10 Steps to Drafting a Legally Binding Contract under Indian Contract Law


October 14, 2024
10 Steps to Drafting a Legally Binding Contract under Indian Contract Law
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Table of Contents

Introduction

The contracts are the essential part of legal and business interactions and are used by people to set forth their rights and obligations. A legally binding contract provides recourse in case of non compliance and makes sure that parties adhere to their commitments.

What is a contract?

A contract is a legally binding agreement instituted between two or more parties that obliges them to agree upon something. Offer, acceptance and the creation of a contract to do (or not to do) some act, are specified in the contract. Contract may refer to contract of sale of goods, services or simply transfer of rights.

Key characteristics of a contract include:

  • Offer and acceptance: To be effective there must be a valid offer and offer acceptance.

  • Intention to create legal relations: There must be intention of creating legal consequences from the agreement.

  • Legality: Agreement which deals with an illegal matter is void. 

Which law governs contracts?

In India, it is the Indian Contract Act, 1872 that governs contracts. This Act establishes the essential elements that constitute a valid contract as outlined under Section 10:

Valid offer

A valid offer is when the offeror makes a clear proposal to the offeree which he is willing to move into a contract. The offer consists in the making, by one person to another, of some promise, the object or probable effect of which is to induce the person to whom it is made to transfer some right. The offer must be definite, and it should be made only with the intention of inducing the person to whom the offer is made to enact some legal obligation by taking action in reply, or doing or forbearing to do something.

Acceptance

The unconditional agreement by the offeree to all the terms of the offer is acceptance. This must be verbalized to the offeror, either by writing, or implied conduct.

Free consent

Consent is free when all parties to the contract freely enter into it, that is, without coercion, undue influence, fraud, misrepresentation, or mistake. A contract is void if consent is not free.

Competency to contract

Only legally capable contracting parties – that is, those who are at least 18 years old, of sound mind, with no such legal disqualification – are legally binding.

Lawful consideration

What each party gains or loses in the contract is called consideration. The access must be lawful and sufficient, but not necessary to be adequate.

Lawful object

The contract is lawful for the purpose under which it is made. Agreements entered into for a purpose other than the one intended, are void and unenforceable.

Not expressly declared void

However, the agreement shall not be expressly declared void by the law, that is against public policy, or without consideration.

With the knowledge of these fundamental elements, parties can draft legally stringent contracts that match with the provisions of the Indian Contract Act, 1872.

10 steps to drafting a legally binding contract


Step 1: Identify the parties involved

  • Detailing the Parties: Start the contract by describing clearly the parties involved. This means their full names, addresses and any identification numbers like company registration for businesses.

  • Importance of clarity: Defining who the parties are, makes things clear and ensures the parties who are entering into the agreement are known. This step bridges the link between contract and parties.

Step 2: Define the subject matter

  • Describing the agreement: It should correctly state what the contract deals with, such as goods, services or rights etc.

  • Specificity and lawfulness: The subject matter must be very specific and lawful. As contracts relating to illegal activities are void, clarity ensures that all the parties know how the agreement is construed. 

Step 3: Establish offer and acceptance

  • Clear communication: A clear offer must be offered on behalf of one of the parties and an unequivocal acceptance offered by the other. This should include in what mode the offer is communicated (written, verbal, electronic), as well as how the offer can be made.

  • Mutual understanding: Both offer and acceptance give a clear confirmation that both parties understand the terms. It is necessary to consider this to qualify the contract.

Step 4: Specify consideration

  • Consideration refers to what each party could gain or lose under the contract. It could be money, services, goods, or the promise of something — to do or not to do something.

  • Legality and adequacy: A condition which must be lawful and not inadequate to the consideration must be acknowledged by the parties to make a binding agreement. This step serves to reiterate an idea that something of value is given in return.

Step 5:  Outline terms and conditions

  • Comprehensive details: Make sure you make the terms and conditions of the contract clear. It includes the rights and obligations of one another; timelines for delivery; payment schedules; expectations on performance; and any warranties or representations.

  • Preventing misunderstandings: Terms of specificity help avoid misunderstandings and conflicts later on. Write using plain language to make sure it’s clear, and to avoid legal jargon.

Step 6: Make a clause for free consent

  • Affirming voluntary agreement: Both parties committed entered the agreement in a voluntary non coercive, non undue influence, non fraud non misrepresentation manner. This clause may help ensure the contract’s enforceability.

  • Implications of coercion: Where a contract is cleaved under duress or through misrepresentation such contracts may be voidable and it is essential to testament to the free consent of both parties.

Step 7: Termination conditions addressed

  • Defining termination clauses: Provide the circumstances in which the party to whom the contract belongs can terminate the same. It could involve breach of contract, non performance or mutual consent to terminate.

  • Protecting interests: Vivid termination clauses may prevent parties from specific shocks and may describe the plan of actions in case of some difficulties before they occur.

Step 8: Integrate methods of dispute avoidance

  • Providing for conflict resolution: Add clauses to cover disputes that are more elaborate than the general dispute clause, covering alternate dispute mechanisms like arbitration or mediation, which offer a way of settling disputes without going to court.

  • Benefits of alternative dispute resolution (ADR): Some of the ADR methods may prove helpful in cutting down on the time and money likely to be utilized by parties in an attempt to effectively resolve their disputes.

Step 9: Clause governing law and territory

  • Clarifying applicable laws: Express which laws apply to the contract between the parties; which legal jurisdiction is applicable to the legal proceedings.This is even more important in the case when the parties involved in the particular agreement come from different jurisdictions.

  • Ensuring legal compliance: Clear jurisdictional clauses can assist in avoiding the confusion and ensure that disputes are resolved in the appropriate legal setting.

Step 10: Signatures and date

  • Finalizing the agreement: It must be witnessed that every party to the contract signs acknowledging the terms and conditions of the contract. This information is also important since it defines when the particular contract is to come into force.

  • Legal formality: Signatures signifies acceptance and make it legally binding to accept what has been signed or agreed upon. There must be witnesses to the contract to append their signatures and this is especially required for significant contracts.

Conclusion

Contract formation is a very technical process which needs careful and thorough preparation as well as knowledge of the law. Following such steps, the parties can produce the contracts that reflect the parties’ intentions and are readily enforceable with the Indian law. It is always recommended that the legal practice or advice be sought when the contract is being drawn or, at least, seek professional help when executing difficult contracts to avoid noncompliance with legal requirements.

FAQs

What are the consequences of breaching a contract?

In case there is a breach of contract, one party may opt for damages, specific performance or even the contract can be terminated. In civil matters it may be considered feasible to resort to legal proceedings.

Should there be a written contract?

It should be noted, however, that an oral agreement is just as legal as any other type of agreement, but it is highly advisable to make the agreement in writing. These include the paperwork from which may be easily enforceable in a court should the parties have a disagreement over the implementation of the agreed terms.




Written By:
Vidhikarya

Vidhikarya


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