This article is written by Mohit Garg, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com. Here he discusses “Client Management and Drafting Bullet Proof Contracts as a Freelancer”.
A contract is one of the most important documents in a business transaction. It lays down the rights and duties of the parties to the contract. The enforceability of the contract in the court of law is the feature that attracts the parties to have their transactions documented in a contract. Let’s understand the concept of contract and points to be kept in mind while drafting it.
What is a Contract?
Section 10 of the Indian Contract Act, 1872 provides for the definition of a contract. According to the Section 10, All agreements which are not specifically declared as void under the law and made by the free consent of the parties, and with a lawful consideration for a lawful object are contracts.
An agreement enforceable by law is a contract.
Once parties enter into the contract it becomes binding on them and any breach on their part to perform their obligation would be punishable and amount to a breach of contract.
In general sense, a contract is a document lays down the rights and obligations of the parties among other things like consideration, dispute resolution mechanism, etcetera.
The following are the essentials of a contract: –
- An agreement
- Free consent of the parties
- Lawful consideration
- Lawful object
- Not expressly declared to be void
Since one of the essentials of the contracts is an agreement it is important to understand in brief what is an agreement to get a clear picture/idea of a contract.
What is an Agreement?
Section 2(e) of the Act defines agreement as a promise and set of promises, forming consideration for each other. An agreement is entered into when one of the parties offers to do something or abstain from doing something and the other party accepts such an offer with the promise to perform or abstain from doing any act which forms the consideration.
Hence, When A makes an offer to sell the house to B at ₹ 20 lakhs and B agrees to buy and pay the money is cash or otherwise, such an arrangement between the parties is an agreement. The person who makes the offer is Promisor (A in this case) and the person who accepts such offer is Promisee (B in this case). Both agree to perform their part of the obligation for a consideration. In this case, ₹ 20 Lakh is the consideration given by the B to the A to buy the House. House is also the consideration offered by the A to the B at the specified price.
When an Agreement becomes the Contract?
An agreement, when it fulfils all the essential ingredients of the contract, it becomes a contract.
For an agreement to become a contract the following are essential:
1. Free consent of the parties
The consent has been defined under section 13 as the agreeing of two or more persons upon the same thing in the same sense/manner.
For example, A agrees to sell his horse named “Ferrari” for ₹10 Lakh. B thinking that A is selling his car “Ferrari” agreed to buy it. Since the parties have not agreed on the same thing i.e. horse named “Ferrari” it is not valid consent.
The consent should be the free consent of the parties. Free consent has been defined under section 14 of the Act as the consent which is not caused by coercion, fraud, undue influence, mistake, and misrepresentation. When the consent would not have been given but has been caused to be given by fraud, misrepresentation, etcetera it is not free consent. The presence of such elements shows mala fide on the part of the party exercising them.
Hence, the consent to be free should be devoid of the above elements.
2. Lawful consideration and object
Section 23 of the Act provides for what is lawful consideration or object. It provides that the consideration or object will be lawful unless it is forbidden by law or is fraudulent or of such a nature that if permitted would defeat the provisions of any law, etcetera. In such cases, the consideration or object of an agreement is regarded as unlawful.
3. Not expressly declared as void
An agreement that is expressly declared as void is not a contract as it is unenforceable. Agreements such as restraint of marriage, trade, legal proceedings, etcetera are expressly declared as void under the act and therefore, they are unenforceable and not a contract.
Role of Contract in Business Transactions
Earlier on, the business transactions used to work on the word of the mouth of the parties. It was an established norm for the parties to honor their word. But, in cases where deal broke due to the fault of any of the parties, it was difficult to determine the compensation or indemnity to be given by the defaulting party to the loss caused to the other for the breach. Some still follow the same practice.
Nowadays, the majority of business transactions are done using contracts. Contracts are important in business transactions as it records the transactions in black letters which is very handful in deal-breaking and lawsuits. Contracts outline the obligations and expectations of the parties, protect the parties they remain unfulfilled and also provide a lock on the consideration or price to be paid for services so that, in the future, any factor does not change the price so determined.
A contract helps the parties knowing what all they are supposed to do and when, and also makes it relatively easier to settle/resolve the disputes that may arise in the future out of the contract.
Importance of a good drafted Contract
The above discussion makes it clear the importance of a contract in transactions. Apart from the contract, it is equally important that a contract is a well-drafted contract.
Contract drafting is drafting/making a contract that incorporates the understanding between two or more parties in a written form which is legally binding and enforceable.
Through the well-drafted contract, the parties can enjoy a number of advantages like avoiding different types of future litigations and breach of contract. It makes easier to understand the expectations and duties parties have towards each other.
Thereby, it will be correct to say that a well-drafted contract can save the fortune of money and avoid future litigations.
Important points to remember while drafting contract
Most of the people drafting contracts are working as a freelancer. Freelancer is a person who is self-employed and hired to work by different people, organizations, companies for a particular assignment.
The emphasis or focus of every freelancer while drafting the contract is to make the well-drafted contract. The biggest nightmare for a drafter of a contract would be when his client gets into any kind of dispute or trouble due to the bad drafting or missing out on some important provisions.
To avoid such circumstances certain points should be kept in mind which as follow:
1. Prepare an outline of the contract
Before starting up with the drafting always make an outline of the contract. Write down what all is to be included and make a structured outline having the broad headings and pointers. While making the structure ensure that it has a logical flow.
An outline prevents the possibility of missing out on important details. Once you have a structure in place all that is required to be done is to fill out the details. This minimizes the chances of error.
2. Clear and precise
The text of a contract should be clear and unambiguous. Avoid including unnecessary details. Keep it short and precise. An unambiguous and unnecessary long text can become a matter of dispute in the future.
3. Always include recitals
Recitals are statements that lay down the background of the transaction which is being incorporated in the agreement and the parties. It defines the relationships of the parties with each other, their business and all the background relevant details of the transaction so that it becomes easier to understand what is being transacted, why and how.
Recitals are like setting up of the stage and characters before starting up the play. Most of the people undermine the importance of the recitals. The fact that in the event of any dispute recitals are being relied upon by the dispute resolution authority to understand the intent of the parties behind the contract makes it crystal clear the necessity to include them.
4. Define importance terms and parties
There are certain terms that are exclusive for a given type of transaction and the general people are not aware of its meaning or there are certain terms that have more than one meaning. The inclusion of such terms sometimes becomes inevitable in a contract. The meaning of such terms should always be defined. The definition of terms determines the sense and intention behind using the terms. If not defined one party may construe it in another sense than the other party which might lead to a dispute.
Identifying the party who all are involved in the contract and using separate terms for each is the general practice. If parties are not identified and defined properly the structure of the whole contract becomes ambiguous and unclear.
5. Avoid inadvertently using words with legal significance
The language and the selection of the words of a contract should be such that a normal person can understand it. Using legal jargon, terms, etcetera should be avoided. The contract should be such that the parties and any other person can understand it with ease and without having the need to flip through the dictionary again and again.
When you use such specialized words only the person from the same industry would be able to understand it. It is always recommended to avoid using words with a legal significance.
6. Writing number in words and numerals
While writing any number, for example, consideration, always write it both in words and numeral. Having both, work as a confirmatory against each other hence reduced the chance of any form of mistake which may arise due to typographical error or otherwise. Missing or writing an extra zero can create a lot of difference and thereby always write the number in both words as well as numerals.
7. Litigation planning
Litigation planning is planning on how the litigation will proceed in case any dispute arises. It includes envisaging the method of dispute resolution like arbitration, mediation, etc., the law to be applicable, the court to which dispute would be referred, procedures incidental thereto.
Having a structured plan of litigation would ease out the process of dispute resolution for the parties as there would be minimal chance of dispute over the procedures and particulars of litigation. Consequently, it would ensure a faster and effective resolution of the dispute between the parties.
8. Pay attention to grammar and punctuation
Special attention should be paid to grammar and punctuation. Using the incorrect tense or misplacing the comma (,) or full stop(.) can make a hell of a difference in the contract.
For example, the use of “shall” in a clause makes it binding and obligatory for the parties to follow whereas the use of “may” suggests discretion or possibility.
Punctuations are as important as any other rule of grammar. Improper use of punctuation can make the statement “Let’s eat, grandpa” to “Let’s eat grandpa”.
Therefore, be careful and choose the appropriate verb and punctuation according to the intention of the parties.
Drafting of a contract is one of the most necessary aspects of a business transaction. All transaction has the risk that in the future party may dispute any of the obligations which may lead to long-drawn court litigation affecting the business and personal life of both the parties. A well-drafted contract, envisaging all the aspects and efficient machinery of dispute resolution has the ability to minimize the future costs of the parties.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.