How to Draft Contracts Efficiently

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This article on how to draft contracts efficiently is written by Rishabh Pandey from Guru Gobind Singh Indraprastha University, New Delhi.

Introduction

In what has become a business-oriented world, a contract works as a document between the parties entering it, to establish a legal relationship between them. The clauses in a contract bind them to certain obligations, terms and conditions and the remedies the aggrieved party(s) can resort to upon a breach of the contract by the defaulting party(s). An error in drafting or any other shortcoming in a contract as a consequence of an unprofessional drafting has caused loss to many clients around the globe.

Before we learn how to draft contracts efficiently, we must first be aware of the essentials of a valid contract, as specified under Section 10 of the Indian Contract Act, 1872:

  1. The parties to the contract must be competent to enter the contract, i.e. they should have attained the age of majority, must be of sound mind and should not be disqualified by the law applicable to them at the time of entering the contract.
  2. There should be a lawful consideration and lawful object in respect to the contract. A contract to perform an illegal object like murdering someone would not be a valid contract.
  3. The consent of the parties should be free. Consent obtained on gunpoint would render the contract void ab initio.
  4. The contract should not be the one expressly declared void.

The Importance of Drafting Contracts Efficiently

Do you know how important a properly drafted contract is? Let us go through an example of a case in Canada. The termination clause in the contract between the parties was as below:

“Subject to the termination provisions of [the Agreement], [the Agreement] shall be effective from the date it is made, and shall continue in force for a period of five (5) years from the date it is made, and thereafter for successive five (5) year terms, unless and until terminated by one (1) year prior notice in writing by either party.”

Before we jump to what the case and the judgment was, make sure you have properly understood the above-mentioned clause.

Now, as the facts of the case go, Rogers Communications Inc. entered into a contract with Bell Aliant, wherein Aliant agreed to provide 91,000 utility poles to Rogers to connect its cable lines at the cost of $9.60 per pole, billed annually. After some time, Aliant informed Rogers that it was terminating the contract and increasing the cost of poles to $18.91 per pole. Rogers argued the contract could be terminated only after completion of five years from the date the contract is made, after giving a one year’s notice while Aliant argued the notice could be served at any time to terminate the contract, regardless of whether the five years were complete or not.

Let’s break the clauses into two parts:

Subject to the termination provisions of [the Agreement], [the Agreement] shall be effective from the date it is made, and (i) shall continue in force for a period of five (5) years from the date it is made, (ii) and thereafter for successive five (5) year terms, (unless and until terminated by one (1) year prior notice in writing by either party).

The whole confusion rooted out of one punctuation mark in the clause, i.e. the comma before ‘unless and until..’. Without the comma, the provision of notice would not apply to both the parts of the clause and hence notice could be given only in the part (ii). However, since the comma is present, the Canadian Radio Telecommunications Commission ruled that as per the rules of punctuation, the comma makes the provision of notice applicable to both the parts of the clause and hence Aliant could terminate the contract by serving a one year’s notice even in the initial five years.

The ruling was overturned when the French version of the contract was referred to, after 18 months of appeal, where there was no comma immediately present before ‘unless and until..’.

If a small punctuation error can cause so much trouble, I believe it is understandable how important careful and efficient drafting of contracts is.

How to Efficiently Draft Contracts?

Below are the simple rules to keep in mind with respect to drafting a contract:

  • Identify the purpose: It is most fundamental to the drafting process, to ensure you have properly identified what the object of the contract is. Listen to the client carefully and verify with him to double check you know exactly what he wants. Missing out to protect a particular interest of the client or failing to cover a risk that the client wants to be covered in a contract will defeat the purpose of the contract.
  • Thoroughly understand the legal provisions regarding the object: It is a common mistake to think that drafting of a contract is not very hard and even a novice can do it with the help of several templates available online. It might be helpful at times. However, when stakes are high enough, people turn to a lawyer for their expertise, foresight and negotiation skills. You are supposed to draft a contract free of loopholes, let alone make an illegal and void contract. Every clause is to be weighed and measured and heavily edited because the contract is put out to the other party for their consideration.

The other party may also go through the same process and propose changes to the contract to suit their interests as well. Following this, a negotiation may take place orally or through the exchange of documents. Once more, every clause of significance is torn apart, investigated, analyzed and modified till both parties believe that they have a deal they can go ahead with. Lawyers also ensure that all the provisions in the contract are compatible with the law of the land and can be enforced. A contract may run into dozens of pages and have hundreds of clauses depending on precedence of a particular organization or how high the stakes are in a matter.

  • Language: The language of the contract should be consistent, precise, simple and unambiguous. You must also use proper punctuation marks. This makes the parties and the authority deciding a dispute regarding the contract easily understand the terms of the contract.
  • Avoid unnecessary complications: Complicating a contract where the language could have been simple is a foolish thing to do and should be avoided.
  • Cover all the possible circumstances that may occur: Think of what are all the possible circumstances that may affect the contract, including the worst. This will help you safeguard your client’s interests.
  • Review: Always review the contract for language errors, punctuation errors, formatting errors, reference errors, omission of important clauses and other possible mistakes which you may have overlooked while drafting the contract. It is almost always advisable to have a second set of eyes do a proofreading and sanity check of any document you may draft.

Below are some important clauses that are present in a contract. Some of them might not be applicable to your contract. However, tallying your contract with the below-mentioned clauses will certainly help you ensure you have not missed what you could have inscribed in your contract for securing your client’s benefit:

  • Title: Give an appropriate title to your contract which speaks what the contract is about. For example, in a contract with the transaction of entering into a partnership, the title could be “Partnership Agreement”.
  • Describe the Parties: Describe the name of the parties. To make the names specific and free of confusion, also mention the address of the residence of the parties and in the case of a company, the date of its incorporation and the address of its registered office.

Illustration:

THIS AGREEMENT made on this ___ day of __________, 20__, (the “Effective Date”) by and between ______________________________[name of manufacturer), a ________________(legal form), having its principal office at _________________________________, and _________________________, (hereinafter “Client”) a ________________[legal form], having its principal office at ______________________________. Both collectively mentioned as “the Parties”.

  • Subject Matter and Terms & Conditions: Lay down the subject matter of the contract with terms and conditions the parties shall be subject to. It includes the obligations of the parties, what they must abstain from doing, how must they perform their services, the date of delivery of services and such other provisions as may be prescribed by the client.
  • Consideration: Specify the consideration a party will receive for the services and/or goods it will provide / the share of interest the parties will divide amongst themselves / other similar provisions that may be applicable to your contract. Also, mention the intervals and mode of such payments.
  • Confidentiality: If the contract is so that its confidentiality must be maintained and safeguarded, add a confidentiality clause in the contract.
  • Remedy/Compensation: When any provision in the contract is breached by a party, this clause specifies the remedies/compensation the defaulting party is liable to.
  • Boilerplate Clauses: Boilerplate clauses are usually present at the end of a contract. It is important to understand the context of the contract to ascertain whether the clauses are applicable in your contract or not. Some of the boilerplate clauses are briefly explained below:

a) Term: Specify when the term of the contract will commence.

b) Interpretation: If you are using abbreviations, terms and phrases not in common use or want to assign a specific meaning to a term or a phrase used in the contract, it is a must that you define them in the contract itself to avoid any future confusion. You can also mention the principles of interpretation of the contract in an interpretation clause.

c) Assignment: In this clause, you can define the rights and obligations of the parties to the contract and whether or not such rights and obligations can be transferred to a third party. If the clause prohibits the parties from subcontracting, it is usually termed as  ‘Non-Assignment’ clause.

d) Amendment: To establish a procedure of amendment in the contract, you can add an amendment clause, describing how an amendment may be effectuated.

e) Entire Agreement: This clause limits the rights and obligations of the parties to only those provisions as expressly mentioned in the contract, denying them a claim of acting on the basis of any document or statement outside the contract.  

f) Notice: It allows the parties to communicate in a specified manner within a predetermined time limit when a certain specific circumstance occurs.

g) Severability: In an occasion any provision in the contract is found to be invalid or illegal, a severability clause allows the parties to remove such provision and continue performing their obligations and exercising their rights, unless such omission of the provision alters the subject matter of the contract, so as to render the contract unfavourable for any of the parties.

h) Set off: A set off clause disallows a party to deduct money owed by the other party to him, from the money he is liable to pay to such party.

i) Force Majeure: The clause prevents the parties from any liability which may occur due to circumstances beyond their control. Such circumstances include flood, earthquake, etc.

j) Indemnity: An indemnity clause makes the party liable for the loss or costs incurred by the other party on occurrence of a specific event. This is one of the most negotiated clauses in the contract, as the party indemnifying always wants to cap the cost of indemnification and limit the scope of circumstances in which he may be held liable while the party being indemnified looks forward to an unlimited indemnification.

k) Termination: It lays out when and how the contract may come to an end. Some examples of ways of termination include expiry of the term of the contract, breach of the contract, by serving a notice of termination if provided for by the contract and other ways that may be allowed by the contract. It is strongly recommended to mention in the contract what happens if the contract is terminated.  

l) The Governing Law: If the law of the land applicable to the parties varies, there should be a clause mentioning the laws of which land will be applicable to the parties in the case of a dispute with respect to the contract. Usually, the law of the land where the contract is performed is adopted, as it is must to abide by the laws of such place.

m) Jurisdiction: It is advisable to mention the court of which state or country (in case of an international contract) will have the jurisdiction over the matter in case of a dispute.

n) Arbitration: If the parties may want, they can add a clause directing the parties to solve any dispute that arises out of the contract to be heard and disposed of by the way of arbitration instead of a court of law.

  • Signature and seal, Location of Execution, and Witness: The signature and seal(wherever applicable) of the parties is present at the end of the contract with the location of execution of the contract and signature of witnesses (along with relationship and/or address of residence) if required by the contract.

(Please Note: The above-mentioned clauses are not exhaustive.)

Stamping and Registration:

Once a contract is drafted, it needs to go through the following steps, wherever applicable:

  • Stamping:

Stamping is a way of taxing the transactions of an instrument. In respect of bill of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts, the stamp duty rates as prescribed by the parliament prevails all over India. For any other document, the state governments are empowered to fix the stamp duty rates. Different states have different Stamp Acts; if not, the stamp duty is valued on the basis of the Indian Stamp Act, 1899. Valuation is done on the basis of the value of the subject matter of the instrument.

Any instrument mentioned in Schedule I of Indian Stamp Act or the equivalent schedule in the stamp act of the state where the contract is executed is chargeable to duty as prescribed in such schedule. If the instrument is not present in the schedule, no stamp duty is to be levied on such instrument. Stamping of such instruments is a must and shall be done before or during its execution. The defaulters are liable to pay fine and the instrument not duly stamped cannot be produced as evidence. Therefore, you should always duly stamp a contract if it is required by the law.

Where it is not specified who shall pay the stamp duty, it is paid by the executant.

  • Registration:

Registration Act, 1908 governs the process of registration of documents in India. The documents in respect to sale, conveyance, exchange, gift, settlement partition, mortgage, lease, decrees and release of immovable property of the value of one hundred rupees or more are to be registered compulsorily as provided under Section 17 of the Registration Act, 1908. The documents mentioned in Section 18 of the Act are registerable but it is at the discretion of the parties to register them.

If the contract falls under the documents required to be registered compulsorily, it must be registered within a reasonable period of time after its execution, at the office of the sub-registrar. In case of an immovable property, the sub-registrar within whose sub-district, the whole or some portion of the property is situated shall be presented with the document to be registered. In case of other documents, it can be registered in the office of the sub-registrar where all the parties executing the document desire it to be registered.

{You can apply for a Certificate Course on Commercial Contract Drafting and Negotiation at law sikho.}

Ajay Thakur :

View Comments (1)

  • Thanks for writing such a detailed piece. I loved how you shared the boilerplate clauses. Makes it easy for people from a business background.