How to draft a Commercial Agreement in India?

According to Section 2(h) of Indian Contracts Act, 1872 “an agreement enforceable by law is a contact” resultantly an agreement which creates legal obligation is a contract. Further an agreement is a promise or a set of promises forming the consideration for each other and agreement which creates legal obligation is a contract.

Thus, commercial agreements and contracts legally determines the liability of the parties by creating legal obligation(s) and bind(s) the parties who enter into an agreement in the regards of business, selling/ buying, renting/ leasing etc.

Parts of Commercial Agreement

• First part: Commercial agreements identifies the parties, defines their definite duty. The details of the agreement shall include specifics such as applicable services, tenure of the agreement, pricing etc.

• Second part: This part of agreement specifies on negotiations, terms and conditions non-performance and includes the details of warranties, indemnification, termination and liquidated damages.

• Third part: This part of agreement specifies on non-performance and includes the details of warranties, indemnification, termination and liquidated damages.

Requirements for a Valid agreement

• Title – the title should reflect the subject matter of the transaction that’s appropriated by the parties.
• Definitions – the use of defined terms can simplify a document.
• Agreement – The agreement must include an offer and acceptance where the parties must agreed upon.
• Covenants – the covenants signifies the promises that are being made by the parties.
• Consideration – quid pro quo is essential for an agreement and this consideration is what makes something a contract rather a gift.
• Legal capacity – the parties to the agreement must be legally competent in the eye of law.
• Willingness – the contract must be free of consent (with no coercion, undue influence, fraud, misrepresentation and mistake)
• Termination – while an agreement is drafted a clause relating to termination shall be entered allowing the parties to continue or discontinue the on-processing business. The termination shall happen due to bankruptcy, insolvency, merger, change of control etc.
• Legal – the contract must legally bind the parties under the law of land (state and federal). The agreement loses its enforcement if it’s performed illegally.
• Other important provisions –
  • Choice of law
  • Amendments and waiver
  • Notice
  • Signatory or receiving authority of issues notices by either parties.

Checklist

• Relationship between the parties – the relationship between the parties shall be contractual and not personal. Further it should legally bind as well protect the parties from exploitation.
• Financial transaction – the release of payment along with the clauses mentioning non-performance from either of the parties and the transaction shall be mentioned in the agreement.
• Terms and conditions – it is a set of rules and regulations which users must agree to follow the orders to use the services.
• Confidentiality – the principle of confidentiality is keeping sensitive information of the business between the parties.
• Dispute resolution – when dispute arises the parties the has to decide on resolving those issues either via arbitration or court proceedings.

Guidelines

• Accuracy – the names of the parties and particulars such as address/ aadhar number/ PAN etc. and to check the accuracy of the draft without misunderstanding due to ambiguity. The agreement must have relevant and exclude other irrelevant information.
• Organisation – the agreement should be logically arranged with free flow and precise transition between paragraphs and sentences.
• Language/ style – the language of the agreement must be understandable and should be clearly structured with proper grammar.

Judicial option

It has become mandatory to include arbitration clause in any agreement before the parties opt for court hearing.

Commercial contract shall be entered among –

• Franchisor and franchisee
• Shareholder and joint ventures
• Loan and financial agreement

Note – include appendix if necessary (examples)

• Conditions of contract
• Letter of acceptance
• Effect of the contract
• Scope of work
• Geographical location
• Risk management
• Insurance
• Certificates (if any)

Conclusion

Regardless of the size of your company or the sector in which it works, a commercial contract must be carefully drafted and checked before signing and regularly. 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.