The article is written by Nikhil Thakur from Manav Rachna University. The author has briefly examined the principles of drafting a contract and the loopholes attached to it. Besides this, the author has suggested a few measures upon how to avoid them.
Table of Contents
Introduction
The establishment of any legitimate connection between two or more parties is based on the premise of a contract. Drafting is a critical concept concerning contracts as it includes steady consideration of specific clauses, terms, and conditions communicated by the parties based upon their needs. Whereas, whosoever is making a draft shall consider the issues attached to it like the subject of the contract, products to be fabricated, dispute resolution, etc.
Drafting a contract requires an abundance of expertise, precision, skills, etc., to which both the parties are cheerful. While drafting a contract, each word, detail, and a line is significant; consequently, it becomes crucial/essential to avoid these kinds of mistakes.
Loopholes, while drafting a contract, signify the lacunae and uncertainties presented so that the parties can keep them away from following the terms of the contract. The loophole may not be noticeable first-hand until the damage has taken place or has been realized. Hence, it is pivotal as far as possible to avoid loopholes while drafting a contract. So, whosoever seeking to provide contract drafting services shall possess thorough knowledge, skills, and understanding.
Drafting of a contract – things to keep in mind
To understand the current topic, firstly, it is important to understand what a contract is?
Basically, a contract is “an agreement enforceable by law,” which means any agreement (not being a void agreement) which is valid, legal, practicable, realizable, achievable, and executable before the court of law is simply a contract. Reiterating the fact, one shall be vigilant before entering into a contract.
Few things shall be kept in mind before or while drafting a contract:
- Purpose of the contract
While drafting a contract, it is pivotal to know the purpose of the contract and such purpose with which the contract has been entered shall be easily conceivable, and understandable. Therefore, there shall be no uncertainty or ambiguity concerning purpose.
- Acknowledging crucial issues
Both the client and the attorney must understand each other so that they get acquainted with the issues while discussing. This step aids in determining the issue and helps determine other crucial issues that were left unattended or overlooked.
- Being specific with the terms as far as possible
Most importantly, the feasibility of the contract shall be kept in mind whether it is capable of being performed or not. Thus, the terms and conditions of the contract shall be prepared carefully, and due consideration shall be ensured.
For instance; “A” and “B” entered into a contract where “A” says that he shall give one crore rupees to “B” if he can go close to the sun (this is the terms and condition in the instant case). As this is impossible, hence, the contract is void. Therefore, terms and conditions shall be framed carefully.
- Examining and analysing the templates utilized
When it comes to drafting a legal document or, more specifically, a contract, one size doesn’t fit all, as it depends from case to case. The legal document depicts the client’s requirements that vary from one another. Thus, a proper and efficient template shall be utilized, which is easily conceivable and understandable.
- Proofreading carefully
Another essential aspect that shall be taken care of is proofreading the contract framed. This step allows the representative or the framer of the contract to understand its flaws to be rectified accordingly. This is a significant step as if proofreading is lacking, the contract framed may cause blunders.
- Ensuring that the contract is easily comprehensible
It is pivotal to ensure that the contract is easily conceivable and understandable; hence no ambiguity shall be left. The contract shall be framed so that even a common person who doesn’t have much or no knowledge of the business understands all the conditions and obligations as presented in the contract. The contract framed shall be overarching and must be simple along with plain English language.
- Inclusive of the arbitration clause
A thorough reading of the contract forms another important aspect of drafting. One shall ask himself/herself what would happen if the other party failed to comply with the terms and conditions of the case. It is not feasible to sue the non-complying party as the same requires time and resources. Hence, in the client’s good interest, a forceful arbitration clause shall be inserted and is more feasible.
- Verifying the contract thoroughly
Besides conducting proofreading, one shall also conduct verification of the document so that whatever information has been passed on to the attorney is recorded and effectively framed.
- Renewal of contract
If the nature of the contract is required for a longer period, then a renewal clause may be inserted to ensure the continual binding effect of the contract. This step ensures that the same contract is taken forward; therefore, there is no need to frame another contract and even register the same again.
- Examining all the obligations
The obligations clause shall be mandatorily inserted within the contract as it forms the crux. This clause enumerates the rights and duties of the parties, and violation of any of them may entitle the other party to bring a suit or hold the other for breach of contract. The parties to the contract determine the rights and duties enumerated in the contract; hence, they shall be clear and understandable.
- Analysing all the possible circumstances
Proper drafting is possible only if all the constraints are thoroughly examined, and the key to drafting is knowing the constraint and framing them accordingly. Anticipation of potential issues which may arise and having a solution to the same aids in the effective drafting of a contract.
- Force Majeure
Force majeure (a reasonably inevitable/ uncontrollable situation) is another important clause in the contract like any other clause, but it is often overlooked or not inserted within the contract. It is essential to draft and insert the same because it allows the parties to stop themselves from executing their duties in unforeseen conditions. It even helps the parties from incurring huge losses.
- Expense payment
This clause specifies the amount of expense incurred by the parties during their business; it can be 50:50, 75:25, and so on. This clause avoids and removes all kinds of ambiguity as to incurring the expense. Further, it provides the mode of payment to be utilized by the parties while in their business.
- Profit-sharing
Similar to point 13 (mentioned above), profit sharing can also be 50:50, 75:25, or so on. After all, the expenses are done, and any profit earned by such a contract shall be distributed accordingly as per the share.
- Compensation
This clause shall also be inserted within the contract so that due to omission/wrongful act, etc., of one party, the other shall not be entitled to any loss. This clause states the amount of compensation to be paid by the other party in favour of the former (who has incurred losses due to default of the other).
Common mistakes made while drafting a contract
Even after considering how to make a contract and what things are important to be inserted, many people still encounter errors; therefore, I’ve mentioned a few pitfalls or errors made while drafting a contract.
- Forget to insert the internal dispute resolution mechanism or arbitration clauses
A contract is entered to protect the mutual interest of the parties and the most common mistake made while drafting a contract is that most of the people fizzled to include the redressal mechanism in the same. So, in such a situation the aggrieved is left in limbo as he/she doesn’t know whom to contact. Hence, it is important to insert a dispute resolution mechanism clause so that no one is at a loss.
Along with this, an arbitration clause shall also be inserted so that the dispute can be referred to here if the primary mechanism has failed. These redressal mechanisms are preferred over litigation because they are cost-effective as well as less time-consuming.
- Missing boilerplate clauses
The provisions or clauses which nearly remain the same in every contract are boilerplate clauses. Due consideration to these clauses is a sine-qua-non; hence, although these clauses are similar in mostly all the contracts, they shall be framed and negotiated accordingly while drafting a new contract.
- Mode of payment mechanism not mentioned
One of the basic focuses that shall be kept while drafting a contract is to dole out a comprehensive mechanism that determines the mode of payment and consideration for each other. There is no contract if there is no consideration; hence, a proper mechanism shall be provided in the contract, stipulating the time intervals, instalments, and compensation process in case of late payment. These clauses ensure the continuity of the contract and avoid any further issues concerning the payment procedure.
- Lacking conditions that qualify breach or termination of the contract
It is important to clarify the condition under which a contract (current) may be terminated or amounts to a breach of contract. This is an essential clause that shall always be inserted and framed as per the client’s requirements. Besides this, a contract shall also contain a provision that allows the parties to terminate the contract after giving reasonable notification and justification.
- Poorly framed definitions
Another mess that is created while drafting a contract is framing confusing or uncertain definitions. A clear and precise definition shall be framed; otherwise, the client would be vulnerable to the dispute, liabilities and so on. Thus, this shall be cured as soon as possible, and an effective proofreading process shall be procured.
- Applying wrong sections
Along with the poorly framed definition, the framer even applies the wrong section which also can put the client at vulnerability. Therefore, all the information and evidence be recorded carefully and framed correctly to apply the correct sections of the Indian Contract Act, 1872.
- Poor templates
A common mistake seen nowadays is that the framer utilises one template for all the clients without considering their requirements. Besides inserting all the information correctly in the contract, a proper template must be used. Template size varies from case to case as the requirements of clients in every case are distinct. Hence, a proper template shall be used accordingly while drafting a contract.
- Poor format
One of the basics of legal documents is the format; any legal document which lacks proper format may break the interest of the other while reading it. However, on the other hand, proper format and arrangement of headings and subheadings allow the interest of the parties and even aids in finding things quickly. Thus, the framer of the contract shall also give due consideration to the same.
- Rights and duties not specified clearly
Another basic mistake made while drafting a contract is that the parties fail to clearly mention the rights and duties. One of the most important aspects of a contract is determining the rights and duties of parties.
This clause aids in determining what are the responsibilities and rights of the parties who are entering into the contract. Further, this helps the parties know what they can do, what they cannot, and what they should do.
- Difficult to understand
Further, another issue as to framing is utilizing heavy and complex words, which become a headache for the reader to get the essence of the contract. Moreover, if everything mentioned in the contract is tangled, it becomes difficult to understand what the contract wants the parties to do. Hence, while drafting a contract, plain English along with clear information/facts shall be used and recorded.
Consequences of the loopholes
- Impossible to perform
When the contracting parties perform whatever is present in the contract, the same is called performance. However, many times due to loopholes present in the contract, it became impossible to be performed.
For instance, “A” and “B” entered into a contract that “A” shall prepare a book naming the discovery of India and if “A” dies before preparing the book, then “C” shall be preparing the same. Woefully, before the completion of the book, “A” died, and thereafter “C” refused to carry forward the work because the contract was entered between “A” and “B”; there was no contract with “C”. Hence, it is impossible to pressurize “C” to complete the work as he is not a party.
- Breach of contract
One of the most common consequences of the loopholes in the contract is a breach of contract. Many a time, the parties are performing as planned according to the contract, but due to lack of information in the contract or the rights and duties clause is not explicitly explained, the parties somehow land up creating a mess, and hence, resulting in a breach of contract. Here, the parties do something which they are not supposed to do.
- Breach of the legal relationship
Similarly, when a contract is a breach in response to loopholes, the legitimate relationship among the parties also terminates; hence no contract or obligation is left to be performed.
- Unfair agreement
A contract is often entered between two parties where it is made unfairly against one party, which is initially not known due to lack of information or records in the contract. Thus, any such activity amounts to a gross unfair agreement and is liable to be terminated. Hence, it is important to verify the contract more than once.
Ways to avoid these mistakes
There are three possible ways that can be adopted to avoid these kinds of mistakes which may create blunders.
- Proofreading the document
The only possible way to avoid any loopholes in the contract is proofreading and is the most efficient and effective method to correct the contract. Proofreading the document allows correction in the formatting errors, in language, and so on. Thus, every person before submitting the contract shall always once perform proofreading.
- Verification
Verification of the documents allows the framer that he/she has applied the correct sections of the concerned Act and ensures that whatever the client has said is adequately recorded in the contract. Verification of the documents plays a pivotal part in the contract as if the contents are not properly framed the other party may benefit from it. Therefore, similar to proofreading, verification is also crucial.
- Using appropriate template
Reiterating the fact that no one size fits all cases. Templates shall be framed accordingly to the cases. Copy-Cut-Paste system shall be strictly avoided.
Conclusion
Drafting a contract is crucial. It requires skills, knowledge, etc.; thus, due consideration shall be made in that respect. A proper contract shall include different clauses so that the reader can easily identify what he wants to read. The terms and conditions under the contract shall be explicitly mentioned along with the purpose of the contract. An efficient contract saves much time, effort, and cost, which may have occurred otherwise.
Along with all this, it shall be made mandatory that before submitting the contract it shall once undergo proofreading and verification.
References
- http://www.legalsupportworld.com/blog/avoid-mistakes-during-contract-drafting/
- http://www.legalserviceindia.com/legal/article-3044-basics-to-contract-drafting-and-contract-review.html
- https://blog.ipleaders.in/top-5-common-mistakes-drafting-contract-avoid/
- https://www.upcounsel.com/contract-loopholes
- https://www.lawctopus.com/ten-common-errors-to-avoid-while-drafting-contracts/
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