This article is authored by Ms. Sakshi Jaiswal & Ms. Aishwarya Parashar, founder and co-founder at Attorneys Checklist.
Contracts are the foundation of commercial relationships, binding parties to their respective obligations and ensuring clarity in business transactions. From the very outset, a well-structured contract should provide a roadmap for understanding the dynamics between parties, leaving no room for misinterpretation or disputes. This article delves into the essential elements that comprise a contract, shedding light on the critical aspects that contribute to its effectiveness.
- TITLE: The title of the contract defines its content. It helps you understand the relationship between the parties before reading the entire contract. Therefore, it is important that the title is given owing to the transaction between the parties.
- PARTIES: If the parties are entities, their registration details and their registered address should be mentioned while defining it in the contract. However, if the parties are individuals then the individual’s identification details along with residential address should be mentioned in the contract.
- RECITAL AND INTERPRETATION: The recital under a contract is often called background or preamble and it is placed right at the start of the contract and its purpose is to tell the story or transaction for entering into the contract. Interpretation sets out the method by which common words under the contract are to be interpreted.
- DEFINITIONS: Definitions are again a very important part of the contract, they help you understand the actual meaning of transaction-specific words in the contract.
- UNDERSTAND THE BUSINESS: Before drafting the operative clauses of a contract, it is a must to understand the nitty gritty of the transaction between the parties for which they are entering into a contract. Operative clauses in contracts are provisions that determine the rights and liabilities of the parties and form an integral part of the transaction between the parties. Some common operative clauses are consideration, change of control clauses, term, termination, repayments and interest terms, reserved matters, indemnity and limitation of liability, non-compete and non-solicit. Therefore, it is recommended to decipher the intent and requirements of the parties who are to enter into a specific type of contract and note down the relevant points from client interaction. You can be on behalf of either of the parties however, you must make sure that your client’s rights are protected under the contract.
- KNOWLEDGE OF STATUTORY LAWS: When the parties to a contract are located in more than one state or perhaps more than one country, it may not be clear which state’s or country’s law will be applicable therefore, commercial agreements must entail this in a very specific manner.
- OBLIGATION OF THE PARTIES: One needs to categorically state the obligations of each party to the contract and leave no space for ambiguity.
- BOILERPLATE CLAUSES: These are some standard clauses that are added at the very end of each contract. Boilerplate clauses in contracts are provisions that do not necessarily form part of the commercial deal between the parties, but which are necessary or standard to include to provide some form of protection for a party, to explain certain processes or procedures which may arise pursuant to the contract or commercial relationship or to set out the legal situation. These include waiver, force majeure, severability, limitation of liability, indemnity, notice, assignment, etc.
- WITNESSES AND SIGNATURES: Though in India, it is not mandatory to have witnesses for the signing of the contract it is often recommended. The presence of witnesses is required to confirm the identity of the parties signing the contract and to ensure that no forgery took place.
- STAMP DUTY: The tax levied on the execution of documents in India is called stamp duty. If you contact our lawyers, they will be able to find out the stamp duty levied on the contract that you are entering too. Stamp duties can vary from 100 rupees to crores of rupees depending upon the kind of contract one is entering into. Non-payment of stamp duty is a criminal offense under the Indian Penal Code and its validity is only for six months. And it must also be kept in mind that Unless stamp duty is paid, the agreement will not be enforceable in court.
In the realm of business, contracts serve as the cornerstones upon which trust and accountability are built. Each component, from the title that encapsulates the contract’s purpose to the meticulously crafted boilerplate clauses, plays a pivotal role in shaping the legal framework of agreements. Understanding the obligations, definitions, and statutory implications inherent in contracts is paramount for both parties. Moreover, compliance with stamp duty requirements is not only a legal necessity but also a safeguard against future legal complications.
