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Contracts And Their Importance

Contracts are an integral part of our life. Contrary to popular belief, contracts are not only extensively used in business deals but also are in our everyday lives. You might be surprised to know that one signs numerous contracts daily! Activities ranging from signing a business deal, buying a movie ticket, accepting the terms and conditions on a website, boarding a bus- all involve the use of contracts. Contracts are omnipresent.

What Are Contracts?

Section 2(h) of the Indian Contracts Act,1872 defines contracts as An agreement enforceable by law is a contract.[i]

To simplify this definition, it can be said that a contract is a written or spoken agreement regarding an obligation enforceable by law. The parties set out mutual responsibilities, rights, and duties towards each other regarding the relevant terms and conditions in a contract. In other words, a contract regulates the relationship by laying down the conditions of the relationship and the scope of work.

A contract can be a written contract or an oral contract.

A written contract is a printed document between two parties, stating their obligations towards each other. Generally, written contracts are preferred over oral contracts for business deals or other important official agreements. This is primarily because a written document has more evidentiary value before the law than mere words. In addition to this, a written contract helps to minimize the risk involved. It is generally advised to reduce the complicated contracts to a written one. Section 25 of the Indian Contract Act,1872 states the types of agreements that must be presented as a written contract.

An oral contract is a type of business contract that is outlined and agreed to via spoken communication, but not written down.[ii] Oral contracts are generally considered as valid as written contracts. However, in certain cases, the oral contract is accepted only if backed by written documents. Other evidence that can bolster the enforceability of oral contracts can include- testimony of a witness, bills, emails, etc. Oral contracts are best used for simpler contracts where the parties are unlikely to go to court. Complex oral contracts should be avoided as they generally fall apart on scrutiny of the court. This is because it is an ordeal to reach a consensus regarding the finer points in an oral contract.

Why Do We Need Contracts?

  1. Record Of Commitment

    Contracts represent the relationship one party enters with the other. Each party has certain responsibilities and enjoys certain rights towards the other. A contract is a visual record of this relationship.

    A well-drafted contract is likely to state every detail and the extent to which the parties are bound to each other. A contract defines the relationship between the parties. If a party breaches the obligation to which it is committed, the other party can approach the court.

    A contract states the:
    1. The goal or objectives that the parties intend to achieve through the transaction
    2. The scope of work to be performed by the contracting parties
    3. In case of a sale deed, the description of the goods to be sold.
    4. The consideration agreed to be paid and terms of payment.
    5. The indemnities which each party would give the other as applicable
    6. The limit of the liability of each person vis--vis the other party or a third party
    7. Grounds of termination of the contract.
    8. Jurisdiction.
    9. Governing law.
    10. Arbitration, if necessary.
    They bind parties to their obligations: If a party tries to back out of its obligations, it can cause problems in the relationship. A contract cuts down the likelihood of a breach.
     
  2. Prevents Conflicts And Minimises Risk

    Contracts detail down each party's responsibility. This leads to clarity between the parties and better understanding among them regarding the deal. Conflicts in a business are undesirable as they exploit resources that could have otherwise been used to increase productivity.

    In addition to this, contracts also minimize the risk involves by detailing out the extent of one's liability. For example- a contract may limit one's liability and save his/her personal property from being liquidated to pay off the debt in case of dissolution of the business.
     
  3. Contracts Serve As A Communication Tool

    Contracts are by nature collaborative and relational. By clearly stating the important clauses for the parties they lead to transparency which enhances communication. A contract with convoluted language and imprecise terms is likely to cause a great deal of confusion between the parties.

    Contracts that clearly state their terms and condition are preferred over contracts that don't. All relationships require clear communication for healthy continuation and so do business relations. Contracts serve as an efficient communication tool that ensures that the relationship is a healthy one.
     
  4. Increases Operational Efficiency

    Contracts are essentially binding agreements that state that one side will deliver goods and services for a certain consideration by the other side. A contract with the appropriate term will help the business to operate efficiently.

    It is important to understand that a blockade in a contract is equivalent to a blockade in revenue. Conversely, a well-drafted contract leads to a smooth flow of operation and hence easily helps to generate revenue.

    In addition to this, contracts are easier to manage and are comprehensive. This helps the business operation to save up a lot of revenue that can be diverted to more productive means.
     
  5. Contracts Are Used As Legal Tools

    Contracts gain such vital importance in our lives because they legally bind the parties in a relation. Any breach of a contract can be redressed, and the damages can be liquidated. Besides the basic feature, the contract also contains other vital legal aspects that boost the relationship between parties.

    Legal essentials like jurisdiction, governing law, arbitration, etc. all find mention in the law of contracts. Contracts boil down the legal principles contained in the contract to outline rules, which are easy to abide by. This essentially helps the contracting parties understanding the law.

Working without contracts can lead to complications in a business deal and is hence inadvisable. In cases where complications arise between parties dealing outside a contractual relation, the sole remedy is to go to court. The judge must determine the liability of each party towards the other, and the outcome may not satisfy either of the parties.

To prevent such hazards from taking place, it is advisable for the parties to negotiate on the important terms and conditions beforehand. Besides preventing the above-mentioned risk, a contract leads to better business relations and efficiency in operation.

Reference
  1. https://www.investopedia.com/terms/o/oral-contract.asp
    Oral Contract Definition - Investopedia
  2. https://www.mondaq.com/india/contracts-and-commercial-law/880946/importance-of-written-contracts-in-everyday-business-transactions
    Importance Of Written Contracts In Everyday Business Transactions- mondaq
  3. https://linkilaw.com/legal-documents/what-are-contracts/
    What are contracts and why do you need them? Linkilaw
  4. https://www.concordnow.com/blog/case-for-contracts-7-reasons/
    The Case for Contracts in 7 Reasons- Concord
  5. https://www.toppr.com/guides/business-laws/indian-contract-act-1872-part-i/what-is-a-contract/
    What is a Contract according to Indian Contract Act?- toppr
  6. https://theconversation.com/we-all-enter-contracts-every-day-so-why-are-they-still-so-hard-to-understand-49129
    We all enter contracts every day, so why are they still so hard to understand?- theconversation.com
  7. https://certificate.queenslaw.ca/blog/what-did-i-agree-to-contracts-in-our-everyday-lives
    What Did I Agree To? Contracts in our Everyday Lives- Queen's University
  8. https://www.upcounsel.com/why-do-we-need-contracts
    Why Do We Need Contracts: Everything You Need to Know- Upcounsel
    1. The Indian contract Act,1872
    2. https://www.investopedia.com/terms/o/oral-contract.asp

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