This article is written by Lalbahadur Pal who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
Body corporate or any individual or any professional body enters into a contract/ agreement/ transaction with another body corporate or individual or with any professional bodies nearly every day as per business requirement. This may include an agreement to purchase supplies and raw materials or to provide or receive services from another party. Contracts particularly include what work or services will be provided, how much the work or services will cost, and who will pay, and when including duties and obligations of each party.
Types of contracts – Understanding the vitality of written contracts
Contracts are executed in two forms – either in oral (verbal) or written. Generally oral contracts are executed for day to day transactions where the performance of the duties and obligations are in immediate nature or very short periods like shopping in the mall, purchasing grocery for the general store on a monthly credit basis, purchasing fruits or vegetables, etc. where disputes have little chance of arising. Written contract is executed for day to day transactions as well as for a particular transaction or where the relationship between the parties of the contract is for longer duration or parties think that in future there may be a chance of disconnect in their understanding which leads to a dispute between them.
These oral and written contracts are legally binding. However, in case there is a misunderstanding between the contracting parties concerning oral understanding, the dispute becomes a “he said, she said” (hearsay) situation that is very hard to prove before the court of law as compared to a written contract. Human memories can fade over time and create legitimate disputes between two well-meaning parties in both cases and in very worst, parties to an oral contract where they have more opportunity and a chance to be disingenuous with any duties and obligations for the benefit. Therefore, a well drafted and written contracts play a very important role in managing the risk and help to avoid misunderstandings and disputes that can lead to future claims and other legal disputes and better protect the interests of the contracting parties.
Further, a written contract plays a very important role in all business transactions. Apart from making the contract between concerned parties legally binding, a written contract can also serve as future references, part of the business’ policies, as well serve as proof in the event of any misunderstandings, complaints, or disputes needing litigation. Therefore, all body corporate or individual or professional bodies enter into only written contact.
Law governing contracts in India – Understanding the nitty gritty
The primary law in India which governs the contracts, their creation, interpretation, and enforcement – namely, the Indian Contract Act, 1872. This law defines the provision requirement of a contract to make a contract enforceable under the provisions of law. Some of the most prerequisite conditions, which are required to be fulfilled under the Indian Contract Act, 1872 for a contract to become a valid contract are:
- An offer by one party;
- An acceptance of the offer by the other party(ies);
- The capacity of all the parties to contract;
- A lawful consideration;
- A lawful object; and
- The contract not being expressly declared void by law or be opposed to public policy.
Each of the above prerequisite conditions have been explained in detail under the Indian Contract Act, 1872.
Once the requirements for the existence of a valid contract as enumerated under the Indian Contract Act, 1872 have been fulfilled, the parties are said to have concluded a valid contract and are capable of legal enforcement.
Disadvantages of entering into oral contracts
Oral contracts are also recognised under the Indian Contract Act, 1872. But, oral contracts can be disadvantageous in many cases as follows:
- The terms and conditions of the oral contract come from the conduct of the parties. In cases, the actual performance of duties and obligations of the contracting parties may be different from the duties and obligations actually agreed upon and hence, the interpretation of the contract may be totally different from what the parties had originally intended.
- Few provisions of the contract like consequences in case of breach of contract, time for performance and manner of performance is open for interpretation by non-contracting parties in the absence of a written contract, thus leaving chances for incorrect interpretations or unintended consequences.
There is also one more strong reason in favour of executing a written contract is that it ensures that most of the terms and conditions are agreed between the contracting parties clearly. It is important that the terms are kept simple and not confusing and are detailed to the extent possible. By ensuring the above, the contracting parties, be in a position to ensure that the contract, in case of dispute and if judged by a competent court or an arbitrator is given an interpretation as close to the terms intended and agreed by them.
It is, therefore, advisable and suggested for the best interest of the contracting parties, irrespective of whether such party is a body corporate or any individual or any professional bodies, that an oral contract be avoided and that the contract be reduced in writing. The written contract not only addresses the commercial terms and conditions between the contracting parties, but also the essential legal provisions under the applicable law for a particular transaction. For example, in executing a sale deed or an agreement to sell or lease deed or leave and license agreement, it is important that the commercial as well as legal terms shall be valid under the Transfer of Property Act, 1882.
It is also noted that in case the contracting parties do not detail out all the terms and conditions of the particular business transaction in their contract, the provisions of the Indian Contract Act may become applicable as the “default” terms. For example, in the case where the contract does not carry the termination clause and any contracting party wishes to terminate the contract, then in such case, the contract can be terminated by that party only by serving a reasonable notice of termination. But the “reasonable notice” is not defined under the Indian Contract Act and varies from case to case and depends on various circumstances, so it leads to the dispute between the contracting parties. Therefore it is advisable that the parties to a contract must enter into a written contract with all possible details, terms and conditions which does not open for interpretation under the Indian Contract Act.
Below are the important elements of a well-drafted written contract
- Format of the contract. Actually, there is no specific format for a written contract or agreement. But for a legally binding contract or agreement, shall contain essential terms and conditions like the valid offer, acceptance of that offer, and the valid consideration for that offer. An offer shall not be against the public policy, such as involving an illegal act(s) or fraudulent transaction(s). The contract must be entered into by parties that are legal adults, and those adults should not be under the influence of alcohol or illegal drugs or otherwise under duress.
- Parties, fees, and timing of services. All written contracts should identify all parties in detail, whether they are individual or body corporate. The contract should contain the complete and full legal name of the business or individual. The fees should also be mentioned in detail, including when payment of consideration is required to be paid.
- Scope of the work to be performed. The scope of work clause of the contract is very important to define. The scope of work clause should contain what work or services are to be performed or what materials or products need to be provided. The contract should identify each party’s duties and obligations.
- When the contract is complete? How to deal in case of a breach? Each and every contract should contain the provision for termination including the period/duration of the contract. If it is a one-time exchange of goods or services, the contract should mention that the contract will be terminated upon the completion or delivery of goods or services. In another case, the contract should contain the provision regarding how and when the parties can terminate the contract. In the event of a breach or any failure to perform duties or obligations by any contracting parties, the contract should contain the provision for dispute resolution with jurisdiction and applicable law(s).
- Signatures and execution of the contract. All contracting parties including the body corporate to the contract should sign or execute the contract. Each party should ensure that the person executing the contract on behalf of the body corporate, should be legally authorized through a valid authorisation letter. All contracting parties should keep a copy of the contract for their future reference in case of an event of a dispute.
Below are the importance benefit of written contract:
A written contract provides:
- proof of what was agreed between the contracting parties;
- prevent misunderstandings or disputes on the part of the interpretation of terms and conditions of the contract;
- give security and peace of mind to the contracting parties by knowing parties about their duties and obligation;
- clarify the party’s status by stating as an independent contractor or service provider;
- reduce the risk of a dispute in payment of consideration and scope of work;
- set out detailed provisions of dispute resolutions;
- set out detailed provision regarding amendment of the contract, and contain detailed provision for termination of the contract.
It can be said and advised to professionals who are involved in regular business transactions as a part of their professional activities or duties, even a normal exchange of goods or services between the parties should be in writing with the opposite party. This is usually because most professionals believe various transactions work well on trust as per their verbal understanding, but when things are unclear or go twisted, a professional will realize the importance of a written contract.
Every professional can minimize their risks by reducing all transactions into written contracts or agreements. By utilizing well-drafted written contracts, businesses and professionals can manage the risks and avoid misunderstandings and confusion that can lead to costly professional liability claims and lawsuits.
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