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Contract Law

What is a "contract" ?

A contract is a legally enforceable agreement between two or more parties. In order to form a contract there should first be an agreement between parties. For this, one party (the "offeror"/"promisor") makes an offer which is accepted by the other party (the "offeree"/"promisee"). An offer is a proposal to form a contract and the acceptance is the promisee's assent to the terms of the offer.

How can I ensure that I enter into a valid contract?

In order to form a valid contract there must exist a valid agreement between the parties.

The important points that should be kept in mind to form a valid agreement are:

When an offer has been made, no contract is formed until the promisee accepts the offer. Contractual liability is based on consent. Therefore, acceptance to an offer should never be assumed but should be expressly obtained.
When an offer is made to you, do not assume that an offer will remain open indefinitely. In general, an offeror is free to revoke the offer at any time before acceptance by the offeree. Once the offeror terminates the offer, the offeree no longer has the legal power to accept the offer and form a contract.
If you need time to make up your mind before accepting an offer, get the offeror to give you a written promise to hold the offer open for a few days. That will give you time to decide whether to accept.
When you are the offeree, do not start contract performance before notifying the offeror of your acceptance. Prior to your acceptance, there is no contract. An offer can be accepted by starting performance if the offer itself invites such acceptance, but this type of offer is rare.
Except for the simplest deals, it generally takes more than one round of negotiations to form a contract. Often, the offeree responds to the initial offer with a counter-offer. A counter-offer is an offer made by an offeree on the same subject matter as the original offer, but proposing a different bargain than the original offer. A counter-offer, like an outright rejection, terminates the offeree's legal power of acceptance.

Once the agreement is reached, it should satisfy the following conditions to become a contract:

There should be some consideration involved.
The parties should be competent to contract.
The consent of parties to the agreement should be free.
The object of the agreement should be lawful.

Once these four conditions are satisfied, the contract becomes enforceable in the courts.

What is "consideration" and how can I ensure that the same is valid?

Consideration is the legal term for the set of mutual promises that form the core of most contracts. Simply put, consideration is what one party to a contract will get from the other party in return for performing contract obligations. For instance, if A, a developer, contracts with B, a builder, to pay Rs 5 lakhs for the construction of a house, the promise to pay the sum assured is the consideration flowing from A to B and the promise to construct the house is the consideration flowing from B to A. Apart from this, a promise to abstain from doing something (for instance, forbearance to sue) also forms valid consideration.

The points to be noted in this regard are:

Past consideration (act done before promise is made) and future consideration (promise to do something in future) also forms valid consideration;
Consideration should be of some value, but it need not be adequate. However, inadequacy of consideration may be a factor taken into account by the court in order to determine whether consent to the promise was freely given;
Consideration may move from the promisee under the contract or from some other person. Therefore as long as there is consideration for the contract, it is immaterial who has furnished it.

An agreement made without consideration is void, unless:

Such agreement is made on account of love and affection between the parties and it is reduced in writing and registered with the appropriate authority;
It is a promise to compensate a person who has voluntarily done something for the promissor;
It is a promise to pay a debt barred by limitation law, provided it is made in writing and signed by the person to be charged.

Thus, according to traditional legal doctrine, if one party makes a promise and the other party offers nothing in exchange for that promise, the promise is unenforceable. However, nowadays lack of consideration is rarely a problem for promises made in the context of business relationships and in most business contracts there is consideration for both parties ("mutual consideration", in legal terminology).

Nevertheless, in a contract, the consideration forms the promises made by the parties and defines the rights and obligations of the parties.

Who are the persons who are competent to enter into a contract?

All persons/entities are generally assumed to have full power to bind themselves by entering into contracts, unless they fall into one or more of the following categories:

Minors (the legal age for entering into contracts is 18. However, in cases where a guardian of the minor’s person or property has been appointed by court, the age of majority is 21).

Mentally incompetent persons (The test for mental capacity is whether the party understood the nature and consequences of the transaction in question).

Person/entity who is disqualified from entering into the contract by the law to which he/it is subject.

A company has a separate legal existence and is competent to contract. Companies enter into contracts through the acts of their agents, officers and employees. Whether a particular employee has the power to bind the corporation to a contract is determined by the position held by that person in that company and the specific authorisation given to him in that regard.

If you doubt whether an individual with whom you are dealing has authority to enter into a contract with you, insist that the person produce the specific authorisation given to him, for eg: a Board resolution or a Power of Attorney.

How can I determine whether consent to a contract has been freely given?

Consent to a contract is presumed to be freely given, unless the same is not obtained by one or more of the following:

Coercion
Undue influence
Fraud
Misrepresentation, or
Mistake.

How do I ensure that I have entered into a lawful agreement?

The rights and obligations of the parties are determined by the contract's terms, subject to limits imposed by relevant statutes. In order to have a valid contract, one of the important conditions is that the consideration and the object of the contract should be lawful. Both are presumed to be lawful unless:

It is forbidden by law;
It is of such a nature that, if permitted, would defeat the provision of any law;
It is fraudulent;
It involves injury to the person to property of another; or
The court regards it as immoral or opposed to public policy.

Therefore, when drafting a contract it is important to ensure that all applicable laws are adhered to and that there are no violations of the provisions of any legislations/notifications etc. Due to the myriad laws and rules that are applicable, it is sometimes difficult to ensure that all clauses in the contract comply with the laws and regulations and also with the public policy as laid down by the courts. Therefore, it is typical to include a clause in contracts that in the event any provision/s of the contract is held invalid/illegal/unenforceable, the contract shall remain otherwise in force, except for the said portions which shall be deemed to be deleted.

What are the reliefs granted by courts in case of breach of contract?

If one party meets its contractual obligations and the other party doesn't, the latter commits a breach of the contract. Accordingly, the nonbreaching party is entitled to receive relief through the courts.

Generally, the nonbreaching party's remedy for breach of contract is money damages that will put the nonbreaching party in the position it would have enjoyed if the contract had been performed. Under certain circumstances, a court will order the breaching party to perform its contractual obligations (specific relief).

The money damages that are allowed by the courts are generally compensatory and not penal. The basic aim of the law of damages is to place the plaintiff in the same position that he would have been, had the breach not occurred. The parties to a contract may, however, determine beforehand the amount of compensation payable in case of a breach. This is called liquidated damages and can be recovered if it is the genuine pre estimate of the damages that are likely to arise from the breach. In any case, once liquidated damages are specified, any amount exceeding the sum specified cannot be claimed.

If no such sum is stipulated in the contract, then unliquidated damages may be claimed.

What are the provisions that are typically found in contracts?

Contracts are in a sense, private law created by the parties and hence there is significant flexibility in setting out its terms. Depending on the type of contract that is entered into and its purpose, certain special types of provisions to reflect the intent of the parties and comply with applicable laws, may be included. Subject to this, certain common types of provisions that are normally found in all contracts are enumerated below:

Are there any general tips I can keep in mind when entering into a contract?

The contract formation process varies widely, from contracts formed quickly in face-to-face meetings to contracts formed after teams of attorneys have spent months in negotiations. However, given below are certain general tips for persons who propose to enter into a contractual relationship.

Write it down.
Though both oral and written contracts are valid, it is highly recommended that all contracts should take the form of a written document signed by both parties. You do not have to hire an attorney to create a simple written contract. If you reach an agreement over the phone or in a meeting, write the agreement as soon as possible and have the other party sign the written memorandum. If you are making a written offer, you may want to make your offer in the form of a letter, with a space at the end for the offeree to indicate acceptance by signing. If you have to go to court to enforce a contract or get damages, a written contract will mean less dispute about the contract's terms.

It must also be noted that some types of contracts must be in writing to be enforced. The Copyright Act requires a copyright assignment to be in writing.

Make sure you are comfortable with your obligations.
If a term-- for example, a deadline - makes you uneasy, make a counter-offer that substitutes a term with which you are more comfortable. Do not assume that the other party will excuse you from strict compliance and do not rely on the other party's oral assurances that it will not insist on strict compliance.

Consider all possibilities.
Before you sign a contract, consider what could go wrong or what could make performance of your obligations difficult or expensive. If the actual performance is more difficult or expensive than you anticipated, that is not a valid excuse for not performing. Enter into a contract only if you believe that you can meet your obligations.

Don't leave anything out.
Accurately cover all aspects of your understanding with the other party. If the other party wrote the agreement based on an oral understanding reached earlier, make certain that the written terms match the terms of your oral agreement. Don't leave points out of the written document, even if the other party says, "We don't need to put that in writing."

Cover all options.
Cover all options, consequences, and possibilities. You should not fail to address an issue because it is "sensitive". Deal with the sensitive issue during the negotiations. Make sure that your contract includes a merger clause to avoid disputes about whether proposals made during negotiations but not included in the final written agreement are part of your contract.

Don't use unclear language or ambiguous terms.
If you don't understand exactly what the other party is expecting you to do, don't try to camouflage the lack of understanding by using vague language. Vague language leads to misunderstandings, disputes and lawsuits. Use simple language that accurately expresses your agreement with the other party and to avoid misunderstandings, define any terms that may be ambiguous.

Be careful using "legal terms."
There are some words with specific meaning in the law. "Assignment," for example, has a number of meanings in the English language. In intellectual property law, "assignment" means a transfer of ownership of intellectual property. Use "assignment" in your contracts when you mean transfer of ownership of intellectual property. Don't use the word in its other meanings or you will create confusion.

Use Terms Consistently.
When you write contracts, you are creating your own law. Therefore terms should be used consistently in the contract. Don't use "royalty" in one paragraph, "license fee" in a second paragraph, and "use fee" in a third paragraph. Pick one term and stay with it throughout the contract.