How to Make Contracts on Your Own: All That You Need to Consider

Article by Sugandha Nagariya.

How to Properly Frame Contracts: All That You Need to Consider

Contract is an agreement which is generally required in a professional or a business – oriented world and thus drafting a contract requires a lot of expertise and professionalism.

Knowing how to draft a contract is an important skill to acquire by a lawyer, entrepreneur, freelancer, employee, employer or human resource professional as it saves you from legal difficulties arising in future, related to the agreement made.

So, in this article I’ll go through HOW TO DRAFT A CONTRACT and what are the pre and post conditions which you need to keep in mind while drafting the same.

What Is A Contract

A contract is an agreement between the parties to enter into a legal relationship which binds them to certain clauses and obligations.

Section 10 of the Act, 1872 says “All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not under any law expressly declared to be void.”

Before Drafting a contract, knowing the fundamentals required for a valid contract is very important, so here it goes-

Fundamentals of a Valid Contract

1. OFFER AND ACCEPTANCE – An offer or proposal is an expression of willingness to do or not to do something to obtain the accent of other person. When an offer is made by one party and communicated to the other party to obtain his assent, the other party either accepts it or rejects it or he can make a counter offer. 

If he accepts, his act is known as ‘ACCEPTANCE’, and he becomes offeree or acceptor. An agreement comes into existence. If he makes a counter offer he become the offeror or a proposer  and it is upon the original offeror to accept the offer and complete the agreement or reject it.

Related Article: Also by Sugandha Nagariya, All You Need to Know about Professional Tax in India

2. INTENTION TO CREATE LEGAL OBLIGATION- An offer must be made with an intension to create legal relationship. An offer is not a valid offer if it does not create legal obligation upon the other party. Mere trifles or social agreements does not create legal obligation instead they create social obligations. For example: An offer to show a friend a movie or take him/her to a dinner is not be an offer that is enforceable by law. This is because there is no intention to create a legal relationship.

3. CONSIDERATION - An agreement without consideration is Void . Consideration is something of value or worth in the eyes of law. For example : A makes an agreement with B to sell his property for rupees 50,000. Here B's promise to pay 50,000 is consideration for A's promise to sell the property .

Consideration is therefore the price of the promise. As the Section 23 of the Act says, consideration to be some act or abstinence on part of the promisee or acceptor at the desire of the promisor and also the consideration or object is lawful when it is not illegal, or fraudulent, or involves injury to the person or property, or immoral, or opposed to public policy.

4. An agreement ought to be between the ‘parties who are competent to contract’. Every person who has attained the age of majority and who has not been disqualified from entering into a contract is competent to contract. Therefore, Section 11 says following persons are parties to a incompetent to contract:

●       A minor i.e. person below the age of 18.

●       A person of unsound mind or insane.

●       A person disqualified by law to enter into a contract.

                

And if the above mentioned persons enter into a contract, the contract must be void ab initio.

5. FREE CONSENT OF THE PARTIES: Consent is "consensus ad idem". It means meeting of the minds or identity of minds.

Two persons are said to consent when they agree upon the same thing in the same sense.

For Example: A is an oil dealer selling different types of edible oils. B orders him to supply 100 litres of oil. A sends him 100 litres of mustard oil whereas B thought it to be coconut oil, thus there is no consensus ad idem and as a result A and B agrees on the same thing i.e. is oil but not in the same sense .

Consent is therefore essence of a contract and it must be free. For consent to be free it must not be vitiated by-

●       Coercion

●       Undue influence

●       Misrepresentation

●       Fraud

●       Mistake

Mere consent is not sufficient to constitute a valid agreement, thus free consent is must.

6. LAWFUL OBJECT AS AN ESSENTIAL ELEMENT OF A CONTRACT:  A contract cannot be made and enforced for an unlawful or illegal objective. I assume you’ve never heard dispute in courts among drug traffickers or smugglers!

Section 24-30 gives the following objects and consideration to be unlawful:

●       It is forbidden by law

●       It is of such nature that it may defeat the provision of the law.

●       It is fraudulent

●       It involves injury to the person or the property of another.

●       The court regards it as immoral.

●       It is opposed to the public policy.

         Agreements which are specifically declared void are:

●       Agreement in restraint of marriage

●       Agreement in restraint of trade.

●       Agreement in restraint of legal proceedings.

●       Agreement which is not certain or not capable of being made certain.

●       Wagering agreements.

●       Agreements to do impossible acts.

●       Agreement with a minor.

●       Agreement without consideration

Questions You Need to Ask Before Drafting Contracts

The purpose of the questions which are mentioned below is to rule out  any scope of confusion or dispute  between the parties in future and thus helping us to look after every minute details which may otherwise change the meaning of the contract.

As every contract has to be customized according to the client’s need, thus it is very necessary for the person who is drafting a contract to ask the client what information they need to mention in the contract. Here are the questions you are required to ask your client before drafting:

1. SCOPE OF A CONTRACT: It includes the following:

●       Purpose or aim of the contract to be achieved by the client by way of contract. For example if you are selling your plot to someone then it is important to know why the client want to sell it , because the purpose of the contract serves the essence of the contract which you need to draft accordingly.

●       Finer details can be explained by the oil example given above ( in the free consent part)  , i.e. you need to know which type of product you are going to deliver , whether it will be mustard oil or coconut oil , you also need to know other specifications regarding the product and also what documents were signed during the origination of the agreement.

●       Nature of the good or service being delivered , like whether they are perishable goods (no delay in delivery is required in these type of goods ) or non perishable goods, which helps the drafter to ascertain the targets to be achieved and what is the time required to achieve them so that the needs of the parties are catered.

         2. PAYMENT DECISIONS: Payment clause in a contract is a bit complicated. Therefore, you need to take a little more time while you draft it as you need to keep in mind all the specifications regarding payment clauses.

●       Mode of payment is the very first thing that comes when you draft a contract. The mode of payment can be by way of cheque, cash or an electronic transfer or in the form of draft.  In addition to that, you also have to be sure of the amount that you have to pay.

For example if someone has deposited a payment in cheque but you don’t accept payment by cheques, you need to have had specified that in the contract clause.

●       Installments or lumpsum: You have to specify whether you have to give or want payment as specified in the contract in installments or one time lumpsum payment , because miscommunication in this aspect may mislead the parties and may lead to discord  between them.

●       Advance or arrears are also required to be determined.

For example, if you have entered into a contract with the vendor to purchase goods and you need to give an advance payment of say Rupees 10,000 to the vendor so that, he can start the production of the goods and after some time  the rest of the payment will be paid.  

Same is the case in arrear payments i.e. is the payment (whole) needed to be paid during or after the delivery of the goods or on a particular date or day? These details help avoid any kind of confusion as well as legal liabilities.

●       Currency: You need to mention the currency, that whether it is 100 rupees or 100 dollars or as discussed by the parties, you should always mention the currency before the value.

3. INCIDENTAL OR ADDITIONAL SERVICES: These services are helpful in running the contract smoothly and avoid the dispute during the post contractual obligations.

●       Additional services like providing maintenance services. For example: When you have sold a car to someone, you need to specify if there is any maintenance period or not i.e, if you are required to be liable for the maintenance of the car for one year, from the date of purchase or something like that .

Thus you need to mention such details in the contract to avoid any dispute relating to such small details in future. In case of big firms, maintenance services are really important and hence you need to mention it as a clause.

       4. DELIVERY:  This is again one of the most important questions when it comes to drafting a contract. It involves:

●       Mode of delivery can be a physical delivery or sometimes you need to deliver the software which cannot be delivered physically i.e. online transfer of the goods. Thus, you need to make sure how your goods need to be delivered.

●       Would the cost of delivery be added to the final cost or be an extra charge , like the coat of truck or labour by which the goods were delivered , So  are these cost to be included or excluded must be a question to be asked before drafting.

        5. ACCEPTANCE: As stated earlier acceptance plays an important role in the making of the contract thus you should ask the following questions relating to acceptance:

●       Mode of acceptance is important in order to ensure the period in which the acceptance is received by the party and thus it gives an assurance to the other party that they can move further with the same.

●       Quality check is the most common way of acceptance. There has to be meeting of minds in terms of acceptance otherwise it would lead to disputes. Thus you need to ask your client how the goods and services need to be accepted beforehand.

And you also need to put reasonable period of time for the acceptance of such goods or services.

●       Payment after acceptance. ( Same as mentioned above)

     6. INTELLECTUAL PROPERTY: QUESTIONS relating to IPR are as follows:

●       You have to ask your client , Is there any IP being exchanged or shared before you draft it as an IP clause, this is required  to make sure that  your contract require an IP or not. You may ask further questions like  your what is the nature of the goods being shared or what are the goods being used for and also if there is any logo which is being shared or exchanged. This information is only required to take an informed decision.

Related Article: All You Need to Know about the Indian Copyright Law

        7.  CONFIDENTIAL INFORMATION

You have to ask your client that, is there any confidential information being exchanged or shared and if there is if he still wants to put that information in the contract or you can ask the client what information is being shared and amongst that if you think that there is any information which is relevant to the business or firm, you can immediately access it on your own and ask the client to think about it and then if the client agrees, put it under a confidentiality clause. 

Steps on How You Can Draft a Contract

Related: How to Create a Power of Attorney

1.      First and the foremost step is to put the names of the parties, address of the parties and the date and time on which the contract took place. It is also required to mention the place where the contract was made and where the acceptance was received.

2.      Second comes the Object of the contract as agreed by the parties.

3.      Mention the Details of the goods to be sold or purchased or the scope of services to be provided.

4.      Price of the goods or services are mentioned thereafter including the price of the taxes, packing cost, tariffs etc.

5.      Duration in respect of the payment, need to be mentioned next as discussed above.

6.      Next is the Obligations of the parties, to be fulfilled as discussed by the parties, like the representations or the warranties by the buyer to the seller and vice versa.

7.      Delivery of the goods and shipping charges involved.

8.      Defective good replacement and repair policy should be written next, to develop clarity in the mind of the parties.

9.      Term of the contract i.e. how many months, years etc.

10.  Termination clause that is how the contract can be revoked by either party or how a party can terminate the contract if the other party does not comply with the rules of the contract.

11.  Duties which the parties may or may not perform. 

12.  Breaches and Damages need to be mentioned, in order to ascertain the liability of the party and the amount to be ascertained or any other punishment as decided, in case the other party to the contract breaches any provision of the contract.

13.  Confidential information, if any, is to be mentioned.

14.  You should mention the laws governing the contract. It is especially important in international contracts.

15.  How will the dispute be resolved should be mentioned i.e, it might be through arbitration, mediation or via a Court of a particular jurisdiction.

16.  Signature of the parties involved.

There are many more clauses besides these (mentioned above) which depends upon the type of contract which you aim to create.

After the drafting of the contract is done, parties need to stamp the contract if required by law, by paying the stamp duty and sometimes the parties need to get it registered.

Wrapping it Up

Contract drafting helps streamline the relation between two parties as to any agreement between the two. Drafting a proper contract can help you curb unnecessary difficulties from arising in the future and even help the parties involved to deal with any kind of unforeseen situation cropping up in their agreement.

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This article has been written by Sugandha Nagariya, a law student, pursuing BLS LLB at Government Law College, Mumbai and an intern at Winsavy. Connect with her on LinkedIn.