COMMERCIAL CONTRACTS IN INDIA AND THEIR NECESSITY IN RECOVERY OF LIABILITY
A commercial contract forms an integral part of a venture, as such arrangements detail the rights and obligations, terms, discussed and agreed upon between the parties including recourse in case of any dispute. Therefore, it is extremely crucial to ensure that the terms mentioned in the contract are drafted in a manner that protects the interests of the parties to the contract.
In any commercial transaction, the most important aspect is consideration. A business entity will always try to ensure that their considerations are never left outstanding and are recovered as and when they become due, but sometimes this does not happen. In India, almost all businesses work on credit-based models. The business transaction happens first and payment is received later on. So, to ensure that unnecessary delays are not caused in repayment of liability, it is imperative that the parties have a duly executed contract appropriate for the transaction in question.
The common types of contracts typically executed when an entity is conducting its business are:-
1. Service Agreement
The Service Agreement is basically executed between the parties to capture the terms and conditions of the services being provided by one party to another party along with the consideration being paid by the party to the service provider, rights and obligations of the parties.
2. Sale and Purchase Agreement
A Sale and Purchase Agreement is executed between the buyer and the seller for the purpose of capturing the terms and conditions of the sale process. The said agreement is important for both the seller and the buyer as it captures the conditions that must be met before the sale but also the end date, purchase price, the amount of earnest money that the buyer must submit as a deposit, and the list of items that are and are not included in the sale, etc.
3. Joint Venture Agreement
A Joint Venture Agreement is basically an arrangement between 2 or more entities who have agreed to undertake either new or existing business together. Under the said arrangement, the parties pool their resources by way of contributing the equity and sharing the revenues, expenses and control of the new venture in proportion to the capital that the parties have contributed.
4. Loan/ Security Agreement
A Loan Agreement is drafted to capture the terms and conditions of lending including the term of the loan, and repayment terms between a borrower and a lender. Whereas, a Security Agreement is executed when any asset or property is being pledged as collateral for the purpose of securing a loan.
5. Non-Disclosure Agreement
The Non-Disclosure Agreement (NDA) is executed to bind the employees, vendors, suppliers, service providers, consultants, and independent contractors with the purpose of restricting and restraining them from sharing any confidential information in relation to the business, such as trade secrets, client details, business plans etc. An NDA can be either unilateral or mutual based on the requirements of the transaction between the parties.
While drafting a contract, it is apposite to keep in mind that it must contain provisions with respect to confidentiality, representations and warranties, force majeure, termination, indemnity and limitation of liability, dispute resolution. This ensures that the contract is iron-clad and will aid in enforcing the contract in an easy manner.
While drafting the contract, it is important to keep in mind the purpose for which the contract is being entered into by the parties. In most cases, the contact is used to ensure that the other party makes payment of the outstanding amount, in time, without unnecessary delays. A well-drafted contract will ensure that payments are received on time, and in case of dispute, the person choosing to enforce the contract will also be on a much stronger footing to prove existence of liability of the other party.
Furthermore, if there is a breach of any of the terms of the contract, the enforcing party will be able to save itself from potential harm and damage by getting the contract enforced through court under various laws such as Contract Act, Specific Relief Act, Indian Penal Code and other specific laws applicable to the contract.
A well-drafted contract leaves no wiggle-room which may later be used by any of the parties to get out of their liability. Therefore, contract drafting plays a crucial role in business commercial transactions and recovery of outstanding liability.
A commercial contract must be carefully drafted and should be thoroughly checked before signing. The parties should expressly mention what they want to include or exclude from the contract. Any term, right or obligation is written vaguely will only leave ambiguity between the parties. Therefore, it is important that the contract should be drafted with clarity and precision and with appropriate professional help to avoid any dispute or litigation in future.