This article has been written by Shraddha Pandey and edited by Shashwat Kaushik. 

Introduction

A contract creates legal binding on the parties who come together to form responsibilities and legal obligations on each other in exchange for goods and consideration. It is basically a promise between the parties and they mutually agreed on certain terms and conditions. If anyone from either party doesn’t fulfil the duties as per the contract, then either party has the right to enforce the contract in court.

While drafting the contract, there are many aspects and several keys that need to be considered and addressed for the effectiveness of the contract and for legal enforcement.

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Key points while drafting a contract

Key points that one needs to keep in mind while drafting a contract are:

  1. Ambiguity

A contract should be written with a clear vision in mind, considering each party’s needs, duties, rights, terms, and conditions. As a result, when drafting the contract, the main and mandatory clauses are the obligations and responsibilities; it should be coherent, and the people involved in it should comprehend it.

  1. Legal conformity

The drafter must follow the contract work obligations requirements in accordance with all applicable laws and regulations. There will be consequences if the appropriate laws are not acknowledged. Understanding and upholding the pertinent legislation is crucial for protecting the party’s interests.

  1. Risk distribution

When a contract is executed between two or more parties, several things are covered that fall under the scope of the specific Contract. Every such contract contains numerous risks and liabilities that the parties must anticipate before accepting and duly acknowledging the contract. Risks and liabilities can be appropriately allocated among contracting parties based on their understanding of the scope of work and the services performed.

  1. Including the right solutions

In the event that the contractual parties commit a breach or default during the terms of the contract, certain pre-calculated remedies are applied to the defaulting parties. Remedies, such as damages, specific performance, termination rights, etc., to protect the interests of the non-defaulting parties. Such remedies must be approved prior to execution or signing by the parties.

  1. Non-disclosure and confidentiality

This clause covers the confidentiality of each piece of information, if there are any and lets each party involved in it be aware of the information that needs to be protected, or there will be consequences for leaking the confidential information. But if the information comes into the public domain, then either party will not be responsible for it. The purpose of the confidentiality clause is to maintain certain secrecy between the contractual parties regarding sensitive and proprietary information. Even before the execution of the contract, the provisions to protect such confidential information from unauthorised use and disclosure, the obligations of the parties and the remedies for a breach of the contract must be clearly specified. The confidentiality clause can be mutual or as per the requirements of the scope of work or services that are being provided by the parties.

  1. Mechanisms for resolving disputes

This clause was included in the contract with consideration for the work and issues that might come up in the future when carrying out the agreement, as well as any difficulties that might be encountered by the parties while carrying out the agreement or not. If a dispute arises later, the parties will designate an arbitrator, mediator, or negotiator to handle it. As opposed to arbitration, litigation takes longer and costs more money.

Some crucial analysis needed to be conducted before drafting

With the foregoing introduction, we now have a better understanding of the critical elements that must be taken into account while creating the contract. It is critical that we undertake a full study and that, while designing it, we ensure that the contract meets and protects the interests of all parties involved. Here are some crucial analysis to conduct

The parties which are  involved in the contract

The parties’ legal names, addresses, and contact information will be explicitly stated at the beginning of the contract. Assuring that the information has been gathered from their legal identification evidence. This procedure must be followed to avoid confusion.

The scope and the objective of the contract

The contract’s scope and purpose are the primary work or intention for which the contract was created. In simple terms, the work that both parties must do for each other is the scope and the objective. Depending on the nature of the work, there will be duties as per the scope of the contract that parties will be accountable for not performing or not performing in accordance with the contract.

Terms and conditions

Analysing and determining the essential terms and conditions to be included in the contract, the drafter will include the essential obligations, timeframes, payment conditions, and delivery requirements, as well as any other special clauses relating to the contract.

Considerations

In the contract, the terms of payment, fines, and whether there are any other costs or fees for each party are all covered by the financial terms and conditions.

Confidential and intellectual property clause

In essence, this clause serves as a safety net for each party, protecting them from one another and preventing them from abusing any confidential information that would be exchanged throughout the contract’s execution.

Dispute resolution

Dispute resolution refers to the process by which the involved parties in a contract will resolve their disputes and any disagreements that may arise during the execution of the contractual relationship. It’s basically a designed mechanism provided for resolving the dispute in a shorter period rather than approaching the litigation method. In specific dispute resolution, the method chosen depends on the nature of the contract and the parties preferences.

Some of the dispute resolution methods are as follow:-

Negotiation

The parties involved in the dispute will have a direct discussion and find a solution that is mutually agreed upon. This is an informal way to resolve the dispute without approaching the formal litigation process.

Mediation

Mediators are the third neutral party that assists the parties in resolving their differences and opting for a solution. The mediator helps the involved parties communicate and identify common interests. It depends on the parties involved in the contract if they agree with the suggestions given by the mediator; if they don’t, they are not obligated to follow the suggestions.

Arbitration

This is a formal way to resolve the dispute. The involved parties will approach the arbitrator and the arbitrator will act as a private judge. The parties can appoint one or more arbitrators, depending on their preference and the nature of the case or dispute. The arbitrator’s decision will be known as the award, which will be binding on the parties and enforceable by law.

Termination

The circumstances under which the termination of the contract will take place. If some of the situations occur and go against the party, the contract will be terminated.

Indemnification

In other words, indemnification also means a hold harmless provision for the contracting parties. It is also insurance compensation for damages or losses caused during the contract term. The act of paying or promising to pay someone an amount of money if they suffer damage or loss.

Limitation of liability

It puts a ceiling on how much you can actually be responsible for paying in damages. Limitation of Liability can be expressed in various ways, such as monetary caps, exclusion of specific damages, or a combination of both. It protects parties from financial burdens and potential bankruptcy resulting from unforeseen circumstances or events beyond their control. 

Force majeure

It addresses the unforeseen events or circumstances that will occur and are beyond the control of the party or humans (e.g., Acts of war, natural calamities) because of which the party is in no position to fulfil their obligations and duties as per the contract. Force majeure is a contractual provision that allows the parties to take a temporary pause on their contractual obligations or  the performance of the contract for a specific period. In the process, no liability for non-performance will be imposed on the parties.

Severability

A provision in the contract that allows the rest of the clauses to remain in force even if a certain clause becomes unenforceable or illegal. It provides the capability of being separated as a clause. It preserves the remaining valid part of the contract.

Other clauses may be included in the contract; it is not required that only the above-mentioned clause be included. It will depend on the parties’ circumstances as to how the clauses will be designed to preserve their natural rights and interests.

Conclusion

Drafting a contract is an important step in every commercial transaction since the written contract should clearly express the rights, obligations, and responsibilities of the parties involved. As previously stated, the contract should have a clear point of view regarding its legal compliance and risk allocation, and there should be revision and review of the drafted contract to ensure it contains all of the fundamental yet crucial things. Basically, to draft a proper and effective contract, the drafter must recognise all parts of the law and regulations, as well as the parties involved in the contract. The contract’s jurisdiction Addressing the primary issue that will occur in the future and making things legal and obvious for everyone are the key and basic things that must be considered when establishing any type of contract.

References

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