This article has been written by Pruthvi Ramakant Hegde, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho and edited by Shashwat Kaushik.
It has been published by Rachit Garg.
Table of Contents
Introduction
In the booming era of the commercial world, India has paved the way for new startups, business ventures, small firms to big firms, and newly established companies to run their businesses in one or another way. India has over 61,400 startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT), with at least 14,000 recognised during fiscal 2022, according to the Economic Survey 2021-22. Effective contract laws are essential for providing legal force to business operations on a daily basis for major commercial contracts like sale and purchase agreements, joint venture agreements, distribution agreements, service contracts and many others.
While entering into any contract, it is important to satisfy all the essentials of the contract as per the Indian Contract Act of 1872. Commercial contracts are not an exception to this facet. Commercial contracts are governed as per the Indian Contract Act 1872, subject to specific legislation. Along with this, in commercial contracts, parties must ensure about important clauses like governing law, force majeure, confidentiality, indemnification, dispute resolution, etc. All these legal nuances play a crucial role in the enforcement and validity of contracts. This article has emphasised the major legal compliances and nuances to avoid future disputes or any possible conflicts that may arise between the parties.
Development in technology has opened the door to entering new modes of contracting, like e-contracts. It has been gaining importance due to advancements in the digital world. These contracts are cost effective, less time consuming and offer a remote mode of entering contracts. But parties must ensure legal compliance and nuances before entering into any type of contract. Thus, in the corporate world, commercial contracts are a profound tool for managing effective and legitimate business transactions within and outside the country.
Meaning and definition
As per Section 2(h) of the Indian Contract Act, “an agreement enforceable by law is a contract.” In general, a contract is an agreement of voluntary arrangement between two or more parties that outlines their rights, obligations, terms and conditions.
According to the Cambridge dictionary, a commercial contract is a legal agreement between businesses. In general, commercial contracts are agreements between the parties that specify the activities of the business by outlining the terms and conditions of the agreements, including pricing, governing laws, intellectual property, dispute resolution, quality standards and others, depending on the nature of each business transaction.
Major types of commercial contracts existing in India
Commercial contracts act as a bridging tool for balancing business affairs by following effective drafting and negotiation between the contracting parties. In India, there are many kinds of commercial transactions. Some of the major commercial contracts that are commonly in practice are as follows:
Sale and purchase agreements
Collectively known as sales and purchase agreements Every business is involved in day to day sales and purchase transactions. This agreement is commonly used in commercial transactions and outlines the sale and purchase rights, obligations, terms and conditions of the buyer and seller. SPA typically covers descriptions of the goods for sale/purchase, ownership, pricing, warranties, delivery, payment terms, and any other conditions as required in such agreements. SPA is governed by the Sale of Goods Act of 1930, subject to other required enactments.
Service agreements
Service agreements are a type of commercial agreement between a service provider and a client or customer. This agreement outlines the terms and conditions prevailing for such a service. This agreement is commonly practised in various industries, including IT services, marketing, maintenance and others. These agreements include the duration, service fee, terms and conditions, governing laws, service metrics and other specific needs.
Distributor agreements
Distributor agreements mainly deal with the distribution of products and services from manufacturer to distributor. It plays a very important role in commercial transactions. Before entering into this contract, it is very expedient to know about the suitability of exclusive and non exclusive distribution.
Joint venture agreements
Joint venture agreements are known as ‘JV’ agreements, in which two or more parties collaborate with each other for any business venture or any project. Joint venture agreements are commonly used when two or more entities pool their resources, capital and expertise to achieve the targeted goal. This agreement specifies the terms, conditions, obligations, duration and rights of the parties.
Other than these, there are many other commercial agreements that play a crucial role in commercial transactions. These include non disclosure agreements, franchise agreements, shareholder agreements, employment agreements, licencing agreements, partnership agreements and many others.
Commercial contracts and legal nuances
Commercial contracts in India are governed by various laws. Parties must ensure the fulfilment of all legal compliances and nuances before entering into legally binding agreements. Some important legal nuances one needs to consider are as follows:
The Indian Contract Act 1872- In order to make a valid contract, it is compulsory that the contract fulfil the essential elements as stated under Section 10 of said Act. That includes a valid offer, acceptance, consideration, competency of the parties, object of the contracts, free consent of the parties, and an agreement not declared void. The Indian Contract Act is the primary legislation that governs all contracts, from commercial to e-contracts in India.
In addition to general contract law, specific legislation plays a crucial role in the enforcement of commercial contracts. There are several legal nuances to consider while entering the contract on the basis of specific legislation. That includes:
Consumer Protection Act 2019- If a commercial contract entered into by the parties involves consumers, the provisions of the Consumer Protection Law will apply. While drafting such contracts, parties must be aware of the recently amended provisions of the Consumer Protection Act of 2019. The Consumer Protection Act clearly specifies the rights of consumers.
For instance, in a distributor agreement, while fixing ‘Product Liability’ under Section 82 of the said Act, it is very important to ensure the liability of the manufacturer or seller of the product in the case of any ‘harm’ caused to the consumer due to a ‘defective product’.
Sale of Goods Act 1930- This Act is the major tool for entering into any commercial transactions relating to sale and purchase agreements. This specific legislation outlines the formation of the contract between the seller and buyer whenever sale transactions arise, the transfer of ownership and title of the goods, conditions and warranties, implied terms for sale, etc., which play a very important role in drafting any contract under this legislation.
Partnership Act 1932- While drafting any agreements between the partners under this Act, it is expedient to know about the formation, duties, and liabilities of the partner, along with the provisions of dissolutions of partnerships, which play a crucial role in enforcing such contracts. While drafting, parties must ensure the mode of dissolution under said Act.
Companies Act 2013- If the commercial contracts are based on the said Act, it is important to consider the provisions of the Act, which include corporate governance, share capital and shares, shareholder rights and protection, penalties and enforcement, and CSR, which plays a major role in validating such commercial contracts.
Other than these, there are many specific laws governing commercial contracts in India, like the Industrial Dispute Act of 1947, The Real Estate (Regulation and Development) Act of 2016, the Specific Relief Act of 1963, etc. While drafting any commercial contracts, it is very important to consider the legal nuances that are involved in the provisions of enacted legislation to avoid future legal issues.
Major clauses of commercial contracts
The clauses of the contracts are considered the determined standards that enable the parties to know about the rights, obligations, terms and conditions of the contracts. In commercial contracts, while drafting and negotiating the clauses, parties need to be very cautious about the nuances of each clause. In commercial contracts, clauses are divided into introductory, operative and boilerplate clauses. Some of the major clauses in commercial contracts are as follows:
- Confidential clause- The word ‘confidential clause’ itself states about the confidential information of the disclosing party to the contracts. Hence, it is the duty of the receiving party to protect such confidential information. This clause has to be drafted by considering the definition, scope of confidential information and obligations, along with exceptions provided to other parties.
- Representation and warranties clause- The representation clause has to be drafted by considering the identity of the parties, financial standards, expertise or specific details as disclosed by the party. The warranty clause gives assurance regarding the accuracy of the disclosed information, facts and conditions of the contracts.
- Indemnification clause- This clause offers protection against losses in commercial contracts. Thereby, it allocates responsibility for certain damages and losses. While drafting, it is important to consider who has to indemnify whom. It has to be properly negotiated to avoid any future legal complications. The indemnified party is entitled to recover certain types of losses, such as attorney’s fees, which are not typically recoverable under a common law cause of action.
- Force majeure clause- The parties to the contract have started including terms such as ‘epidemic’ and ‘pandemic’ within the definition of a force majeure event in order to avoid any issues arising as a result of the COVID-19 pandemic. While embedding this clause, it is important to consider the circumstances of force majeure.
- Dispute resolution clause- Almost every commercial contract includes this important clause talking about dispute resolution. While embedding this clause, it is important to mention the method and the place of dispute resolution. If any dispute arises in relation to the subject matter of the contract, the parties refer to this option for solving disputes without any delay.
Other than those mentioned above, while drafting commercial contracts, some other clauses need to be considered, like title, nature, recitals, intellectual property protection, governing laws, notices, and other clauses that solely depend on the circumstances and factuality of each contract.
Importance of negotiation in execution of commercial contracts
While negotiating any contract, it is important to consider future success, not short-term wins. In commercial contracts, negotiation must create a win-win situation for both parties. Hence, while negotiating, it is important to consider and protect both parties’ opinions and interests for future success. Negotiation is the bridging tool that balances every corner of the contract. In commercial contracts, the operative clauses are negotiated as per the requirements and convenience of the both parties.
Advancement in commercial contracts
As an advancement in the digital world, everything is done and dusted through the e-platform. Contracts are not an exception to this platform. Emerging technology has proved that traditional contracts can be diverted from a physical to an online, paperless mode. These contracts are less costly and less time consuming. Most of the business and corporate sectors pursue these modes of contracting. Especially in commercial contracts, the time and cost of the contracts are very important to standardise business management. The Indian Evidence Act of 1872, the Indian Contract Act of 1872, and the Information Technology Act of 2000 have provided validity, enforceability and legal recognition to e-contracts in India. Section 10A of the Indian Contract Act states that a contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means were used for that purpose. Along with it, e-contracts must satisfy all the essentials of Section 10 of the said Act.
While entering into e-contracts parties must ensure legal nuances and requirements to validate such contracts. While entering into e-contracts it is important to ensure the e-signatures, place of execution, terms and conditions, scope and duration of such contracts, and exceptions to e-contracts. There are various other necessary elements to be considered while entering into these agreements, like data protection, online security, verifications, authentication, etc., before entering into these contracts. Otherwise, it will cause huge losses to the contracting parties because of online fraud, cybercrimes, hacking, identity theft and many other related issues.
Conclusion
Commercial contracts play a crucial role in the management of the day to day affairs of various corporate sectors. In order to be enforced and executed legally, it must be well drafted and negotiated by following each and every nuance of such contracts. Further, it is very important to comply with the requirements for each kind of commercial contract subjected to the provisions of such legislation on that behalf.
There too arise major challenges like protection of good faith, difficulty in enforcement due to the existence of multiple languages in India, comprehensive legislation, cross border issues, a lack of specific legislation with regard to e-contracts enforcement and many others. Thus, in order to give proper legal recognition and enforcement to commercial contracts, it is important to consider every nuance of the contract for its enforcement. Otherwise, there may be a chance of diverting opinions, conflicts and future deviations, which often lead to the termination of such contracts without accomplishing their objective. Therefore, before entering into legally binding commercial contracts, parties must ensure each and every legal nuance of such contracts.
References
- https://www.indialawoffices.com/legal-articles/commercial-contracts-in-india#:~:text=Although%20the%20term%20’Commercial%20Contracts,case%20of%20a%20contract%20breach.
- https://www.ahlawatassociates.com/blog/types-of-commercial-contracts-in-india/
- https://www.lexology.com/library/detail.aspx?g=548fffed-0123-4fd2-917d-deef1c44b954
- https://ssrana.in/corporate-laws/commercial-contracts/commercial-agreements-contracts/
- https://www.ipandlegalfilings.com/contract-drafting-caring-the-nuances/
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