To Business Like-minded = Understand Contract, its Importance, Why Contract, For What Contract and Why Lawyers

A Contract is an enforceable agreement between two or more Parties that can be enforced by a court of law and has the consensus ad idem of the Parties to the Contract. In all areas of life we make contracts. If you buy or sell a house, a contract is made and ‘exchanged’. When you start a job, you will probably have a contract of employment. Under contract law, the money that you give in exchange for the goods is referred to as the ‘consideration’. The meaning and importance of the Contract is very well known to the Business community and infact those Business house who have always given the importance and value to written contracts have been more successful than others. I have stated in my other articles as why a Business shall not happen on Handshake Agreement but only with Written Agreement.

Importance of Contract

It is always relevant to have an idea as what constitute contract, importance of contract, advantages of contract and it is more important to have standard templates to ensure smooth flow of your business as every business has procedure and process. As informed a contract can be simple and or complex and it is always better to have been drafted and or vetted and or approved by Commercial Lawyer practicing in this area. Irrespective of the nature of contract, following are the four (4) important ingredients a Contract contains and shall contain:

  • An Offer
  • An Acceptance of that Officer
  • The intention of creating a legal relationship
  • The adequate consideration, subject to certain exception. However, in all the Business transaction there has to have a consideration and in India Barter system is not legally promoted.

It is important to point out here there may be a contract with above ingredients but they still can be taken as invalid if the contract:

  • Contract giving an intention of committing an illegal activity or crime
  • Minor Contract or contract with those who are not competent to Contract
  • Contract is against Laws of India

Unilateral Contract:

You will find that there are standard contracts which are being made and not allowed to changed specially in Loan Agreements, Insurance Contracts, etc and the same is executed without reading which is not a good way of doing but there is also nothing wrong to say that there is no say on those contracts and infact mostly this contracts are taken care by Government and consumer protection and hence on dilute version you can avoid reading the terms but I always prefer you reading the terms and understand and then take a call. However, don’t every sign any agreement when the other party is private party as this is where the Contract terms come into picture.

Bilateral Contract:

When most people think of Contracts, Bilateral Agreements come to mind. In its most basic form, a bilateral contract is an agreement between at least two people or groups. Most business and personal contracts fall into this category. This is where you need Lawyers expertise to ensure your safety and business safety and at same time to get the business deal closed.

Why Contract but at all in Business or else?

  • Recently a non-regular client approached me after almost 1.5 years for seeking legal opinion on the almost broke relations with another partner in his partnership business and the reason to approach me is due to the fact that the relations was not in any possibility of gaining any good momentum for further business and it was just getting in personal and affecting per se. There were two partners at the time of initiating the fresh and new partnership business wherein my client was an experienced IT skilled and other partner was in marketing. It needs a mention that the business model of the said partnership was of my client solely and there was no contribution of another partner in any manner either as monetary investment or idea selling or else but was the partner in equal ratio and it seems that my client never expected the dispute will arose with another partner as the another partner was someone own to my client since good years and he didn’t see it that way!
  • Contracts have many purposes and thus many different reasons for why they are important. For starters, contracts are the main source of revenue and relationship building for an organization
  • As it happens many times of business being done on trust basis which I am totally against (you can refer my article named “Is it risk-free to do business on Trust and no written contracts and in this case too there was no proper documented term sheet written agreement but only the trust. There was no proper partnership agreement was drawn as the partnership which was made was just a copy and paste from online and just had a simple notary which was done to open the bank account and this was and is a certainly very bad news for my client. There was no specific clause on ownership of Intellectual Property Rights, way of dealing of Intellectual Property Rights and without any terms agreed, it was and is no doubt very hard to work out what the real understanding between partners were at the time they got together and that makes even worse to bring the legal separation which is fair to both parties.
  • As I have stated in my earlier articles of no business to be done on trust and without written contracts, I will suggest of having proper documentation in any business relations and this may include any business relations as this document is nothing but can be said as “Documenting Your Relationship!”  It is very easy to use a standard template from online now a days but you need to have a legal guidance to have proper documented all the intentions and business purpose as that ultimately will define at the time of any dispute being arose.

Advantages of Written Contract:

  • Two Parties entering into an document containing Terms and conditions gives a certainty of what product or service will be dealt with, how the payment will be taken care off, how to raise the invoices, other modalities of executing the business, raising of dispute, if any and so on. It is important to understand that if there is a terms and conditions being agreed upon for any commercial or non-commercial dealings, it completely set-out the intention and infact satisfy the contractual mindset which is popularly called as consensus-ad-idem and then there is no uncertainty about what the Parties’ rights and obligations are and this only saves a lot of time and cost if there is any conflict arises and having dispute resolution terms agreed upon only resolves the areas of disagreement between Parties if at all it comes up in a very friendly and amicable manner. In brief, having terms and conditions bring CERTAINTY of what to be done and to avoid, timeframes and so forth
  • A written contract plays a vital role in any business transaction. Apart from making the agreement between concerned parties legally binding, contracts can also serve as future references, part of the business’ policies, as well serve as proof in the event of misunderstandings, complaints or disputes needing litigation proceedings
  • Having a clear terms and conditions being agreed upon between the Parties, it only gives a document which makes the Parties bound by such document and this helps majority times of any customers to make a wrong claim against another bound party and in case there is any dispute, Parties can take the assistance of their legal attorneys and take the clarity of their stand against the dispute being aroused and this ensure that no wrong claims are succeeded.
  • It serves as a record of commitments for Parties to Contract
  • It prevents conflicts and mitigates risk and hence indirectly helps in generating revenue which indirectly helps business growth
  • It is widely accepted notion that a Business person has only two work to do in its business, Marketing and Innovation and else be taken care by its made system and hence executing Terms and Conditions only ensure protection of business and once there is a certainly in place and system in place to ensure having certainty, the Business Parties can focus on the doing the work and getting paid on time.
  • It indirectly is a boost to entire organization maintain compliance and thereby the main goal and focus is not disturbed
  • It increases operational efficiency
  • Certainty document only gives the clear reading of various rights and duties as mentioned and agreed and this helps and enable the non-default party to make successful claims or purchase of goods in the event of any breach of agreed business terms
  • It also extends immensely the business brand and its values amongst market and its consumers and public at large
  • It provides security and peace of mind as it prevents misunderstanding between the Parties
  • Having clear terms and conditions helps either parties to comply with Legal Obligations in all aspects and this also takes care of any customer related claims or IPR infringement claims and so on

Damages for Breach

  • Having Contract provides relief to the non-default Party in the case where the performing party fails to perform as per the agreed terms and this is where the written contracts comes into reading for awarding damages. The most commonly awarded damages include:
  • Compensatory damages, which are intended to place the non-breaching party in the position that he or she would be in had the breaching party fulfilled his or her end of the contract;
  • Punitive damages, which go above and beyond compensatory damages and are intended to punish the breaching party and discourage similar behavior in the future;
  • Nominal damages, which are awarded when a breach occurred, but the other party did not actually experience any monetary loss; and
  • Liquidated damages, which are included in the contract when it is formed in the event that one of the parties fails to uphold its end of the bargain. 

Why not getting your Business Contract drafted online for avoiding paying to Lawyers? 

There are many online legal services offering services such as standard business templates, online business formation companies and or online legal services offering cheap services and forms and templates but what is the reasons that you should not use them? You should consider these factors before deciding whether an online legal services company is your best choice:

  • They do not understand your strategy and there is no understanding consensus meeting and hence they are not in a position to analyze what type of entity is best for you. [Please note, that choosing the business type depends on your business strategy and plans and this is the most important stage as one has to know whether you are ready to take the risk in starting partnership firm where liability is limited or private limited company, where the ROC compliance are many and appointing CS or CA for this work becomes almost mandatory]
  • They do not discuss the levels of liability protection available to you nor how to conduct your business for maximum protection.
  • Their online applications do not discuss your business goals with you. [Please note that Business Plan and Business Goals are part of Business Strategy and hence everything has to be known to one person and one contact so that there is sync going one else for every work if there is no co-ordination the work will get its own interruptions]
  • If you do call to speak to someone on the phone, just who are you talking to and what do they know about Indian Laws and local laws
  • Will you get to speak to the same person each time you call?
  • You will not have the chance to see the form contracts they offer you before you buy them.
  • The contracts you buy from them will be one-size-fits-all and it may contain the provisions which may not be appropriate for your requirements
  • They will not advise you about the local regulations, such as trade license requirements, which may restrict your business operations or prohibit it altogether at the location you choose.
  • The information they request in order to prepare an agreement between multiple company owners is scant and is very unlikely to result in a very good agreement for you. And then, who will answer your questions?
  • They do not discuss your business succession or liquidation plan.
  • They don’t discuss of what is required or not in any affidavit or agreement
  • In regard to IPR, they don’t inform you what is the best way to protect your IPR [Please note, that each mark can fall under various classes and also may get in other IPR protection and each has its own specific purpose and this is not possible to close on one call and there is no way you can get one person at one call]
  • The list goes on and on and on. 

Why you shall take the assistance of the Lawyer in Business Contracts or else?

  • To advice on how to operate within the requirements of the law (e.g., Essential Commodities Act, Employee Related Laws, Labour Laws, etc) so that the business can avoid fines and or penalty and or imprisonment as this is not good for business reputation in the market
  • Assist the business in drafting contracts for all commercial and non-commercial transactions in a very precise and clear manner so that all the parties to the contracts are aware of its legal rights and obligations and thereby ensuring the smooth business transaction which in turn ensure growth in faith and trust between the business parties and thereby resulting in the growth of business parties
  • To advise the business about complying with the already signed and agreed documents and to ensure of avoiding any dispute in regard to such already signed and agreed documents be taken to court!

What do you mean by “Having Standard Contract Templates” and How does Standard Contract Templates helps in Business Growth?

  • Doing Business in today’s ever-changing scenario compels the business entities to ensure they are well within the coverage of being able to beat their competitors and if not then they fade from the market very soon. For e.g., Shopping Malls have been duly replaced by online shopping and in fact Refund policy offered by online shopping has just added armour to ensure that customers first choice has become online shopping and Shopping Malls though not the third choice of customers but cannot be also said as the first choice and in fact, the only place in Shopping Malls which are not empty most of the times mostly in the evening time is Food Zone and maybe sometime Gaming Zone if the monetary budget of Gaming Zone is not higher. There is no doubt that each passing day a new technology is coming in the market and this brings the competitiveness amongst players to remain in the market and to remain in the market it is more relevant to be in a position to at least take a stable stand of not losing the place of doing the business and this is where most of the business starts well but lose its stream in the stage when the business starts. Most of the time, post months of starting the business via Partnership Model, partners fight, and then that itself is the end of business which was started after long planning. There are many grey areas as to why the small business or new business in today’s age comes with force and goes with no noise and in fact, is dead even before the news comes. One of the reasons is that a businessperson shall understand that the only work is to do Marketing and Innovate its business and have a system in place for else work. Another reason which can be attributed is of not taking proper legal guidance and understanding the role the Lawyers have in their business. The main reason for avoiding and not taking the experience lawyers’ assistance is to avoid paying fees of such experienced lawyers and most of the time either they end up taking assistance from lawyers who are not well equipped or suitable for this area or they end up taking the legal opinion from Google or else search engine without understanding its relevance to its business. There is nothing as such that Lawyers who charge less are not good lawyers but the question is business entities sacrifice taking the help of Lawyers which are most suitable for their work. Having a lawyer as a legal advisor and especially Court practicing lawyer helps not only in resolving the issue but also act as guidance to give the best referrals of such experience attorneys or counsels who can be reached any time in urgency for its business issues.
  • There are many points which the Business entities have to take care to ensure having a proper system in place for the smooth functioning of its Business and certain points are as under: (a) Ensuring it has all the Licenses which are mandatory for conducting the Business; (b) Ensuring it has executed safe Lease Agreement for using the premises for its business operations if the place of business is not owned by the Owners of the Business entities; (c) Ensuring it has a financial back-up plan to ensure there is continuity in business sales and so on and on. One of the major points which are missed by the Business Entities while starting its new venture or business is not taking the help of the lawyers for reasons to avoid legal costs or nowadays using the templates which are available online without understanding as to how the templates will work for its business. I shall give my thoughts on how to use the online templates for your business in another article but I always prefer any templates used shall always be seen and verified by experienced lawyers at least once if not regular. Having a Lawyer on Retainership is always better but since it comes with a regular monthly cost, most of the business entities avoid availing services of Lawyers on a monthly Retainership basis. It is very common that any business venture to start the business will require certain documentation and the basic template which may be called is of Invoice Draft. Templates are nothing but a document that is once verified are used by respective departments and no changes are being allowed except if required and that too only by the Management of the Business entities or Owners and that too if there is approval from Lawyer. Any business shall understand that before venturing into any business shall ensure that it has got drafted all the agreements/contracts/Purchase Order/Work Order/SLA, etc and the same shall be numbered as Template No. 1 or be numbered in Standard Operating Procedure in Business and this act as the Standard Templates for the respective requirement and no change is to be allowed majorly except commercial and little here and there. Having all Templates in place only ensures that the Legal System of documentation is in place which thereby results in the smooth functioning of the business. Most of the successful business today has its own standard Non-Disclosure Agreement, Employment Engagement Letter, etc which are used by its employees as and when the need arises rather than calling for a new agreement with new points for same work and purpose at all the time and this creates confusion during any legal claims is made or one has to make.
  • In my view, Standard Templates is though not mandatory from a legal point of view, but from a business and management point of view, it is advisable and can be said mandatory to ensure that the documentation is being taken care of in the manner as agreed and approved by Lawyers. It not only saves time but also ensure safety and security of not getting into any monetary losses for the wrong act by employees.
  • When your business is offered contracts, make sure they are examined by your lawyer.  This can avoid problems later on by ensuring you know about and agree to all the terms and can get out of the contract with no or only nominal compensation to be paid or delivered. When you offer a contract to anyone, make sure it is done legally by having a lawyer draft it. They can ensure there are no loopholes to cause you problems.
  • While a contract can be ended by mutual agreement, it can also be ended by one party who has an unforeseen problem such as ill-health, or due to a breach of the terms by one of the contracted parties. It is wise to include a clause that allows both parties to end the contract by providing written notice to the other party.

Starting a business and getting it up and running can be a chaotic and stressful process, and things like contracts may slip your mind. However, business contracts are absolutely essential and will make your business journey far more straightforward in the long run. It has been found that majority of times the MSME / Traditional Business Owners does not give importance to written contracts and infact it is more on MSME / Traditional Business Owners to be extremely careful when signing contracts as faulty agreements with vendors, contractors, or clients can cost huge damages which may be more than your business turnover. It’s understandable that MSME / Traditional Business Owners are reluctant to hire legal services but MSME / Traditional Business Owners shall realise that having lawyers by side will only help them in closing the big deals in a very effective and both party comfortable manner.

Author Bio

Qualification: LL.B / Advocate
Location: Navi Mumbai, Maharashtra, India
Member Since: 01 May 2020 | Total Posts: 44
I have been in Law Practice for more than 15 Years. My practice areas include: (a) Drafting of Commercial and Non-commercial Agreements/Contracts; (b) Recovery Matters before all Forums/Courts; (c) Arbitration and Conciliation; (d) Cross-Examination, Admission and Interim Stay; (d) Devising Strategy View Full Profile

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April 2021