ADV. ROMAAN MUNEEB & ADV. VIQAS MALIK
Introduction
By using written contracts, parties to an agreement guarantee to each other that they are aware of their roles and responsibilities and at the same time they safeguard their organisation, assure its professionalism, and reduce legal risk. A contract is defined as “an agreement enforceable by law” in Section 2(h) of the Indian Contract Act, 1872. A written agreement that carries out the intentions of the parties is referred to as a contract. A contract’s primary function is to formally establish new ties and lay out the numerous legal obligations that each party has to the other. Contracts are important for businesses of all kinds, whether you are just starting out or have been operating for a while.
We typically trust people on the basis of their reputation or market position. We believe that a new business client, customer, employee, or a consultant will treat us fairly because they are a friend, relative, well-known individual, or otherwise trustworthy. However, the issue arises when “external influences” are involved—things that are just impossible to take into accountand that is when things start going south.
Islam also places a high value on keeping promises and fulfilling contracts. In the Holy Qur’an, Allah (SWT) says, that agreements must be put in writing. According to Islamic history, the activities of the Holy Prophet (S.A.W) demonstrate that when Prophet Muhammad (S.A.W) established an agreement, it was documented in writing, consider Sulah-Hudabia. Knowing exactly where you stand is crucial since it fosters stronger working relationships and gives you a piece of paper that explains what should have happened right away if something goes wrong. The fact is that every business relationship should be supported by contractual agreements. If a situation arises that isn’t covered, you can also draft an addendum, which is an attachment to a contract that amends, clarifies, or revokes any of the terms and conditions of the original contract. The original contract and any subsequent written agreements altering it are regarded as one and the same contract.
There are many types of commercial contracts which form the backbone of business transactions and include employment agreements, partnership agreements, supply agreements, distribution agreements, franchising agreements, non-disclosure agreements, joint-venture agreements, service agreements, sale and purchase agreements and more.
The basic components of a valid contract are:
Offer & Acceptance
The entire process of entering into a contract begins with the proposal or an offer made by one party to another. The proposal must be accepted to enter into an agreement. Section 4 of the Indian Contract Act, 1872 says that the communication of a proposal is complete when it comes to the awareness of the person to whom it is made. The Indian Contract Act, 1872 defines acceptance in Section 2 (b) as “When the person to whom the proposal is made signifies his assent thereto, the offer is said to be accepted. Thus, the proposal when accepted becomes a promise.”
Consideration
It is one of the essential parts of the contract and the main reason why the party enters into the contract. The consideration can be of any amount – a token worth 1 rupee would be enough to enter into a valid contract. Consideration is something valuable, but it’s not limited to only money.
Capacity to Contract
Section 11 of the Indian Contract Act, 1872, states when a person is a major, of sound mind and not disqualified by law, then he is said to be competent to contract. Contract with a minor, unsound or intoxicated person and persons disqualified from contracting by law (alien enemy, foreign ambassadors, convicts, insolvents etc.) is void, as they are incompetent to contract.
Free Consent
For a valid acceptance of the offer, the consent must be free and authentic. Consent is considered voluntary if it is not based on coercion, fraud, undue influence, misrepresentation or error.
Legality of Object
The contract whose object is illegal and contrary to the law of the country is void.
Importance of Contracts/Agreements
Safeguards both parties
Having the agreement in writing will make enforcement much simpler if a problem occurs. All parties concerned may feel pressure to fulfil their duties on time simply because they are aware that it is in writing. Once a contract is signed, everyone has the assurance that its terms will be followed and that they will be protected if something goes wrong.
Record of rights and responsibilities
Contract is a record of the duties, rights, and obligations of the parties who have signed them. The parties demonstrate with their signature that they intend to honour the agreement, and both sides can then be held responsible for the terms of the contract. An effective contract will explicitly state what obligations each party has to the other, how they should be fulfilled, how they will be judged, and by what standards. Contracts therefore serve as a helpful reminder for each party as to the obligations they owe and are owed to one another.
Formalisation of a commercial relationship
Contracts define how a commercial relationship will be maintained, what obligations must be fulfilled, for how long, and at what cost, contracts offer a mechanism for individuals/companies to formally establish their relationship. Contracts also specify how the working relationship will be maintained, the conditions that can cause the contract to be cancelled, and how that will be managed. They highlight each party’s responsibilities, how they ought to be carried out, and how they will be monitored and evaluated.
Ensures payment
A written contract might also specify how payments will be made. In practically every commercial transaction, there is a cost. This fee will be specified in a contract together with other information, such as the precise sum that must be paid, the frequency of payments, the mode of payment, the penalties for late payments, and the terms and deadlines for auto-renewal. Consequently, a contract serves as a safeguard to ensure your company’s entitlement to payment on a specific date.
Mitigates risk and loss
The best way to safeguard your company from dangers like financial loss or legal problems is through written contracts. However, this doesn’t prohibit dishonest individuals from disobeying or breaching the terms of a contract. However, it guarantees that you have options, including legal action, if the worst occurs. Who is in the right will be evident by a clear agreement.
Increases revenue
The company’s cash flow will be predictable thanks to a strong contract’s assurance that you’ll be paid on time, allowing you to plan your business actions accordingly. Contracts help to establish conditions that are advantageous to parties through smart negotiation at the time of entering into the contract, such as deciding to charge more for the services you provide. Additionally, stronger vendor ties might help you sustain and grow as a company.
Prevents litigation/disputes between parties
Contracts are useful at preventing conflict and contractual issues in the future because terms and conditions have been agreed upon by the parties in advance in writing. Every business seeks a fruitful outcome when beginning a new relationship, and contracts make sure that this is achieved. Contracts give the parties the chance to discuss, revise, and suggest terms, so there won’t be much on which they can later disagree. The contract specifies how dispute arbitration/litigation will proceed if it is necessary. When another party violates the terms of the agreement and causes damage of any kind, the aggrieved party has the legal right to pursue the contract in court. A contract will safeguard all businesses of all sizes. A contract will not only provide parties the right to sue if the terms agreed to are broken, but it will also specify the court parties can sue in and the procedures parties must follow.
Parties to the dispute may choose the option of arbitration either through inserting a clause in the agreement or a separate dispute resolution agreement, to resolve disputes instead of litigation by filing a lawsuit. In the case of arbitration, the parties have far more flexibility and can often select the arbitrator that will hear their case, typically selecting someone with expertise in the relevant field involved in the dispute. In this manner the emphasis can be on the considerable issues involved instead of on the complex procedural guidelines or rules. Alternative dispute resolution offers the advantage of getting the issue resolved quickly than would occur at trial which means less fees and time incurred by all parties.
Guarantees confidentiality
An important function of a contract is that it can safeguard and provide particular rights with respect to maintaining confidentiality of data or information that is crucial to the company.
Strengthens your organization’s brand
A good contract portrays your company as one that is capable of adhering to commitments and is reliable. A contract signifies that a company desires to maintain a record of all business dealings and is ready to stake its reputation. Furthermore, the attention and amount of time taken in contract creation and the discussions that follow demonstrate a strong company brand.
Conclusion
Every business should have contracts in place. Contracts are a part of the reality of doing business today. Thus, accept it rather than becoming frustrated by it. A clear, well-drafted contract makes it clear what is expected of someone or a company and can actually help you avoid arbitration or going to court, saving your business lot of time and money.
(The authors Adv. Romaan Muneeb & Adv. Viqas Malik are lawyers at the J&K High Court and Partners at “Malik and Romaan Law offices, Srinagar”. The authors can be reached at [email protected])
