term of the agreement between them. While in most countries both the types contracts are taken to be valid, when it comes to the enforceability of such contracts, the latter is easily relied upon and is much easier to function with.
Oral contracts are very difficult to prove in the Court of law because of its nature. Since nothing is expressly recorded, this becomes the first defense that every lawyer uses to escape from any dispute or suit against his/her client. The victim in such cases will have a difficult time to prove that there, in fact, exists an oral contract between the parties which is legally binding and enforceable upon the parties to such contract and that he/she/it is a victim to the violation of certain terms so agreed upon under such contract.
Hence, it is always advisable to make use of a written contract. Such contract will consist of specific clauses which may be written by one or more parties to the contract, but is only considered legally binding when all the parties to the contract give their consent to it. Thus, the terms that are agreed upon are recorded in a documented form. These contracts are much easier to rely upon in practicality as the relationship between and the rights & obligations of the parties to the contract are jotted down in the contract itself, thereby eliminating any kind of ambiguity that may arise in the future. Written contracts are a much safer option to choose from when we look at the practical procedures and enforceability that both arise in lieu of the two types of contracts. But, please note that even if a contract is written, it cannot be considered totally safe or entirely relied upon until and unless it is registered.
Why register a contract:
Currently, in many countries throughout the globe, the laws do not expressly state that all contracts must be mandatorily registered in order for them to be legally enforceable and recognizable; however, when a party becomes a victim to some default made by the other party/parties, it becomes highly tedious for the victim to prove the legality, binding effect and validity of the contract. Adding to this, there are also application of various laws to the same subject which may lead to confusion as to whether contracts should be registered of not.
For example, in India, the Indian Contract Act, 1872 states that all agreements, whether oral or written, are valid if and when:
- they are formed with the free consent of the parties to such contract;
- the consideration so involved is lawful in nature; and
- it includes a lawful object.
The Indian Contract Act, 1872 does not talk about registration or stamping of any contract whatsoever.
However, provisions of the Registration Act, 1908, enumerates the documents which must be compulsorily registered for them to be legally recognizable and enforceable in the Court of law, these include: instruments related to immovable property (sale deed, deed of lease, gift deed, et cetera), instruments of movable property amounting to Rs. 100 or above, et cetera.
Further, the Indian Stamp Act, 1899 expressly mentions that documents such as a Power of Attorney (except with the power to sell an immovable property), Development Agreement, et cetera shall be made on a stamp paper but need not be compulsorily registered for them to be legally enforceable. Such provision creates a sort of vagueness as to what are the types of contracts that must or must not be compulsorily registered in order for them to be legally enforceable in the eyes of Law. Therefore, it is advised that parties should get their contracts registered if they want to avoid any vagueness and unnecessary harassment and/or losses and/or litigation costs that may arise in the long-run.
The person reviewing the contract must also understand the importance of registration of a contract. If the review of the contract is taking place pre-registration, then one must understand the importance of each clause and how changing/modifying any unwanted terms can save the parties much harassment and cost in the future. If the review is taking place post-registration, it helps the reviewer understand the gravity of the clauses imbibed in contract and how such clauses will affect both parties, especially in times of dispute.
The Basic Process:
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. It 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).
Terms and Clauses:
There are certain basic terms and clauses that are very general and basic in nature. Such clauses form a part of every kind of contract.
The following are a few of such clauses:
- Subject and its legality: The first and foremost place to begin the drafting of a contract is to determine what the subject of the contract is. The subject of the contract will determine the nature of the contract. The subject of the contract will also determine if the contract will be legally enforceable or not. While reviewing a contract, this is the first point that one must look at. Many cases are won simply by stating that the subject to a contract is not considered to be legal in the eyes of the prevailing laws.
- Definition clause: Each and every contract must consist of a definition clause. Such clause contains all the definitions to various words that are used throughout the contract. Certain words holding a general meaning may be used throughout a contract, but the contract may contain a definition of such word which might describe the meaning of such word specifically in relation to said contract. In such cases no other 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, in binding on them.
- Term of contract: Contracts are generally made for a definite period of time, no matter how long the time frame may be. 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 and once the time period expires, the contract automatically dissolves.
In many cases, the term of the contract also depends on the achieving of a certain goal for which the contract has been entered upon.
For example: A and B enter into a contract that will last for such time as it takes for them to reach place AA, once they will reach the place AA the contract between them will dissolve.
- Clause for renewal of 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 need not 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. Such clauses are often included in the clause describing the term of the contract.
- Consideration amount and legality: Another important clause in a contract is the clause stating the amount of consideration. It states the consideration amount that one or more parties must pay to the other party/ parties for service done or goods produced by the latter.
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.
- 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.
- 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.
- 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, et cetera 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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.
In my experience, these are small areas that are essential for the formation of a good contract. The inclusion of the afore stated terms and conditions will give the reader a detailed idea of what is sought to be achieved by the contract and what is the relationship between the parties.
Further, any dispute between the parties to the contract can be efficiently dealt with if the clauses given herein above are included in the contract. All such efforts will result in a contract which will save a lot of time, effort and costs which could have occurred otherwise.
Further, the review of the drafted contracts is equally as important as the drafting itself. If a contract is not reviewed, then the signing party or parties may be at risk of affirming terms and clauses which may not be favorable to them and which may cause them financial or mental injury in the future.
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