Basics of Contractual Agreement, Its Drafting & RegistrationJuly 18, 2022 By Ajita Sharma
Do you still seal a business deal with a handshake? Well, that’s not a good idea at all because verbal agreements can vanish into thin air but papers stay forever.
The Verbal Contract & Its Loopholes
Earlier businesses were done based on verbal agreement and handshakes and when any violation of trust occurred, the matter was either solved internally or taken to the court which then goes on for years proving each other guilty.
It does not mean that oral agreements are baseless. A verbal contract, also known as a parol contract, is a type of business contract that is done between two or more parties via a spoken communication, but is not documented and is indeed legally enforceable in the court of law but, is extremely tricky to prove when a dispute arises. So, it is always safe and best to record whatever is spoken into text which is called a Written Contractual Agreement.
Understanding Contractual Agreement & Its Importance
“Can you give it in writing?” A phrase we all use when the fear of the possibility of getting cheated or violated sparks in our mind. A contractual agreement is the same thing done lawfully.
According to the Indian Contract Act, 1872, Section 2(h), the term “Contract” is defined as - “An agreement enforceable by law” which means it can be used in court to support a decision on a disputed item. Whereas the term “Agreement” in Section 2(e) is defined as - “ Every promise and every set of promises, forming the consideration for each other” which means an offer or proposal made by one party is accepted by the other. These agreements are a set of terms and clauses framed by the individuals, companies, and/or other legal entities specifically stating the relationship between all in the future. The set of terms recorded as per law becomes legally enforceable taking the form of a contract, which not only means recording of terms agreed upon for a defined return to validate the arrangement but also binding the parties involved legally for the performance of their parts to complete the objective for which the contract has been made.
For any contract to be valid and enforceable, it has to have certain ingredients in it which are mentioned in Section 10 of the Indian Contract Act,1872.
Following are some of those conditions :
1. Offer - An offer/proposal must be made by the Offeror because without it there is no contract. It is an expression of a desire to do or abstain from doing so to gain the approval of others.
2. Acceptance - What the Offeror is offering must be accepted by the other party. It means the person to whom the offer is made has given his/her consent to that offer.
3. Intention to Create Legal Relationship - Both parties entering into a contract must establish a legal relationship so that if any party fails to comply with the terms of the agreement then it will amount to a breach of contract and will give rise to legal consequences.
4. Lawful Object and Lawful Consideration - The object upon which the contract is made must not be illegal, immoral, forbidden by any law or opposed to public policy means a contract cannot be made to carry out any illegal business or activity barred by the law.
Also, there cannot be a contract without consideration. It means something valuable like money, goods, or services must be exchanged between the parties. However, the consideration
- should be legal and should not be impossible to perform.
- may be tangible or intangible hence consideration is just not void because it is inadequate.
- has to be at the desire of the promisor,
5. Consideration Should Not Be Forbidden by Law - In Sec. 23 of the Act, unlawful consideration is specified. It means the consideration for the contract must be legal and must not involve or imply injury to the person or property of another.
6. Capacity to Contract - Parties entering the contract must be legally competent which means they must be of the age of majority, of sound mind, and sober (not under the influence of drugs or alcohol) and must not be minor or mentally deficient.
7. Possibility of Performance - A valid contract must be made on something that is capable of performing. If the act is impossible in itself, physically, practically or legally then the agreement is not enforceable.
8. Legal Formalities - Although according to Indian Contract Act,1872, a contract can be both in oral or in writing, a written agreement that has gone through all legal formalities means it is signed and and attested by witness and registered if required by the law is considered to be more valid.
9. Free Consent - The contract must not be forced upon. Both parties must enter into an agreement with their free consent and must not constitute the following elements; Coercion (persuading someone to do something by the use of threats or force), Misrepresentation, Fraud, Undue influence, Mistake.
Note: You can make a contract even if you are not meeting any of the above requirements but the contract will not be enforceable in court.
Now, coming to the importance of why you must write down a contract then When something goes wrong, a written contract protects both parties and if one among both parties has broken the contract (the legal term is breached) then it becomes easier and practical for the other party to prove and file a lawsuit. But, the court will only hear if the contract is valid and registered. So, let’s see how the drafting and registering of the contract are done.
Drafting and Registering a Valid Contract
As per The Indian Contract Act, contracts are classified on the basis of the following:
Formation - which includes Verbal contracts, Written contracts, Express contracts, Implied contracts, Quasi-contracts, and E-contracts.
Nature - which includes Unilateral contracts, Bilateral contracts, Unconscionable contracts, Adhesion contracts, Aleatory contracts, and Option contracts.
Execution - which includes Executory contracts, Executed contracts.
Validity - which includes Valid contracts, Void contracts, Voidable contracts, Void-ab-initio contracts, Unenforceable contracts, and Illegal contracts.
Although the drafting of a contract varies as per the classification, there are some essentials or sections that remain common and are a must while drafting any contract for it to be an effective, legally enforceable contract and they are:
Preamble - the basic information about both parties.
Recitals - a basic structure, text, and context of the contract.
Definitions - keywords, terms, and abbreviations that are essential for understanding.
Body or Matter of Content - a brief explaining what the contract is regarding, the particular method, rights, and duties of both parties, scope of payment, completion time, and other fundamental content of the contract.
Consideration and Terms of Payment - all about the amount to be paid and received, mode of payment, the terms for payment, and break up of the final price inclusive of all the factors adding up to the total cost.
Scope of Supply and Services - a list of all the products and services to be provided/sold and received under the contract.
Indemnity and Risk Allocations - repercussions if either party breaches and their remedies.
Confidentiality - a provision if both parties want their information and terms to be safeguarded from others.
Effective Date, Completion Time, and Validity - a date when the contractual obligations were accepted by the parties, the completion time as well as the date till when the contract will be valid.
Termination - the way out of the contract or the end of the contract with mutual agreement between the parties.
Miscellaneous Provisions - certain provisions and sections that do not fall in any particular section like the Force Majeure Clause (for natural disasters), Integration clause (for amendments), etc.
Note: Drafting a contract is not as easy as it sounds and if it's for a business, there are specific clauses, terms, and conditions to be included that a corporate law adviser can help you with. Hence, it is advisable to approach a corporate law firm to draft your business contract to avoid falling into a trap in any way. The same applies if you are to sign a contract.
Once a contract is drafted, affirmed, and signed by the parties, comes the most important part - registration without which a contract is void. So, let’s see what you have to do to register your contract.
Not all contracts must be compulsorily registered in order for them to be legally enforceable in the eyes of Law, although it is advisable to register your contract no matter what nature it is to avoid any vagueness and unnecessary harassment and/or losses and/or litigation costs that may arise in the long-run.
Steps to register your business contract with the MCA/RoC (Ministry of Corporate Affairs/Registrar of Companies) as per the Companies Act 2013.
Step 1 - Apply for registration
Step 2 - File for name approval
Step 3 - Get your Memorandum of Association (MoA) and Articles of Association (AoA), drafted by a corporate lawyer.
Step 4 - Obtain DIN (Director Identification Number) which is a unique identification number given by the Central Government to individuals intending to be the directors of a new or already existing company.
Step 5 - Gather and submit all the required documents for registration like the contract, affidavit certifying all the details mentioned in the contract and its documents are correct, identification and address proofs, as well as the proof of principal place of business of the firm (ownership documents or rental/lease agreement), DIN, name approval certificate, MoA and AoA, Appointment letters and declarations, etc.
Step 6 - File the INC-29 form which must be done carefully as you only get one chance to resubmit it and if you mess it up you have to pay the filing fees again and go through the entire process which is a huge waste of time. Once you file it, you will be required to pay RoC fees and stamp duty electronically as per the state of India as charges differ in each state.
Step 7 - The RoC will verify your documents and if found all legal, the registrar will issue a digital certificate of incorporation.
Step 8 - Obtain PAN and TAN. According to The Income Tax Act, of 1961, a company must have a registered Permanent Account Number and Tax Account Number. To obtain this you have to visit the NSDL website, fill in the application for PAN and TAN, pay the fees, and receive an acknowledgment letter for each. Next, you will have to courier both the acknowledgment slips separately along with the copy of the Certificate of Incorporation with the company seal (rubber stamp) and the signature of the director who will be operating the bank account on each document. You will receive hard copies of both PAN and TAN within 21 days at the registered office after which you can open a current account and commence your business.
Drafting, understanding, and registering a valid contract is indeed a tiring process. It is possible for anyone to DIY but, it will compromise the quality and security of rights of the parties. Therefore, it is better to approach a law firm like us Parker and Parker Co. LLP which has the best corporate lawyer on their team who will guide you and take care of every single process without giving you any headaches or hiccups.