Fundamental Principles Of An Effective Contract Drafting
Updated: Jan 18
When a party with sufficient legal capacity makes an offer and the other party with sufficient legal capacity accepts the offer with a legal consideration, a contract is formed. The Agreement must include valid consideration for being a contract, i.e, both parties will contribute to the agreement a Quid pro quo such as money, labour, a guarantee of return, etc. To form a legitimate contract, all parties must have the legal capacity to enter a contract and the contract’s intent or goal must be lawful.
Fundamental principles of legal drafting are
1. Competency to contract
The Contracting party should be sufficiently competent to form legal relationships and fulfil contract performance obligations. The competence of the parties is provided in Section 11 of the Indian Contract Act, 1872. Under Section 2(h), a contract is a legally enforceable agreement. Essential Components for contract effectiveness is the ability, expertise, and experience of the person drafting the contract. Currently, the corporate sector is designating this job to the legal experts concerned, who have experience of good prudence in handling and drafting the contracts. These legal experts are well versed in the understanding of contractual requirements and their legal implications.
2. Purpose of the contract
The purpose of the contract is to construct the understanding made by the parties. This includes scope, structure, and other conditions of the contract terms to be used. For example, parties who have agreed to supply goods with some consideration for them, the terms of the number of goods, the delivery of goods, the price payment method, the compensation, the rejection, and, lastly, the dispute resolution clause shall apply.
Unlawful or unconstitutional consideration and conditions shall not be the subject of the contract, and these things make the contract invalid or unenforceable by law. For instance, when considerations are unconstitutional, deals are invalid.
3. Domestic or international agreement
When entering into an international or a domestic contract, the requirements of terms such as position of operation, language of the boilerplate (standard or miscellaneous) clauses, mode of payment, the option of law, etc need to be taken care of.
Draft Language: Parties shall use the common language which is in line with the contract. For example, if two parties are from separate countries, English is usually preferred.
Place of results: The contract performance terms should be specified by the parties from different countries. Clauses need to be updated according to the location.
Payment mode: Parties from various regions shall state explicitly the mode or currency that will be used in the contract. It should insert preferred currency, current exchange price, advance or full payment, etc.
The option of Law: Generally, the parties would attempt to put in place its indigenous country rule, but this may create problems during the contract. Consequently, in most cases, a country’s law from where the contract is to be executed is preferred. Here the drafter can consider the advantages and disadvantages of a country’s law.
The seat of Arbitration: The parties must agree on the conditions for the selection of a competent arbitrator who will have exclusive jurisdiction over the arbitration.
4. Basic sections
There are other basic words to be applied with proper recitation and introspection, as this portion will form the contractual introductory clauses. Such initial sections of an agreement are the principal part of the drafting process.
Preamble: This section includes the identity of the contracting parties, the date of the contract, the place of agreement, and the address for the contracting parties’ business purposes. This can also include trustees, business partners, branches, and guarantors if there is the involvement of several associated parties.
Recitals: These apply to the “whereas” clauses preceding a contract’s main text which includes a transaction’s basic text, structure, and meaning. They give the reader a general idea about the deal.
Definitions: It characterizes words that appear in different parts of the contract.
Contract length, effective date, and validity: if the contract is valid for a fixed period or permanent if reversible, how many times and how many years in each cycle to be considered. The effective date may be the contract date, or as agreed by the party, from which all the contractual obligations and rights begin.
Consideration and Terms of Payment: This section sets out the amount to be paid, whether before or after delivery, any advance payment, or a complete description of transaction costs. These distributions of the expense of deals may have impacts on tax estimates.
Scope of results or services: It is an essential part of any contract specifying the item or services being transferred. A plan is to be rendered considering the possibility of items being moved (real estate/services/products / intellectual property, etc).
5. Standard terms
Standard terms or boilerplate clauses are the essential terms and conditions which should be included in an effective contract.
Force majeure provisions are legally binding provisions that modify the commitments of the parties as well as the obligations under an agreement when an unforeseen opportunity or condition beyond their ability to control prevents one or each of them from fulfilling those obligations. If success is unlikely or impracticable, it is a contractual concept allocating the risk of failure.
The termination clause is essential in the uncertainty of failure, to satisfy the closing conditions before the date stated. Such “exit clauses” grant parties the right to terminate such stated events upon occurrence: insolvency, bankruptcy, the merger of the other party, changes in government regulations, etc.
An assignment provision specifies the legally binding duties, rights, and responsibilities that may be passed to the next party from one of the contracting parties.
6. Structure of the contract
The contract should be simple, clear, unambiguous, understandable, and easy to understand. It should be neither too long nor too short and should be according to different sector requirements. The terminology used in the contract should be to the point and not vague. There should be no obsolete words, no civil pairs, no Latin or international phrases, plain English, or jargon.
7.Appropriate arbitration clause
The Alternative Dispute Resolution provision which commits the parties to bring their disputes to arbitration or mediation as opposed to litigation will viably supervise any disputes arising out of the agreement. The provision of arbitration will stand irrespective of whether the agreement is exhausting or expiring, and the clause would require the establishment of an arbitration tribunal, venue, time, language, arbitration law, and various necessities of arbitral proceedings, etc
The drafting of the contract must be done skillfully to avoid conflicts or confusion. The terms should not be ambiguous so that the matter can be resolved amicably in the event of any dispute. This is a standard draft of a trade contract and in most of the States, the basic principles remain the same.
ABOUT THE AUTHOR
Akshita Kesharwani is currently pursuing BA.LLB from Alliance University.
They can be contacted at email@example.com or https://www.linkedin.com/in/akshita-kesharwani-07aa511a4
Edited By: Swathi. Ashok. Nair.
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