Commercial Contracts In India: An Overview
The term contract is defined under Section 2(h) of the Indian Contract Act,
1872 ("Contract Act") as an agreement enforceable by law.
Commercial Contracts are primarily governed by the Contract Act and the Specific
Relief Act, 1963 ("SRA").
In its most simplest form, a commercial contract is a legally binding agreement
between two or more parties. Commercial contracts are most often written
documents, but they may be verbal agreements under certain circumstances.
Commercial contracts spell out exactly what each party must do for the contract
to remain legitimate, as well as the consequences of any of the terms and
conditions not being followed.
It's for the companies and organisations, and one
of its main requirements is that legal agreements enable the contract's maximum
benefits to be realised. The terms of the agreement, which cover all the
important factors, are also specified in the contract. A breach of contract
occurs when one party fails to fulfils their obligation under the contract.
Lets try to understand it better by the following points:
While negotiating a contract, there is no statutory obligation under Indian laws
to use good faith. As in the case of common law, Indian laws also do not impose
a general obligation to use good faith when negotiating a contract. The
obligation to act in good faith is finding its way into commercial contracts
both by its inclusion as an express term but also by implication.
A duty to act
in good faith promotes honesty and fair dealing between parties of commercial
contracts. However, the parties may choose to either exclude or define the duty
to act in good faith. The parties may also draft carefully to incorporate the
doctrine of good faith in contracts.
Battle Of Forms
Owing to awareness, the number of battle of forms disputes has seemingly
reduced; however, it is still present in variant forms in businesses. Courts
have used different mechanisms and relied on the provisions of the ICA and
common law principles. Indian courts have also relied on several interpretations
of international conventions, such as the United Nations Convention on Contracts
for the International Sale of Goods, the UNIDROIT Principles of International
Commercial Contracts and the United Nations Commission on International Trade
The courts in India generally follow a variation of the common law based 'mirror
rule' in resolving disputes relating to 'battle of forms' whereby the contract
form that constitutes a complete and concluded contract prevails. While the key
ingredients of a concluded contract are offer and acceptance of such offer, the
principle of 'mirror rule' that requires an absolute and unqualified acceptance
is not strictly applied by Indian courts. Contracts have been held to be
enforceable and binding on the parties where the acceptance is qualified with
minor or immaterial variance and where the offer is not materially affected
In India, contracts are generally drafted in English for practical convenience
of the parties. Here, international contracts are drawn up in English which is
one of the two official languages of the country (the other is Hindi) and the
language used in communications with governments of all states and the Courts.
In business relations with foreign companies it is quite exceptional to use
contracts in bilingual versions: French-English, Spanish-English,
Execution and validity of e-contracts in India
There is no prohibition in India pertaining to the execution of e-contracts.
However, it is pertinent to note that e-contracts should be in compliance with
the necessary prerequisites provided under the Contract Act. Further, the
e-contracts are legally recognised under section 10 of the Information
Technology Act, 2000 and their evidentiary value is recognised under section 65A
of the Indian Evidence Act, 1872.
A practical challenge in regards to the enforceability of online contracts is as
for their stamping. In India, stamp duty is expected to be paid on all
agreements irrespective of the form of execution to make them admissible in
evidence before Indian courts. If an online agreement is not stamped at the time
of its execution, it is technically possible to complete the stamping
formalities at a later date on payment of a statutory penalty on top of the
applicable stamp duty.
A supplier in a contract cannot limit its liability towards defaults in the
goods delivered where the buyer has already paid consideration towards delivery
of such goods. Further, courts in India have struck down contractual exclusion
and limitation of liability for death or personal injury resulting from a
party's negligence in specific instances depending on the facts of the case.
Managing Commercial Contracts
Commercial contracts set the tone for how your organisation functions, so it's
important that you have a methodology for dealing with your contracts over the
contracts lifecycle. The contract management process has many phases, ranging
from contract preparation to contract execution to contract closeout.
Here is a short outline of the seven phases of contract management:
As the name suggests, this is the time to plan out your process for managing
each agreement, this is an ideal opportunity to delineate the cycle for dealing
with every arrangement, allot jobs and obligations, and assign resources to
ensure the contract is closely monitored and commitments are fulfilled.
The execution stage is the most common way of setting your strategy in motion,
and guaranteeing you have the appropriate devices set up to oversee
arrangements, including contract management software.
During the pre-contract stage, new arrangements are carefully drafted,
reviewed, and signed. Be certain each contract incorporates the required terms
and conditions, so all gatherings feel confident that the agreement clearly
states what is generally anticipated of them and the stakeholders have the
details they need to make decisions about the next steps.
Since individuals who drafted and negotiated the contract aren't generally the
ones who can monitor the dynamic understanding, this is the ideal opportunity to
ensure the contract manager is in the know regarding the deadlines,
commitments, and other contact information
The contract stage is the timeframe when the understanding is dynamic and the
parties included are attempting to convey the services according to the agreed
Prior to settling on conclusions about a contract 's future, for example,
whether it ought to be ended, reworked, or expanded, the contract ought to be
surveyed to check whether it influences the organisation. This happens during
the pre-renewal stage, so stakeholders have the details they need to make
decisions about the next steps.
The post-contract period, otherwise called contract closeout, is the point at
which one wraps up all parts of the arrangement and does a post-mortem to
perceive how one can alter the manner in which one handles future commercial
Common Types Of Commercial Contracts In India:
The Service Agreement is essentially executed between the parties to capture the
terms and conditions of the services being given by one party to another party
alongside the consideration being paid by the party to the service provider,
rights and obligations of the parties.
Non-Disclosure AgreementThe Non-Disclosure Agreement (NDA) is fundamentally executed to tie the
employees, vendors, suppliers, service provider, consultant, and independent
contractor with the purpose of restricting and restraining them from sharing any
confidential information in relation to the business, including trade secrets,
client details, business plans etc. of a company The NDA can be either one-sided
or shared in view of the prerequisites of the exchange between the parties.
Partnership AgreementA Partnership Agreement captures the relationship, duties, powers and
obligations of the partners, capital contributed by each partner to the
partnership, procedure that will be followed for dissolving the partnership,
admission or removal of any partner
Loan Agreement/Security AgreementA Loan Agreement is drafted to capture the terms and conditions of lending
including the term of loan, repayment terms between a borrower and a lender.
Whereas, a Security Agreement is executed when any asset or property is being
pledged as collateral for the purpose of securing a loan.
Licensing AgreementA Licensing Agreement is a contract between 2 (two) parties, i.e. the
licensor and the licensee. Under this agreement, the licensor grants the
licensee the right to produce and sell goods, apply for a brand name or
trademark or use patented technology owned by the licensor.
Distributor AgreementA Distributor Agreement is essentially an understanding between the provider of
products and distributor of merchandise. The provider can either be the producer
of the merchandise or the wholesaler exchanging another's products.
Important Clauses Of Of Commercial Contracts
Whenever at least two firms go into a contract, there will almost certainly be a
considerable amount of details exchanged in order for all parties to fulfil
their contractual obligations Given the need of giving a few insights regarding
each party's monetary and strategic approaches, the contract must have a strict
confidentiality clause. This provision should prohibit all parties from
disclosing any and all information exchanged during the transaction. Of course,
where valuable intellectual property is at stake, this is especially important
Force majeure/Mitigating Factors:
The expression "Force Majure" basically signifies "greater factor". This
statement ought to be included for all business contracts since it can protect
parties from occasions that are outside of their reach.
A shipping schedule could be unavoidably interrupted in the event
of a natural disaster such as an earthquake or hurricane. In general, the term
"force majeure" is very broad, and many contracts have clauses that cover items
like terrorist attacks and even acts of God.
This provision is important to guarantee that any inability to proceed because
of an unexpected interference isn't considered as breach of contract.
Things don't generally go as expected in a company, so parties should have the
option to come and go as required. This generally entails including a
termination clause in contracts. No matter what the leftover time under the
agreement, this segment of the agreement should explicitly express the
conditions under which either or the two players might end the contract. For
instance: If one of the parties to the contracts is bought by someone else, the
other party to the agreement might claim all authority to terminate the
Cross-border transactions are very normal nowadays, both locally and globally.
Whenever the parties to a contract areDue to high level of contract violations
and the need to prevent them, it is also common practise for commercial
contracts to include damages clauses.Liquidated damages clauses, which are
normally a fixed sum due if one party fails to perform, will be used in most
contracts. Depending on the extent and effect of the violation, a court can
award other forms of damages in addition to that amount.
There are contracts from various states, or even various nations, it can be
difficult to determine which state's laws apply to the contract. Therefore,
commercial contracts should always state which state will have authority over
the deal, so that the relevant laws are crystal clear.
The most carefully written contracts are prone to disagreement. As a
consequence, it's important to understand the parties' strategies for resolving
disputes in the event that one occurs. Firms are increasingly using an
arbitration provision in their contracts, forcing the parties to agree to
arbitration before or in lieu of finding a settlement through litigation. While
some contracts do allow for conventional legal redress, this is usually a
quicker and less expensive way to resolve contract-related issues.
Due to the high level of contract violations and the need to prevent them, it is
also common practice for commercial contracts to include damages
clauses.Liquidated damages clauses, which are normally a fixed sum due if one
party fails to perform, will be used in most contracts. Depending on the extent
and effect of the violation, a court can award other forms of damages in
addition to that amount.
Regardless of the size of the company or the sector in which it works
the commercial contract must be carefully drafted and should be thoroughly
checked before signing. The parties should expressly mention what they want to
include or exclude from the contract. Any term, right or obligation written
vaguely will only leave ambiguity between the parties.
It is abundantly clear
that when assessing the rights and obligations of the parties to a contract, the
terms and clauses of the agreement from the contracts or agreements foundation
must be considered. Therefore, it is important that the contract should be
drafted with clarity and precision and with appropriate professional help to
avoid any dispute or litigation in future.
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