A contract is known to be one of the oldest ways of communication between human beings. Right from the times when the barter system was the only way of trading, human beings have been entering into contracts, first verbal and eventually written documents. While contracts can be both written or oral, written contracts are more valued in the commercial and business world, Oral contracts are very difficult to enforce as they fail to provide a clear understanding of the parties’ intention, offer, acceptance etc. Thereby, failing to provide a sufficient evidentiary value to the contract.
Contracts have come to form one of the most important aspects of dealing and carrying out safe and profitable commercial transactions. While contracts are of various types, there are quite a few clauses or terms that are important for all types of contracts to have.
What are the standard clauses in a contract?
There are certain Standard Clauses that every contract contains, whether it is a loan agreement, share-purchase agreement, sale deed, etc. However, these clauses differ in the way they are drafted. They should be drafted with utmost precision, keeping in mind the form of agreement, specifications and most importantly, they should be as per the intention and requirement of the parties.
These Standard Clauses include –
A. Title – It is the main heading of a contract and therefore should be succinct and clear. It must be able to state the nature of business or transaction intended by the parties through that contract. Especially in a business contract, the relation among parties must be clear i.e. whether it is a joint venture, a partnership, agency, etc. It must be noted that the Courts in cases of disputes determine the nature of agreement by Title and owing to this reason the Title must be very clear about the transaction, else it can lead to issues.
For example – If a contract deals with the Sale of Goods the title would be “SALE DEED”. If a contract deals with the purchase of shares it would be titled “SHARE- PURCHASE AGREEMENT”.
B. Identification of Parties: This clause gives the details of the parties to a Contract. It must be clear who the contract is between – which parties and shall be binding on whom. Keeping in mind that the contract can lead to a dispute, the address, names, related details, identification numbers, etc. must be clearly enlisted so that no discrepancy arises in whatsoever manner. In case of either of the parties being a company or an entity, it’s important to mention and specify their registered as well as communication address, details of authorised representative signing the contract, etc.
In cases of Individuals, their name, father’s name, permanent address, Aadhar No. etc. can be important details.
C. Recitals: – This clause explains the intention and motive of parties behind the formulation of the contract, i.e. the summary of what has led the parties to enter into the contract, the history behind it, etc. Recitals play an important role as narrator of an agreement. These recitals can be of two types: the introductory recitals and the narrative recitals. The introductory recitals work more as a brief introduction of parties whereas narrative recitals work more as the backstory of the event that led to the contract formulation. However, certain contract do not incorporate recitals for example the loan agreements.
D. Definitions & Interpretation: Definition clauses of a contract are different from Interpretation clauses. Definition clauses are used for defining terms once and for all in the contract, as there are certain terms that are used again and again in the contract and their specified meaning is important for better understanding and interpretation of the contract. Therefore, parties, authorities, conditions, business terms, processes etc are defined in the contract before starting with the operative part. The interpretation clauses are general rules of the construction of various references in the contract. For example- references regarding Gender, Days and dates, Singular and Plural etc.
E. Rights, Duties, Responsibilities & Obligations of Parties: As per Indian Contract Act, 1872, a contract among other factors most importantly comprises of Offer, Acceptance, and Consideration. Hence, there are often exchanges of promises to do or to not do something. Therefore, in view of the same it becomes important for sake of clarity to explicitly state Rights that parties hold by the virtue of the contract. However, there are certain rights that are implied in accordance with the Contract Act. As of Obligations, one party’s rights become another party’s obligation. Obligations are duties and responsibilities owed by the party. The clause that stipulates obligations, therefore, becomes important as if such duty is not fulfilled it leads directly to breach of Contract. These Rights and Obligations are very contract-specific and depend completely on the type of Contract. However, certain general obligations may be to act in good faith, to not misrepresent, etc.
F. Representations and Warranties: Representations are assertions which the parties to a contract make to each other which shield the contracting parties from any misgivings related to the transaction. This clause is mentioned in a contract to avoid misrepresentation and so that later dispute regarding the same does not arise. A warranty is a promise that a condition or an assertion of fact is true and is typically supported by an implied promise of indemnity if the condition or assertion is false. It is an assurance given that in case any stated fact is untrue the party asserting that fact will indemnify.
G. Covenants – A Covenant is an undertaking or promise by a party in an agreement that certain activities will or will not be carried out. These Covenants can be either Financial mentioning payment, commercial understanding , currency, etc. The other two types of Covenants are Affirmative and Negative. Affirmative covenants are usually positive, intimating about activities that are to be carried about whereas the negative covenants are restrictive in nature.
H. Conditions precedent and condition subsequent: A Condition Precedent as the name suggests tells about an event that must be performed, unless its non-performance is excused before the performance of the contract is due. In the contracts which incorporate Condition precedent, the party is not obliged to fulfill its obligations under the contract, until and unless the stipulated conditions are met. For example – a requirement of approval from government authorities, the requirement of valuation report by merchant bankers in cases of acquisition agreement, etc. It must be noted that obligation for satisfying condition precedent can be shared by parties in certain cases, therefore it shall be properly drafted as to which party what obligation is cast and which obligation is shared by parties. A condition subsequent on the other hand is a condition that must be satisfied, removed, or waived after the closing date.
I. Confidentiality – While engaging in a transaction and negotiating details a lot of information is exchanged between the parties. In light of the same Confidentiality or Non- Disclosure Clause is incorporated in a contract. A confidentiality clause binds the other party to not disclose any information shared during the transaction in any manner other than what is agreed in the contract.
J. Term: It is important to mention the duration for which the agreement lasts if it is intended for a certain specific period of time else the clauses will be binding till perpetuity and may lead to conflict.
K. Termination: A termination clause is a written provision in a contract that defines the circumstances under which said contract can be terminated. Termination can happen before the duties outlined in the agreement are fulfilled. The grounds of termination depend on the type of agreement it is. The grounds of termination are explicitly and clearly written in such clauses.
L. Fee: With any contract, there are always attached costs relating to its execution and implementation. The contract shall specify as to which party shall pay expenses related to contracts or transactions completed thereunder such as registration fees, stamp duty, etc. This clause is important to make parties aware of the costs of execution and give them the opportunity to negotiate the same.
M. Force Majeure: Sometimes parties may not be able to fulfill their obligations due to an unforeseen and unavoidable event. This clause relieves the burden of the affected party from fulfilling its obligations and responsibilities. However, to take benefit of this clause the party shall have taken all due care and caution to avoid the situation.
N. Indemnity: As in a contract, every part has certain rights and obligations. In a situation, any party fails to perform its obligations it is required to make good the loss. This clause is mentioned in the contract specifying the damages to be paid in case of breach of obligations. The clause is made in light of the Contract Act which mentions, liquidated and unliquidated damages. The indemnity can be in the form of Restitution, Compensation, penalty or Specific Performance.
O. Dispute Resolution: In most of the transactions people/ companies opt for Alternate Dispute Resolution such as Arbitration, Conciliation, Mediation, etc. This clause mentions the resolution process that parties choose to opt-in cases of breach.
P. Governing Law/Jurisdiction: This clause is inserted in a contract, in order to provide clarity about governing laws and jurisdiction applicable. In various cases, a transnational agreement is signed and therefore it becomes important to determine pre-contract the law that will be applicable in cases of breach.
What are Boiler-plate clauses?
These are the Miscellaneous or general clauses. They are generally perceived as non-substantive provisions and are different from transaction-specific clauses that form the essence of a contract. Example of Boilerplate Clauses includes – Notice, Severability, Force Majeure, entire agreement, further assurances, counterclaim, waiver, etc.
What are some common kinds of contracts?
1. ADVERTISING Contracts- An advertising contract or a marketing agreement where the transaction includes giving rights to one party to advertise the products of another party. The recitals of such a contract may include the details of the company and the kind of products they deal with. Some important clauses /information that shall be mentioned in such contracts other than standard clauses are IPR Clause, Confidentiality, the deliverables under the contract, the time period for which such marketing/advertising rights shall be available, the scope of the contract, etc.
2. ARBITRATION AGREEMENT – Arbitration is an alternative method of Dispute Resolution, though it is very efficient and opted in the commercial world in a lot of business transactions, it is always beneficial to have a written arbitration contract. The contract mainly mentions the governing law and the essential conditions of the arbitration taking place.
3. LOAN AGREEMENT – Loan agreements are contracts relating to a loan process. They being specific to loan shall importantly include the details to interest rate, terms and durations as to when it is paid and other such specifications. Loan contracts must mention the terms of loan, amount of money, manner in which repayment is done and also define any penalties or interest rate applicable in case repayment of amounts is delayed.
4. CONSTRUCTION CONTRACTS- Such contracts are related to Construction and are usually executed between the property owner and contractor. The important details requisite in these types of contracts include Construction work, Construction Period, Construction Prize, Responsibilities of a Contractor Inspection of work, Cluses dealing with delay, etc.
5. EMPLOYMENT AGREEMENT – This is a common and important contract for both employers as well as employees. It lays down the terms and conditions of employment. The important details required in these Contracts are Terms of Appointment and Duties, Remuneration, benefits, Prerequisites, Non- Competitive Activities, Non-Disclosure, term and termination, etc.
6. JOINT VENTURE AGREEMENT – A Joint venture is a kind of business where two or more businesses combine together and meet their different skill set to achieve a common advantage. A contract is drafted among companies when such a venture takes place. It shall be detailed and shall include details such as right and obligations of companies, details regarding shareholding, additional capital, management including Directors and their appointment and removal, Meetings, Deadlocks, Transfer of Shares, Business and policies of Joint Venture Company, Accounts and Maintenance details etc.
7. NON-DISCLOSURE AGREEMENT – It is a contract where confidentiality is the core value. It is a legally binding relationship in which parties agree that any sensitive information they have during any transaction between parties shall be kept secret. The details of such contracts shall include and define the confidential information, exclusions, permitted use, compelled Disclosure, disclosure to Employees, ownership etc.
8. SHAREHOLDERS AGREEMENT – A shareholders’ agreement is an arrangement among a company’s shareholders that describes how the company should be operated and outlines shareholders’ rights and obligations. Such contracts are intended to make sure that shareholders are treated fairly and that their rights are protected. The details that shall be included in such contracts include Management of the Company, i.e with regard to directors their appointment, removal etc. Shareholder Meetings, Voting Rights, Pre-emptive rights for new issues of Equity Securities, Transfer of Shares, Drag along Rights, Rights of Inspection, Information Rights, Invalid transfers, details regarding Borrowing and Funding, etc.
9. SHARE SUBSCRIPTION AGREEMENT – A share subscription agreement is basically an arrangement where the agreement is made between the company and the investor that involves the acquisition of ownership in the company by issuance of new shares. Details that shall be included in this agreement include Shareholding Pattern, Subscription and Subscription Securities, Closing, Use of Shares, Subscription Proceeds, Warrantors, Taxation, etc.
10. LIMITED LIABILITY PARTNERSHIP – It is a contract between two or more individuals or businesses who would like to manage and operate a business together in order to make a profit. This setup provides the benefits of limited liability of a company and the flexibility of a partnership. The details that shall be included in these agreements include Contribution of partners, Refund of Contribution, Rights and Duties of Partners, Limit on partners authority, LLP’s liability, Partner’s Liability, Management of LLP, Cessation of Partnership, Appointment of New Partner, Winding Up/ Termination etc.
11. TECHNICAL LICENSE AGREEMENT – A Licensing Agreement can be defined as the permission granted by the Technology owner i.e the licensor to the party making requests for such permission (being the Licensee) for a specific period of time. The details that shall be included in such agreements include details of the grant of license to the licensee, disclosure of technical information, manufacturing, use of trademarks, royalty, accounting and audit rights, infringement clauses, etc.