This article has been written by Sanjukta Das pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

We start realising at some point in our lives that we are surrounded by contracts in one form or another, whether it is using an app, buying a new car, a simple rent agreement, or even hailing a cab. In everyday life, we enter into a range of agreements, both formal and informal. A contract helps us establish legal relationships between parties and prevents conflict from arising. This is where contract drafting comes in.

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So, what is a contract? A contract is a legally binding agreement between two or more parties with the intention of building a legal relationship. The contract lays out the terms and conditions of an agreement in clear and concise language that both parties can understand. The goal of contract drafting is to reduce the risks of disputes and litigation. This article will provide a basic guide to cover the essentials of contract drafting.

Types of contracts

There are various types of contracts that can be formed in several ways. The following are the most common contracts based on how they have been formed:

Verbal contracts

These are the most basic forms of contracts. Before the prevalence of written contracts, offers and acceptances through oral communication were the most common methods of contracting. However, with time, proving the facts and circumstances for the validity of the contract got more difficult.

Written contracts

As the word suggests, written contracts mean those contracts that are in writing. The contract should fulfil Section 10 of the Indian Contract Act of 1872 to be a valid contract. These documents provide proof of what was agreed upon by the parties and also the rights of the parties involved.

Express contracts

According to Section 9 of the Indian Contract Act, if a proposal is expressly made in writing or orally, then it is an express contract as long as there is an acceptance from the other party.

Example: X wants to sell his car for 2,00,000/-. Y agrees to the same by saying yes. This is an express contract.

Implied contracts

An implied contract is based on the circumstances and conduct of the parties involved. Section 9 of the Indian Contract Act recognises implied contracts as well. Example: A customer buying a product from a seller assumes that the product is working properly even without the seller explicitly claiming that the product works.

E-contracts

Electronic contracts, as the word suggests, are electronic in nature. We come across e-contracts on a daily basis. Making a purchase online is an example of such a contract. Whenever we click on “I agree” on any page, we are giving our acceptance and agreeing to the terms of the contract.

Quasi- contracts

It is a court imposed legal obligation between two parties who did not have a previous legal obligation to each other.

Essential elements of a contract

For a contract to be legally binding, it must have certain elements. The following are the essential elements of contract drafting:

  • Offer and acceptance- An offer is a proposal made by one party to another, stating the terms of the agreement. When the other party agrees to the offer, that becomes acceptance. A contract is valid when there is both an offer and an acceptance.
  • Consideration- Both parties must exchange something of value with each other. It can be money, goods, services, etc. It need not be of equal value but must be sufficient.
  • Mutual consent- All parties involved must agree to the terms and conditions of the contract.
  • Legal capacity- The parties involved must have the legal capacity to enter into an agreement. This means that they should be of legal age and have a sound mind.
  • Legality- The agreement must not be against the law or any public policy.

Legal expressions in contract drafting

Legal expressions can be confusing and discouraging to those who are not familiar with them. However, it is important to understand the key terms in contract drafting. These include, as follows:-

  • Party/parties: Any individual, group or organisation entering into a contract.
  • Indemnification: Undertaking by one party to compensate the other party for certain costs and expenses.
  • Governing law: This determines which law shall be applicable in the event of a dispute.
  • Severability: Terms of a contract are independent of each other.
  • Force majeure: An unforeseen event that prevents a party from fulfilling their obligations under a contract.
  • Indemnity: A promise by one party to reimburse another party for any losses they may incur as a result of a breach of contract.
  • Liquidated damages: A predetermined amount of damages that will be paid in the event of a breach of contract.
  • Mutual assent: The agreement of both parties to the terms of a contract.
  • Offer: A proposal to enter into a contract.
  • Acceptance: The agreement to an offer that creates a legally binding contract.
  • Parol evidence rule: A rule of evidence that prevents the introduction of extrinsic evidence to vary the terms of a written contract.
  • Statute of frauds: A law that requires certain types of contracts to be in writing in order to be enforceable.
  • Termination: The end of a contract.
  • Warranty: A promise by one party to the other party that a certain fact is true or that a certain event will happen.

Structure of contract drafting

A well-written contract is arranged and structured in a logical and systematic way. A typical structure of a contract is as follows:-

  • Introduction: The introductory clause identifies the parties to the contract, the subject-matter of the contract, as well as the effective date. It provides basic information about the parties involved.
  • Definitions and interpretations: The “Definitions” clause is exactly what the word means. It defines or explains certain words that are used in the contract. Further, the “Interpretations” clause explains the rules on how to interpret certain words or phrases (which are not defined) or concepts that are referred to in the agreement.
  • Scope of the contract: This clause is a part of the contract that specifies all the criteria involved between the parties. It includes the products, services, or deliverables.
  • Obligations: This clause explains the situation/condition in which an individual is legally bound to perform something or not to perform something. Parties should be made aware of their duties in writing to avoid confusion in the future.
  • Payment terms: A “Payment” clause provides the details of how the transactions will be processed, the forms of payment that are accepted, payment dates, and late payment penalties.
  • Term and termination: This clause sets out the duration of the contract and the conditions for termination.
  • Intellectual property: Specify the ownership and use rights of intellectual property created or used during the contract.
  • Representations and warranties: It guarantees certain conditions for products or services, often including remedies for breaches of the warranty.
  • Confidentiality: A confidentiality clause is added to a contract when there are trade secrets, confidential information,etc. This clause maintains secrecy and ensures that the information remains secret. It prevents parties from disclosing sensitive information.
  • Alternative Dispute Resolution (ADR): ADR refers to a situation where the parties involved resolve disputes without a trial. Rather than filing a suit for each and every such issue, the parties can go for ADR (Alternative Dispute Resolutions) which includes arbitration, mediation, etc.
  • Governing law and jurisdiction: This clause includes the body of laws and courts that will be applicable to the contract.
  • Miscellaneous: This clause incorporates any other clauses that are relevant to the contract.

Guidelines for contract drafting

  • The contract should always begin with the recital clause.
  • It is advised to use an active voice throughout the contract.
  • All key terms and abbreviations should be clearly defined.
  • The language of the contract should be simple,direct and easy to understand. Avoid using legal jargon that may confuse the reader and cause misunderstandings. If the use of legal terminology is necessary, then explain the terms in plain language.
  • There should be consistency in the use of terminology. This plays a significant role in an accurate understanding of the contract.

Example: If “goods” is used to refer to the subject- matter of a contract, then it should not be replaced with “items.”

  • Make sure that the contract does not contain any illegal or unethical terms that cannot be enforced in a court of law.
  • Proofread the contract twice or three times to make sure that there are no errors or inconsistencies in it.

Best practices for contract drafting

  • Clarity and precision: Use clear, concise, and unambiguous language to avoid misinterpretation.
  • Organisation: Structure the contract logically, with clear headings and sections for easy navigation.
  • Plain language: Avoid legal jargon and technical terms that may not be easily understood by all parties.
  • Legal review: Have the contract reviewed by a qualified legal professional to ensure compliance with applicable laws and regulations.
  • Negotiations: Engage in open and transparent negotiations to reach mutually agreeable terms.

Role of technology in contract drafting

  • Contract management software: Contract management software can assist in drafting, storing, and tracking contracts, streamlining the process and ensuring compliance with legal requirements.
  • Electronic signatures: Electronic signatures have gained legal recognition in many jurisdictions, making it possible to execute contracts digitally.
  • Artificial Intelligence (AI): AI-powered tools can help analyse contracts, identify potential risks, and suggest improvements to the drafting process.

Conclusion

Proper contract drafting is an important part of any legal transaction. Being able to draft a proper contract is a display of one’s skills as a legal professional. Contract drafting is a useful skill that comes in handy in many aspects of life. Moreover, a legal professional should definitely learn this skill. While understanding the necessary components, structure and language of a contract, one will be capable enough to create a document that is clear and concise. By adding the aforementioned terms and conditions, the parties involved will get an exhaustive idea of what is to be achieved by the contract.

Always make sure that the contract is legally enforceable. It is very important to remember to always proofread the contract and carefully examine and understand it before signing it. A review of a contract is as important as drafting a contract. Additionally, it is crucial to make sure that all parties involved understand the terms and conditions of the contract. 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 that could have occurred otherwise. When done with precision, a well-drafted contract can protect both parties and ensure a beneficial result.

References

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