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Many individuals perceive drafting legal contracts as a complex endeavor. Furthermore, there is often an assumption that even when a contract is meticulously crafted, counterparties may not adhere to the agreed-upon terms. This guide aims to debunk these misconceptions. With the guidance provided here and the development of effective negotiation skills, you can independently create professional agreements. As long as you have a clear understanding of your objectives and grasp the fundamental contract terms, we will provide you with straightforward steps to achieve your goals.
In this article, we will dig into the process of contract drafting, key considerations before reaching an agreement, and the dos and don'ts of contract creation. Additionally, we will outline a preliminary framework for the clauses that should be included. In the final section of this article, the author will explain how to efficiently and effectively review these documents. Embark on this user-friendly guide to craft contracts like a seasoned professional.
What is contract drafting ?
Lets first discuss about contract drafting. Under Indian Contract Act ,1872 ,Contract drafting is an act of writing of the terms and conditions of an agreement between the parties on a piece of paper ,which determines the future relations between the parties . In the modern world contracts plays a crucial role for companies success. They make a basic legal connection between the people involved.
However ,Having a written contract is great for any organization because if in future any certain problem arise between the parties ,then both side can look at the agreement they both agreed to. If things get really bad and it end up in a court ,the contract can be used as a proof .
Once a contract is written , agreed upon , and signed by parties who were involved then it should be officially recorded. This step is important to prevent issues down the road .
Writing contract is really an important job , and it needs to be done without mistakes. So its a good idea to hire a professional to write an agreement .
Define Contract under Indian Contact Act ,1872 .
Contract :-
The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as “An agreement enforceable by law”. In other words, we can say that a contract is anything that is an agreement and enforceable by the law of the land.
This definition has two major elements in it that is – “agreement” and “enforceable by law”. So in order to understand a contract in the light of The Indian Contract Act, 1872 we need to define and explain these two pivots in the definition of a contract.
Agreement :-
In section 2 (e), the Act defines the term agreement as “every promise and every set of promises, forming the consideration for each other”.
Now that we know how the Act defines the term “agreement”, there may be some ambiguity in the definition of the term promise.
Promise :-
The Act in its section 2(b) defines the term “promise” here as: “when the person to whom the proposal is made signifies his assent thereto, the proposal becomes an accepted proposal. A proposal when accepted, becomes a promise”.
In other words, an agreement is an accepted promise, accepted by all the parties involved in the agreement or affected by it. This definition says that in order to establish or draft a contract, we need to initiate some steps:
The definition requires a person to whom a certain proposal is made.
The person (parties) in step one has to be in a position to fully understand all the aspects of a proposal.
“signifies his assent thereto” – means that the person in point one accepts or agrees with the proposal after having fully understood it.
Once the “person” accepts the proposal, the status of the “proposal” changes to “accepted proposal”.
“accepted proposal” becomes a promise. Note that the proposal is not a promise. For the proposal to become a promise, it has to be an accepted proposal.
To sum up, we can represent the above information below:
Agreement = Offer + Acceptance.
Before making an agreement, there are important things to keep in mind:
1. know What You're Talking About: The person making or checking the agreement should really understand what's in it. It should be clear and in simple words so that anyone can understand it without any problem.
2. Make Sure It Can Work: The stuff in the agreement should be doable. Think about if the people in the agreement can actually do what it says.
3. Think About Future Problems: Try to guess what problems might come up because of the agreement. If you can do this, it can help avoid issues later on.
4. Don't Leave Holes: Try to make the agreement without any gaps or unclear parts. A clear agreement can save you from legal problems later and help everyone know what they have to do.
5. Understand the Main Points: Before getting into all the details, figure out what the agreement is really about. This tells you what rules and conditions need to be in there. For example, if it's about a job, make sure it covers everything about how the employer and employee will work together.
* Also, remember that the subject of the agreement is super important. If it's something illegal, then the whole agreement is no good from the start. So, check if it's legal and make sure it makes sense before going into all the details. If the agreement is illegal then it should be consider as void agreement .
Terminology Clause:
In any contract, it's important to have a terminology clause. This means that the contract should explain what certain words and phrases mean. This is done to prevent any confusion where the same word might mean different things to different people. Adding a terminology clause helps to make sure that everyone understands the contract. So, before you start writing the contract, it's a good idea to identify all the technical terms that need to be defined. For instance, terms like "employer" and "employee" should be clearly explained so that there's no confusion.
Example of a Terminology Clause
Terminology Clause:
In this Agreement (the "Contract"), the following terms shall have the meanings ascribed to them below in accordance with the definitions provided under the Indian Contract Act, 1872:
1. Offeror: The "Offeror" refers to the party making an offer to another party, as defined under Section 2(a) of the Indian Contract Act, 1872.
2. Offeree: The "Offeree" refers to the party to whom an offer is made, as defined under Section 2(b) of the Indian Contract Act, 1872.
3. Consideration: "Consideration" shall have the meaning as defined in Section 2(d) of the Indian Contract Act, 1872, encompassing something in return for which a promise is made, executed, or hold back .
4. Void Agreement: A "Void Agreement" shall be in accordance with the provisions of Section 2(g) of the Indian Contract Act, 1872, signifying an agreement that lacks enforceability from the beginning due to illegality or certain other factors.
5. Voidable Contract: "Voidable Contract" as defined in Section 2(i) of the Indian Contract Act, 1872, pertains to an agreement that is initially valid but can be voided by one party due to coercion, fraud, undue influence, or similar reasons.
6. Capacity to Contract: "Capacity to Contract" refers to the legal competency of parties to enter into a contract, as explained under Section 11 of the Indian Contract Act, 1872, specifying that parties must be of a sound mind and of an age of majority.
By providing these definitions in the Terminology Clause in accordance with the Indian Contract Act, this Contract ensures that the terms used in the document align with the legal definitions specified in the Act, promoting clarity and legal precision in the agreement.
Details of the Parties:
A contract comes into existence when two separate entities or parties intend to establish a business relationship. These parties are at the core of the contract, making it essential for the drafter to possess comprehensive information about them. This information concerning the parties involved in the contract must be included. The agreement should explicitly state the terms and conditions agreed upon by the parties, the nature of their business engagement, and the respective addresses of their organizations .
Validity of a contract :-
The contract's timeframe must be clearly defined. Regardless of its length, every contract is established for a specific period, and this period must be clearly outlined to determine the duration of the legal relationship between the involved parties. In certain cases, the contract's duration may also be contingent upon achieving specific objectives. Therefore, it is essential for the drafter to explicitly specify when the contract will conclude .
Renewal of the contract :-
The contract renewal clause is occasionally included within the contract's duration section. This incorporation aims to prevent the repetitive creation of identical agreements. When an agreement's terms and conditions are unlikely to change over an extended period, a renewal clause can be introduced. It's important to note that this clause should only be included if both parties mutually agree to it; it should never be unilaterally inserted by the drafter during contract drafting.
Consideration's legality must be ensured :-
In a contract, both parties must clearly outline what they're exchanging as consideration. Consideration is what one party gives in return for a service or product. It's important that the nature of this consideration is legal and provided through lawful methods. If a contract involves illegal consideration, either entirely or partially, it will be deemed unlawful and void, as stated in Section 23 of the Indian Contract Act, 1872. When drafting a contract, it's essential to assess the nature of the agreement and ensure its legality.
Standard of goods and services :-
This provision is included to guarantee that both the buyer and the seller receive and provide goods and services of the specified quality as explicitly outlined in the contract. If there are any deficiencies in quality, either party can seek legal recourse with sufficient evidence of this contractual obligation .
Return and refund:-
The inclusion of a return and refund provision within the contract is essential to provide a mechanism for a party to request a refund if they are dissatisfied with the goods. This provision should clearly outline the return process and specify the refund policy. It is advisable for the contracting parties to communicate their preferred return and refund terms to the drafter to ensure alignment on these terms.
Resolving disagreements and specifying jurisdiction in the contract :-
A clause should be mention in the contract, in case of any disagreement arises between the involved parties. The contract should outline how the dispute will be resolved and in which location or court it will be addressed . This decision should be made based on what works best for the parties involved. It's usually better to have a clear process and location for handling disputes.
Ending the contract :-
We need a section or clause in the contract that explains when the contract can be canceled / terminated . This helps set boundaries for both parties. If one party doesn't follow the agreement, then the other can ask to end the contract. However, this can only happen if we include this clause in the contract, and both parties agree on how to end it .
Roles and Obligations :-
The contract should outline the rights and duties of each party involved. Including this clause ensures that there's a clear set of rules governing how both parties should behave.
The clauses mentioned earlier serve as references but are not exhaustive. Depending on the specific needs of the contract, the drafter can include additional clauses to prevent future complications. It's crucial to maintain a fair and balanced approach when drafting the rights and duties, ensuring that neither party is unfairly favored over the other.
Now, let's search deeper into the four main sections of the agreement and explore which clauses should be incorporated into the contract .
Four main parts of the contract :-
Writing contracts can be quite challenging. While there are many templates online, they often lack a structure that fits your specific needs. These templates are designed for various laws and transactions, which might not match your situation.
Your transactions are unique, and if you just copy and paste from these templates, you might end up with unnecessary or missing clauses. That's why it's important to know how to draft contracts effectively.
In the previous section, we talked about some things to consider when drafting contract clauses. You can use those points as a reference while creating your contract. Now, let's focus on the key clauses that are typically included in most contracts, unless there's a specific contradiction.
Contracts usually have four main sections, each containing different clauses. This structure makes the contract easier to understand and navigate.
I. Introduction in Contracts :-
Contract introductions encompass the agreement's title, a concise summary, party names, definitions, interpretation, preamble, and recitals. When drafting these clauses, keep these key points in mind.
Title in Contracts :-
Including a title in the agreement is important. It tells you what the agreement is about and gives you a quick idea of what's inside. For instance, if the title says "Employment Agreement," you know it's all about the rules and terms between an employer and an employee.
Starting Line in Contracts :-
The opening line is crucial because it shows when the agreement was made and when it goes into effect. It usually reads something like, "This ABC agreement is made on 'this' date at 'that' place."
Parties and Identification :-
In this section, we list the names of the people or entities involved and provide additional details like parentage, business entity numbers, and other identifying information. We also include the official address of the entity and a short abbreviation or nickname for easy and consistent reference throughout the contract. This helps simplify and standardize the language used in the agreement .
Preamble and Background Information :-
The preamble serves as the opening paragraph in an agreement, typically introducing the parties involved. The primary reason for including both a preamble and recitals in a contract is to address the five W's: who, what, when, where, and why.
Recitals offer a background on the parties, explaining how they came into contact and the circumstances leading up to the contract. These often begin with "Whereas" and provide detailed information about the parties' history and context.
Definitions:-
In contracts, it's important to clearly define any terms that might have a broad meaning or are meant for a specific purpose. This definition clause ensures that a term, once defined, has the same meaning consistently throughout the contract. These defined terms are often capitalized whenever they appear in the agreement.
II. Operative Clauses :-
Operative clauses are designed to express the commercial intentions of both parties in a contract. These clauses outline the specifics of the agreement, considering the exchange or "give and take" that occurs between the parties.
Obligations and Consideration Clause:
In a contract, it's essential to clearly outline the responsibilities of each party and what they will receive in return for fulfilling these duties. This helps ensure both parties understand their roles and avoids potential confusion in the future .
Contract Duration:
The agreement should clearly state how long it will be in effect. For instance, if the parties intend to be bound by the contract for a period of five years, this duration should be explicitly mentioned to prevent any future misunderstandings.
Ending the Agreement :-
Including a termination clause is essential as it outlines the conditions under which the agreement can be ended. It's crucial to draft this operative clause carefully to avoid potential disputes in the future. Additionally, it should be balanced and not favor one party over the other.
Covenants:
This clause outlines the responsibilities and rights of the parties involved in the contract. If one party breaches these obligations, the other party is relieved from their duties and can either take legal action against the defaulting party or choose to terminate the contract.
Representations and Warranties :-
The "Representations and Warranties" clause in a contract is like a promise list. It's there so that if one party doesn't keep their promises in the future, the other party can take legal action. For example, imagine a contract says a product has a 5-year warranty. If the company later says they won't honor that warranty, and it's written in the contract, the other party can use the contract as proof and take the issue to court to try and get their way.
III. Standard contract clauses :-
After you've put all the important stuff in a contract, there are some standard parts you include just in case something unexpected happens. These parts are like backup plans. They help solve problems that might come up. Here are some of the things you usually put in this part of the contract ;
Governing law :-
The "Governing Law" clause, even though it might seem obvious from its title, is crucial. It spells out the specific rules that apply to the contract. This clause becomes especially important in international agreements.
Indemnification :-
Indemnification is like a way to shield someone from losses, whether those losses are their own fault or caused by someone else. When creating a contract, we include this clause to define how much protection one party will provide to the other. It helps determine how far the responsible party will go in covering the losses for the other party.
Dispute Resolution :-
In this clause, as its name suggests, outlines how any disagreements or problems related to the contract will be resolved. Usually, parties use methods like talking it out, seeking advice, mediation, or arbitration to settle disputes. Including this clause is important because it helps resolve issues quickly and fairly.
In addition to the "Dispute Resolution" clause, there are other standard contract clauses like a waiver, assignment, amendment, and more. These clauses are added as needed, depending on what the contract is about. Now, let's move on to the final part of the contract, which is signing it .
Finalizing the contract :-
After the contract is written, the next step is making it official by having both parties sign it. Signature on the contract means both sides agree to what's in it. This part of the contract is about confirming that both parties are on the same page.
Now, when you're writing a contract, there are some important things to remember, both things you should do and things you should avoid. Here's what you need to know:
Guidelines for Drafting Contracts :-
1. Address the Five W's : Make sure your contract answers these questions:
a . Who are the parties involved?
b . What is the purpose of the contract?
c . Why are the parties entering into this agreement?
d . When is the contract effective and when does it start?
e . Where will the contract be enforced?
2. Use Clear Language : Keep the language simple and avoid legal language. Make it easy for everyone to understand.
3. Mind Punctuation and Connectors : Pay attention to punctuation marks and words like 'and' or 'or' as they can change the meaning of a sentence.
4. Start with a Recital Clause : Begin the contract with a clear recital clause that sets the context and purpose of the agreement.
5. Prefer Active Voice : Use active voice whenever possible to make the contract more straightforward.
6. Numerals and Alphabets for Numbers : Write numbers both in alphabets and numerals to avoid any confusion.
7. Define Technical Terms: Clearly define any technical terms or industry-specific jargon used in the contract.
8. Keep Records : Always keep a copy of the contract in your office for future reference.
9. Put Yourself in the Parties' Shoes : Imagine yourself as one of the parties to the contract to identify any errors or ambiguities more easily.
10. Notarization if Required : If the law requires it, include notarization in the contract.
11. Avoid Ambiguity : Ensure the contract is clear and free from vague or ambiguous terms.
12. Proofread Thoroughly : Proofread the document carefully at least twice to catch any mistakes.
13. Comprehensive Definitions : Provide exhaustive definitions for terms used in the contract to avoid misunderstandings.
Following these guidelines can help create clear, effective contracts that minimize potential disputes and legal complications.
Common Mistakes to Avoid When Drafting Contracts
1. Avoid Long Sentences: Keep your sentences short and concise in a contract. Long, complex sentences can lead to confusion.
2. Don't Assume Consistent Definitions: Don't assume that a specific term has the same meaning throughout the contract. Clearly define terms and use them consistently.
3. Document Everything: Relying only on verbal agreements is risky. Ensure all important details are in writing to prevent misunderstandings and potential disputes.
4. Stick to Agreed Terms: Follow the terms and conditions agreed upon by all parties. Don't take actions outside of what's written in the contract.
5. Avoid Rushing: Don't rush through the contract. Take your time to read and understand it thoroughly. Hasty agreements can lead to problems later on.
6. Minimize Abbreviations: Limit the use of unnecessary abbreviations in the contract, as they can be confusing and unclear. Use full and clear terminology.
By avoiding these common mistakes, you can create contracts that are more effective, clear, and less prone to legal issues.
Evaluating Contracts Effectively :-
Reviewing a contract is a critical step after drafting, as it helps identify and correct any errors or mistakes that may have been overlooked during the drafting process. It's often challenging to spot mistakes in a document you've been working on for a long time because your mind becomes accustomed to the content. Therefore, it's highly recommended to have someone else review your contract to catch any issues. Here's how to efficiently and effectively review a contract using a principle called "three-level reading":
1. First-Level Reading - The Big Picture:
- Start by reading the entire contract from beginning to end without focusing on the details.
- Pay attention to the overall structure, major clauses, and the general flow of the contract.
- Look for any gaps, inconsistencies, or missing sections.
- Ensure that the contract aligns with the initial goals and intentions of the parties involved.
- Check for any unusual or unexpected terms that might need further clarification.
2. Second-Level Reading - Clause-by-Clause Analysis:
- After the initial reading, go through the contract clause by clause.
- Carefully examine each clause for clarity, completeness, and accuracy.
- Check if all defined terms are used consistently throughout the contract.
- Verify that the obligations, responsibilities, and rights of each party are clearly stated.
- Ensure that any conditions, warranties, or guarantees are correctly documented.
- Confirm that the contract complies with relevant laws and regulations.
3. Third-Level Reading - Proofreading and Detail-Oriented Review:
In this stage, focus on the fine details of the contract.
- Check for typos, grammatical errors, punctuation, and formatting issues.
- Verify numerical values, dates, and any financial figures for accuracy.
- Ensure that references to other sections, exhibits, or attachments are correct and consistent.
- Pay attention to the use of defined terms, making sure they are used consistently and accurately.
- Review any boilerplate clauses and ensure they are applicable and correctly stated.
- Check for any cross-references and confirm they lead to the correct sections.
4. Additional Tips for Efficient Contract Review:
- Take breaks between each level of reading to maintain focus and reduce fatigue.
- Consider using legal technology tools or software that can help identify potential issues, such as contract management software or proofreading tools.
- Involve legal professionals or experts if the contract is particularly complex or high-stakes.
- Keep a checklist of common contract errors and mistakes to help guide your review process.
- Collaborate with colleagues or legal advisors to gain different perspectives on the contract's content.
Note :- Remember that contract review is a meticulous process that requires careful attention to detail. While there may not be shortcuts to a thorough review, following the three-level reading approach can help streamline the process and improve the overall quality and accuracy of the contract .
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