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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:

Good Faith

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 Law.

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

Language

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, German-English, etc

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.

Liability

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:

Planning

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.

Execution

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.

Pre Contract

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.

Transfer

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

Contract Making

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 upon terms.

Pre-Renewal

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.

Post Contract

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 contracts.

Common Types Of Commercial Contracts In India:

Service Agreement

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 Agreement

The 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 Agreement

A 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 Agreement

A 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 Agreement

A 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 Agreement

A 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

Confidentiality
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.

For example:
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.

Termination Triggers
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 contract.

Jurisdiction
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.

Dispute Resolution
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.

Damages
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.

Conclusion:
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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