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Author: Rashi Suri

Associate: Pradyun Chakravarty, Dikshita Damodaran, Anjana Sridharan

Even though contracts are ingrained in our everyday lives, we neglect the importance of understanding the basics of contracts. For instance, when we hit the convenient “I Agree” button on the cookie message prompt that appears on our screen, we are effectively entering into a contract with the owner of the platform, giving our consent for the storage and use of our personal data, in return for continuing our use of that platform. There are so many other instances where we enter into contracts without quite considering its legal implications. So let’s take a look at what a contract is, what constitutes a contract and what are the essential elements of a contract .

WHAT IS A CONTRACT?

The most basic and reduced definition of a contract is that it is a legally binding agreement wherein two parties agree on the exchange of value in some form. It needn’t necessarily be a written contract for it to be legally enforceable and valid except in some cases where the law requires it to be a written contract. For an agreement to constitute a legally enforceable contract, it must fulfil all the conditions laid out under Section 10 of the Indian Contract Act, 1872 (ICA). Let’s go over what these essential elements are:

1. Offer and Acceptance:
   One party needs to make a proposal to do or refrain from doing something, with a view to obtain something of value in return from the other party. The proposal is deemed to have been made when such a proposal is accepted (when acceptance is communicated to the proposer), it becomes a promise. 
2. Intention to Create Legal Relationship:
   This can also be said to be meeting of the minds (consensus ad idem). Both the parties must have intent to make the agreement legally binding and thereby, a contract is entered upon. An example of it would be domestic contracts such as within a family or between a husband and wife. These are generally construed not to have legal intention and the person claiming intention must prove it.
3. Lawful Consideration:
   Simply put, consideration is what you give in return for the promisor’s act or abstinence from acting. It’s an exchange of something of value for the other party’s doing or lack thereof. The consideration is not limited only to money, it could also mean shares in a company, or a barter exchange or anything of value in return for the promise.
4. Lawful Object:
   The object must not be fraudulent or illegal or immoral or against the public policy or must not imply injury to any third person. 
5. Parties Competent to Contract:
   The parties to a contract must be capable of entering into a contract. Essentially the person must:
   i)   Have attained the age of majority
   ii)  Be of sound mind
   iii) Not be prevented by law from entering into a contract
6. Free Consent:
   The contract must be entered into voluntarily and not by coercion, fraud, undue influence (a person in a position of authority exerting his power on an inferior), mistake, or misrepresentation. The consent should be informed and thoroughly voluntary in nature.
7. Not Expressly Declared Void:
   Agreement without consideration, agreement in restraint of marriage, agreement in restraint of trade, agreements in restraint of judicial proceedings, an agreement by way ofwager, etc., are agreements prohibited by the law under Sections 25 to 30 of the ICA.

A FEW COMMON COMMERCIAL/BUSINESS CONTRACTS AND WHEN TO USE THEM:

• Intellectual Property Agreement (Licensing/Assignment):
  An assignment results in a permanent transfer of ownership of the Intellectual Property (IP) in question. The assignor transfers his interest in the IP. A licensing agreement grants permission to the licensee to use the IP without being sued. A licensing agreement may come with restrictions as to what extent and for what purpose it may be used. The Licensor retains ownership. The license may be exclusive or  for limited purpose.
• Employment Agreement:
  An Employment agreement contains various terms and conditions of an employment including remuneration, responsibilities, benefits, termination, non-compete clause, etc. In some instances, there is a separate Non-Compete Agreement and Employment Separation Agreement (Termination).
• Non-Disclosure Agreement:
  A Non-Disclosure Agreement is a vital agreement, for protecting the confidential information of a business when collaborating with clients, either potential or current employees, vendors, sub-contractors etc.,
• Indemnity Agreement:
  An indemnity agreement is used to transfer or distribute the risk from one party to another. The indemnifier agrees to reimburse any losses suffered by the indemnitee so the indemnitee shall not be held liable for any damages, costs, charges etc.
• Bill of Sale:
  This serves to legally recognise the ownership of a certain property. It contains particulars such as the name of the owner, the consideration for which the property was bought, when it was bought and from whom.
• Security Agreement:
  This is used while issuing loans to provide a security interest to the lender in the buyer’s property as collateral. 
• Partnership Agreement:
  As the name indicates, a Partnership Agreement is used  when entering into a partnership in order to clearly map out the responsibilities of each partner, the profit/loss distribution, capital contribution, terms of dissolution, etc.,
• Shareholder Agreement:
  A Shareholder Agreement contains information as to how the company should be operated and outlines shareholders' rights and obligations. It includes a capitalisation table that details each member’s contribution and shareholding.

IMPORTANT CLAUSES IN BUSINESS CONTRACTS:

Apart from the standard boilerplate terms in a business contract, these are clauses that you could, as a business owner, benefit from.

• Termination Clause:
  This clause will list the set of circumstances under which either party can terminate the agreement irrespective of the time that is left of the agreement. 
• Termination and Damages Clause:
  The purpose of a termination and damages clause is to limit the damages of the party in case performance of the contract becomes impossible or is financially detrimental to the company. It gives the business owner an “early out” while also limiting damages. It could prove vital to your company’s financial health. The difference here is that irrespective of the circumstances, the agreement can be terminated for a small loss resulting in greater savings.
• Forum Selection Clause:
  This clause determines the jurisdiction of the forum to be approached if any dispute arises out of the contract. This is especially important in dealing with parties from a different state. Wherein the forum where the suit can be filed can be used to prolong legal proceedings.
• Severability Clause:
  A severability clause can save an entire agreement from being nullified simply because one of the clauses happens to be unlawful. On occurrence of such an event, the remainder provisions of the agreement will still be considered as valid and legally enforceable.
  Several other clauses such as confidentiality clause, force majeure clause, indemnification (discussed earlier as separate agreements) are also extremely important. Hiring a legal consultant is the best way to make sure you’ve covered as much ground as possible.

WHAT CONSTITUTES A BREACH OF CONTRACT?

A contract is breached (broken) when either one or both parties fails to perform as promised in the contract. A breach may occur when a party:

1. refuses to perform its promises under the contract
2. does something that the contract prohibits, or
3. prevents the other party from performing its obligations under the contract.

Non Performance refers to a failure to perform your duties under a contract. However, this duty of performance is called into question only when the performance becomes due. Perhaps the other party had to fulfil a certain condition as a prerequisite to your performance. However, a breach may occur even before the performance becomes due or after the performance is due, by way of non-performance. Every non-performance is a breach but not every breach is a non performance.

REMEDIES FOR BREACH OF CONTRACT:

To sum it up, there are three remedies for breach of contract:

• Rescinding a Contract:
  When one party does not fulfil his contractual obligations, the other party can rescind (terminate) the contract. If the person rescinding the contract has already benefited from the contract, he must restore such benefits. If has suffered any loss from rescinding the contract, then he is entitled to claim damages for the same. 
• Damages:
  Each party is entitled to claim damages for the loss suffered by them due to breach of contract by the other cause in the ordinary course of business. Extraordinary damages will not be covered.
  Liquidated damages refers to when the parties have previously agreed upon the sum to be paid upon breach as damages.
  Un-liquidated damages is when such a sum is not predetermined and it is up to the court to specify the damages to be paid.
• Specific Performance:
  In instances where the performance of the contract is still possible and beneficial, the court can order that the party perform his obligations under the contract. This is a positive injunction.
• Injunction:
  Where the obligation under the contract stipulates that the other party refrains from a certain act, an injunction in one way of ensuring performance of a contract. It’s the flipside of a specific performance.
• Quantum Meruit:
  Quantum meruit means "what one has earned". In the present context it means “reasonable value for services". When one party is prevented from carrying out his obligations under a contract, and he has already carried out a part of it, he will be remunerated for the portion that he has already completed. This could be the remuneration of the services he has provided or the value of the work he has already done.

We have now looked at some of the most important information to consider whilst entering into a contract. That being said it’s essential to keep in mind the various elements of the contract. Further, it is important to have clarity on what your expected outcome is from a particular contract which  will help you to better frame a contract and consider its legal implications.

WEBLIOGRAPHY

1. Mehendi, F. (2020, April 6). Offer and Acceptance (Overview). Retrieved from https://www.legalbites.in/offer-and-acceptance/
2. Ignatowski, C. (2018, May 16). What Is An Indemnity Agreement? 
   Retrieved from https://blog.suretysolutions.com/suretynews/what-is-an-indemnity-agreement-with-examples
3. Common Business Contracts. (2018, January 17). Retrieved from https://smallbusiness.findlaw.com/business-contracts-forms/common-business-contracts.html
4. Friend, C. (n.d). 5 Common Types of Business Contracts. Retrieved from https://bitman-law.com/5-common-types-of-business-contracts/
5. Naughter, T. (2017, November 16). 6 Key Clauses Found In Business Contracts. Retrieved from https://www.contractworks.com/blog/6-key-clauses-found-in-commercial-contracts
6. Commercial Contract Terms. Retrieved from http://www.iberglobal.com/files/2016-2/commercial-contract-terms.pdf
7. Trembly, B. (2014, August 30). Five Essential Clauses That Must Be Present In Every Business Contract. Retrieved from https://www.avvo.com/legal-guides/ugc/five-essential-clauses-that-must-be-present-in-every-business-contract
8. Fishman, S. (n.d.). Small Business: Breach of Contract and Non-Performance. Retrieved From https://www.lawyers.com/legal-info/business-law/small-business-law/breach-of-contract-and-non-performance.html