This article has been written by Divyani Newar, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho and edited by Shashwat Kaushik.
It has been published by Rachit Garg.
Table of Contents
Introduction
A contract, in simple terms, is a written agreement between two parties with respect to areas covering employment, business, and property related matters that are mostly enforceable in a court of law. It acts as a shield to protect one’s legal rights.
A contract may be defined as an agreement that creates a mutual obligation between the parties to the contract that is enforceable by law. The primary components of a valid contract include: offer and acceptance; mutual assent; sufficient consideration, which may not always be in monetary value; and the legality of the document.
Contracts can be executed on paper or online. Drafting contracts is not a child’s play. It requires proficiency, in-depth knowledge of the subject, practice and persistence. Skill in this particular section of legal practise can prove to be very rewarding for legal professionals.
Understanding the concept of a contract
What is a contract
The term ‘contract’ has been derived from the Latin words ‘con’, which means ‘together’ and ‘trahere’, which means ‘to draw’.
A contract denotes a legally binding document in writing between two consenting parties. It highlights the terms and conditions set out and the obligations of the parties to be performed after executing the contract. Before drafting a contract, there is negotiation between the parties, which is important in order to incorporate their views and opinions. This is followed by preparing a number of drafts before making a final copy of the agreement.
All agreements are not contracts. Agreements give rise to a contract, provided they include a legal obligation, consideration of some form and parties competent to contract. Examples of agreements that are not contracts are privacy policies and terms and conditions agreements.
In the end, parties sign the agreement to validate the contract, which depicts the proof of approval set out by both parties.
Contracts hold primary importance for any business deal. As per the reports of IACCM, contracts carry out varied business functions that are pivotal in such transactions, which makes them valuable documents for such corporations or organisations.
Contracts can be unilateral, in which one party commits in exchange for another party’s performance, or bilateral, in which both parties have made commitments to one another.
Elements of a valid contract
Contents that make a contract valid are:
- Intention to enter into a legal relationship- Both parties must genuinely intend to conduct business in an honest and sincere way. The commitment must be made with the goal of establishing a legal relationship, and there must be a shared interest between the parties.
- Offer- Contracts are initiated with an offer made by an offeror to an offeree. The offer should be clear and properly communicated to the other party.
- Acceptance- After the offer is made, the offeree has to decide whether to accept or reject it. The offeree has the option to accept the offer orally or in writing, which includes electronic mediums such as email.
- The offer must be accepted in order for a contract to be legally binding. Similar to an offer, an acceptance must be clear and properly presented to the other party.
- Consideration- A contract is made for parties to receive something in return that is of value. Without consideration, a contract cannot be considered valid. It can be monetary in nature or something valuable, such as terms and conditions, promises, services, goods, assets, etc.
- Legal capacity- The legal capacity to enter into a contract requires the parties to understand and abide by the terms, obligations and consequences of the contract. Each of the parties must demonstrate their legal capacity to validate a contract.
As stated in Section 11 of the Indian Contract Act of 1872, some people are prohibited by law from engaging in contracts. They are:
- A person who is a minor.
- A person who has an unsound mind.
- A person who is disqualified from contracting by any law.
- Free consent- Contracts must be entered into voluntarily and without any form of force, fraud, mistake, misrepresentation or undue influence from the parties involved.
Registration of a contract
Registration may be defined as the procedure where original copies of a document are produced before a recognised officer in order to record and safeguard the original copies along with other important information.
The rules and guidelines for registering a legal document are provided by the Registration Act of 1908.
After a contract is prepared, agreed upon and signed by both parties, it proceeds to the next phase, which is registration. It makes a contract valid and enforceable in a court of law. It is not a compulsion to register a contract, though it is advisable to authenticate it as a legal document to protect the parties from unwanted trouble in the future.
As per Section 23 of the Registration Act, 1908, for the object of registration, all documents, with the exception of wills, are required to be presented before an officer within a period of four months after the date of execution.
Review of contract
Contract review is the process of going through the contract thoroughly before agreeing to and signing the terms and conditions. The piece of documentation will be examined and analysed to ensure that none of the elements or clauses are missing and that it is free of any kind of error or discrepancy to help the parties have a satisfactory experience after executing the contract.
What is an E-contract
In the present scenario, we have encountered every transaction taking place online, including shopping, online banking and the signing of business and government deals on the internet. All these constitute an electronic or e-contract. E-contracts take place online, where the parties don’t meet in real life in most cases. E-contracts take place or are executed online, with the parties rarely meeting in person. They resemble paper-based commercial contracts to a great extent.
These are of various types, such as browse wrap, click wrap and shrink wrap.
What is contract drafting
It is a skill that has been traditionally mastered by legal professionals, such as lawyers. Regardless of the area of specialisation, all lawyers are expected to know the basics of contract drafting, which has proven to be exceedingly beneficial.
Contract drafting requires a great deal of analytical skill, quick thinking, and attention to detail. One has to acquire skills in terms of being mindful of the minute details and able to comprehend and interpret difficult legal concepts with ease.
Legal documents set forth both the facts and the law relevant to and potentially affecting the parties to the document. The accomplishment of the client’s objectives and goals is a lawyer’s first priority. Here, legal documents play a crucial role because they clearly and explicitly describe and explain how to accomplish the client’s objectives.
In today’s contemporary world, most contracts take place mostly between businesses. Contracts that take place between individuals are basic in nature, such as while accepting a job offer or selling a property. Legal agreements that take place between business bodies are on a large scale with clients, partners, and other persons associated with them. Thus, contracts form the pillars of commercial transactions.
Basic principles to be followed while drafting a contract
Basic principles to be followed while drafting a contract:
- Identification of purpose: The object for which the contract is drafted needs to be prioritised, the client needs to be heard and every detail of the conversation needs to be noted down.
- Having clarity regarding the legal provisions in relation to the object: A contract should be drafted to perfection and error free to be enforceable in a court of law. Clauses need to be incorporated with precision; they are incorporated keeping in mind how high the stakes of an individual or an organisation are. The law of the land needs to be kept in mind while drafting; as the saying goes “ignorance of law is no excuse” as expressed in the Latin maxim “ignorantia juris non excusat”.
- Precise and to the point: The language of the contract should be simple and concise
- Inclusion of payment clause: When the payment has to be made, whether be it pre or post payment, full amount or in parts, mode of payment, etc., such details according to the negotiation between the parties to the contract are to be incorporated without any ambiguity.
- Description of the parties involved and their roles and responsibilities: Defining who the parties are to the contract, their description, which includes their name, address, and other details necessary to be incorporated in the contract. The roles and responsibilities of the parties need to be clearly specified and the parties must be made to be obligated by them so as to avoid disputes in the future.
- To cover up all the unforeseeable future circumstances: In order to protect the client from any future mis-happenings, insertion of this clause becomes very important in order to safeguard the interests of the client.
What are “clauses” in a contract?
A contract is a legal document that has clauses for specific purposes. Clauses are the segments of a contract that state the conditions, requirements and legal provisions with respect to the contract. They help to keep the documents consistent throughout. Contracts consist of different types of clauses with distinct purposes, which together make up a legally binding agreement for the parties to agree to and finalise by signing it. Additionally, they can provide guidance with regard to the enforceability of the contract in different situations.
Important clauses to be kept in mind while drafting a contract
Some of the important clauses of a contract are discussed below:
- Definition clause: Definition clauses contain definitions as per the necessity of the contract. It is used to explain the words that are used in the agreement to avoid misinterpretation of any terms used in the contract.
- Parties to the contract: Information such as persons involved in the contract is covered under this clause and is referred to throughout the contract using the same name stated in this clause to avoid ambiguity about people’s identities.
- Term: It specifies how long the contract will be in effect. The commencement and termination of the contract’s legal effect.
- Representations and warranties: The assertion of facts by one party to the other is covered under representation clause. Indemnity if the fact turns out to be false or in breach of the fact is covered under the warranty clause. Representation and warranties are distinct terms, as they each have their own specific remedy for infringement.
- Payment: One of the important clauses that need to be incorporated is the payment clause. It directs how to make and receive payments, modes, types of payment methods and all the details related to payment.
- Confidentiality: These are also known by the name of non-disclosure agreements. Parties are barred from disclosing sensitive information to third parties under this clause.
- Indemnification: When there is loss to one party because of breach by the other party to the contract, the party at fault has to compensate the former or the party suffering loss is covered under this clause. The mode of indemnification has to be stated clearly under this clause.
- Governing law and jurisdiction: It covers the law that will be used for the interpretation of the contract if there is a dispute between the parties. This often specifies which state law will be applicable to resolve disputes.
- Termination clause: It outlines the circumstances under which the contract can come to an end by the parties involved, which include the obligations pre and post termination such as notice period, payment, and other rights and duties of the parties.
- Dispute resolution: Modes of resolving disputes amicably outside the court, which is much more feasible in terms of money, time and energy as compared to the courtroom process. There are several modes, such as arbitration, conciliation, negotiation, etc.
Areas of opportunities for legal professionals with respect to drafting contracts
Contract drafting is a highly rewarding part of legal practise. It accounts for a notable and profitable share of income for lawyers individually as well as reputed organised law firms. Negotiation and contract drafting, as compared to other areas of work in the legal field, are foreseeable or predictable with high and satisfactory margins. It can even prove to aid in providing a good source of income for fresh young lawyers who are struggling in courtrooms as litigators.
The legal profession has had an increasing expansion in recent years in terms of job prospects, revenue generation, and profits. Large scale law firms generally generate high revenue from contract drafting from different branches, such as banking, mergers and acquisitions, and corporate finance, with respect to such deals. Many experienced lawyers also hire junior lawyers based on their contract drafting skills.
One can opt for a diverse range of jobs if one has a good grasp on this skill, ranging from being an advocate to working as a legal advisor or a legal analyst and other positions in private companies or organisations. Advocacy is one of the primary professions for a fresh law graduate. In addition to litigation, a significant portion of the practise involves reviewing and drafting various cases and documents. For law graduates, working as an in-house counsel or legal advisor for multinational corporations (MNCs), corporate organisations, non-governmental organisations (NGO), and governmental entities is another alternative.
Legal analysts have a specialisation in law and work for lawyers both individually and in teams to conduct research on the subject and analyse related documents. Private companies provide a great deal of opportunities in terms of career growth for law graduates. They hire them as legal counsel to deal with their legal matters.
Contract lawyers assist their clients with contract negotiation and drafting, protecting their clients from fraud. They assist the client in understanding the technical or legal jargon that a layperson could find challenging to understand in a contract. They assist the client with the contract’s enforceability.
Common contracts for legal professionals to draft
Employment agreement
It outlines the guidelines that must be followed by both employers and employees at their place of employment.
Contract of sale
It is an agreement wherein the buyer and seller accept each other’s terms and conditions for the seller to sell his goods to the buyer and the seller to get payment for those goods. Ownership is handed over from the seller to the buyer.
Lease deed
This contract covers the leasing of immovable property, such as commercial real estate, as well as the terms set forth while renting out the property.
Memorandum of understanding
It is an agreement that conveys the aligned will between the parties. It can be in between two parties (bilateral) or between many parties (multilateral)
Confidentiality and non-disclosure agreement
This agreement states that sensitive information shall not be shared with any third party, thereby establishing a confidential relationship between the parties.
Leave and license
It is an agreement with respect to immovable property where the licensor grants permission to use the property for a short period of time, generally for a period of 11 months, to the licensee before renewal of the agreement.
Conclusion
Contracts act as a shield for the parties against any unforeseeable future circumstances. Clauses are the heart of a contract. It should be incorporated according to the demands of the case and the parties involved. Along with it, the language, elements, and basic principles need to be followed. Before the parties have signed a contract, it is advisable to have it reviewed. After executing the contract, it can be registered to make it more enforceable and legally binding. Mastering the skill of contract drafting takes time. It is not a skill that can be picked up in a day or two. This is why legal professionals draft with such perfection and receive generous payment.
References
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