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Important Clauses for

forming a Perfect
Contract
June 13, 2020  17035  0

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Image Source- https://bit.ly/2AsLDjW

This article is written by Chetna

Agarwal, pursuing a Diploma in Advanced
Contract Drafting, Negotiation and Dispute
Resolution from Lawsikho.com. Here she
discusses “Important Clauses for forming a
Perfect Contract”.

Table of Contents

1. Introduction
2. Checklist of Clauses to be included in the
contract are mentioned below
3. Tips for drafting a perfect contract
4. Case Laws
5. Conclusion
6. References

Introduction
If a person wants to make another person or
body corporate bound by certain terms and
conditions, it is preferable to enter into a
contract with them. According to section
2(h) of the Indian Contract Act, 1872, ‘An
agreement which is enforceable by law is a
Contract’.

Contracts can be written by using formal or

informal terms, or could be entirely verbal or
spoken. There are certain elements that,
when fulfilled, would constitute a valid
contract and contrary to that it would be
considered null and void depending on the
circumstances. Section 10 of the Indian
Contract Act, 1872 enumerates certain
conditions which must be fulfilled in order to
constitute a valid contract.

Assuming that you are well-versed with the

provisions of Contract Laws, I would like to
take a step forward in explaining “How to
Draft a Perfect Contract”.

A well drafted contract is easily understood

and avoids confusion. However, a badly
drafted contract results in ambiguity and
wastes a lot of time in understanding the
intention of parties.

One of the most important things to be

considered while drafting a contract is to
make it straightforward and easy to
understand. A contract should be able to
clearly explain rights and obligations of both
the parties.

Have you ever started drafting an agreement

but you are clueless as to which clauses
should be included so that it is free from
loopholes or you are about to execute an
agreement with someone and want to be
extra sure as to whether all the important
clauses have been inserted into your
agreement or not?

This article will guide you so that you won’t

miss out on any clause which should exist in
an agreement to form a perfect contract.

Click Above

Checklist of Clauses to be
included in the contract
are mentioned below
Title of agreement

It is necessary to name the agreement. The

title of the agreement denotes nature or type
of agreement.

Names of the parties

The parties are provided with a particular

name that is used to refer them in the entire
agreement.

Recitals

This clause gives the background of the

parties and the purpose of entering into the
agreement. If it is a supplementary
(additional) agreement then the reference of
the main agreement is provided under this
clause.

Definitions

There are certain terms used in the

agreement which have a technical meaning.
Such terms should be defined under this
clause of the agreement that makes
interpretation accurate.

Representation and Warranties

This clause provides an underlying statement

of fact by the parties (for example, Mr. X is
sole owner of the property, the property is
free from encumbrances). In future, if it is
proved that the other party has
misrepresented the facts, the party has the
right to seek compensation from the guilty
party.

Covenants

Covenant means a promise to do certain acts

in future. Unlike representations and
warranties, it does not include statements of
fact (for example, Mr. X shall make payments
to Mr. Y before the 10th day of each month).

Term

The duration of the agreement should be

included in the agreement (in year or
months). The term of the agreement shall be
in force unless contract is terminated by
either parties or on mutual consent of both
the parties (term clause is linked to
termination clause).

Consideration

One of the essential elements for a contract

to be considered valid is consideration.
Consideration can be monetary or it may take
the form of a promise to carry out a particular
act (such as services, money, etc.).

Terms of Payment

Duration of Payment:

1. Time based payments – every 30 days, 45

days, etc.

2. Progressive payments – on completion of

first milestone, on receiving results,

3. Full payment on the entire work done.

Method of Payment:

1. Fixed Based Model – a fixed amount of

payment shall be made;

2. Revenue Based Model – a percentage of

revenue earned shall be paid,

3. Profit Based Model – a percentage of profit

made shall be paid.

Mode of Payment:

1. Cash,

2. Cheque,

3. Net Banking.

Indemnification

It is basically about shifting the risk to

another party. In case breach of any provision
by one party causes loss to another party, the
defaulting party has to make good the losses
caused to the non-defaulting party. How
indemnification will be done should also be
mentioned in this clause.

Termination

Circumstances when the agreement can be

brought to an end by either parties shall be
mentioned. Also, how many days prior written
notice period is mandatory should be
specified.

Invoices (in some contracts)

What all things should be included in an

invoice? Date of invoice, name of the parties,
name of item/activity/service for which
invoice is made, amount of invoice,
percentage of taxes, etc.

Note: If you are registered as MSME (Micro,

Small or Medium Enterprise), the invoice
should specify the same.

Notices

The address or email-id of the parties should

be provided in this clause to deliver notice to
the parties.

Force Majeure

In case any event is beyond the control of

parties or unforeseeable, whether the
agreement can be terminated due to non-
performance by either parties?

Intellectual Property (in some

contracts)

This clause will help to know who shall own

the intellectual property (patents, copyright
and trademark) that is created out of contract
and whether such intellectual property can be
assigned or transferred to a third party.

Confidentiality

Whether the confidential information

exchanged between the parties can be shared
with a third party. Also provide with the
exceptions to it. It is recommended to define
“confidential information” in the definition
clause.

Exclusivity (in some contracts)

The parties can be restrained from providing

the same kind of services or entering into the
same nature of agreement with a third party
during the existence of this agreement.

Severability

In case, some part of contract is declared

illegal then other part of contract shall be
valid. Such a clause saves the contract from
being entirely dysfunctional.

Amendment

If the Parties wants to make any alteration in

the contract, its procedure should be specified
in this clause.

Jurisdiction

In case of any dispute between the parties,

which court shall have jurisdiction to handle
such matters? The Parties shall use the word
‘exclusive jurisdiction’ to limit the location.

Governing Law

The laws applicable to the contract are very

important (for example, this agreement shall
be governed by the laws of India).

Dispute Resolution

How the dispute shall be resolved? There are

different modes of dispute resolution such as
mediation, arbitration or conciliation.

Signature sections

First and last pages need to be signed by the

parties along with initials on other pages.
Signature is mandatory for validity of the
contract. In certain contracts, attestation from
witnesses shall also be required.

Schedules or Annexures (in some

contracts)

When the information is too lengthy to be

included in the clauses section, such details
can be mentioned in tabular or pointer form
at the end of the agreement (for example: list
of properties sold, services to be provided by
event managers).

Entire Agreement

This clause specifies that the agreement

covers all rights and obligations of the parties
and supersedes all other agreements whether
written or oral between the parties. Such a
clause helps to avoid negotiations earlier
made which were not finalised later.

Duplicate Copies

It is recommended that each party should

have a copy of the agreement and both the
parties have understood and agreed upon
terms and conditions of the agreement.

Tips for drafting a perfect

contract
Each clause should be drafted considering
the purpose of the contract.

An agreement should be drafted in active

voice for better clarity. A sentence framed
in passive voice often creates confusion or
becomes ambiguous for the reader to
understand. For example, “the amount of
fees to be paid to the contractor shall be
decided” (written in passive voice). Now if
we write the same sentence in an active
voice – “Developer shall decide the fees
amount to be paid to the contractor”, it
creates an instant precision to the reader.

There are some standard clauses which

form part of every agreement. For
example, term clause – duration of the
agreement. However, there are specific
clauses which are particular to certain
agreements. For example, non-solicit
clauses in the employment agreement.

Simple language should be used. Avoid use

of technical terms unless compulsory.

Even a person with a non-legal background

should be able to understand terms and
conditions of the contract while reading it.

A well drafted contract is self-explanatory

and concise.

Case Laws
While drafting a contract, there is always an
urge to mitigate risk for ourselves and
transfer it to another party. However, you
should keep in mind that clauses framed
should be reasonable and acceptable in the
eyes of law.

In Standard Retail Private Limited v. Gs

Global Corp and 3 Others, Bombay High Court
recently dismissed a plea invoking the Force
Majeure exemption, in a contract involving
steel importers. While dismissing, it observed
that the distribution of steel has been
declared as an essential service, and there
have been no significant restrictions on the
movement of vehicles and manpower in the
context of the steel industry, or operations of
container freight stations and warehouses for
steel. It further noted that the lockdown
would be for a limited period and the
lockdown cannot come to the rescue of the
petitioners so as to resile from its contractual
obligations to the respondent of making
payments.

In V. Lakshmanan v. B.R. Mangalagiri and

Others, Supreme Court held as follows: The
question then is whether the respondents are
entitled to forfeit the entire amount. It is seen
that a specific covenant under the contract
was that respondents are entitled to forfeit
the money paid under the contract. So when
the contract falls through by the default
committed by the appellant, as part of the
contract, they are entitled to forfeit the entire
amount.

In Diljeet Titus v. Mr. Alfred A. Adebare and

Others, the defendant was working as an
advocate at the plaintiff’s law firm. On
termination of employment, the plaintiff
contended that taking away privileged
information of the law firm, the use of which
other than by plaintiff, can make them liable
to their clients. The defendants claim to be
the owners of the copyright in what they have
created and it is their contention that the
creation was independent and the same was
so created by advising and counselling the
clients and the computer generated data was
lying in the computer system of the plaintiff.
The Delhi High Court rejected this contention
and ruled that defendants are restrained
either through themselves or their
representative from utilizing the material of
the plaintiff forming the subject matter of the
suit and from disseminating or otherwise
exploiting the same including the data for
their own benefit.

In ABC Laminart v A.P Agencies, there was a

contract between the parties for the supply of
5000 bobbins of Rulon Metallic yarn. The
Appellant had the jurisdiction of Kaira, Gujrat
and the respondent functioned his business in
Salem, Tamil Nadu. The jurisdiction clause in
the contract reads as “Any dispute arising out
of this sale shall be subject to Kaira
jurisdiction.” The respondent on the arising
dispute filed a suit in the court of Salem,
Tamil Nadu, the appellant on this filed a case
challenging the jurisdiction of the court of
Salem, and the dispute was appealed to the
Supreme Court.

It was observed by the Supreme Court that it

is not explicitly mentioned in the contract
clause regarding exclusive jurisdiction. It was
held by the court that in the absence of words
– “Only”, “alone” and “exclusive”, the maxim
of “Expressio unius est exclusio alterius” is to
be used which means the explicit mention of
one is the exclusion of another. It was stated
by the court that “it could not be said that
jurisdiction of the Court at Salem which Court
otherwise had jurisdiction under law through
connecting factor of delivery of goods there at
was expressly excluded hence, both the
courts had jurisdiction.

Conclusion
If you want to figure out whether your
contract is simple and can be easily
understandable, you can ask someone to read
the document who has no knowledge of the
proposed agreement, would they be able to
understand it or more changes need to be
done?

One thing to be kept in mind is that a contract

is much more than a legal document. The
contract is mainly tested when differences
arise between the parties.

If your contract is enforceable, that’s a great

thing. To do that, you need to see every
clause inserted makes the agreement more
relevant and precise.

Even if you consult a lawyer to draft a

contract, you can also suggest to him/her to
make the agreement in an understandable
and simple way.

There have been cases where courts are

unwilling to enforce a clause that takes away
the rights of parties hence consulting a good
lawyer having in-depth knowledge in drafting
contractual agreement will help you save in
litigation costs and structure it as per needs
of the client.

Considering the above checklist and an

overview on important clauses for a perfect
contract, you can now be better negotiator to
keep your terms in the contract or to make
your own contract smoothly and efficiently.

References
1. https://indiankanoon.org/doc/53894809/

2. https://indiankanoon.org/doc/16443/

3. 2006 (32) PTC 609 Del, 130 (2006) DLT

330

4. 1989 AIR 1239, 1989 SCR (2) 1

5. https://www.business.gov.au/Products-
and-services/Contracts-and-tenders/How-
to-prepare-a-contract

6. https://www.brownejacobson.com/training-
and-resources/resources/legal-
updates/2019/04/drafting-the-perfect-
contract

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TAGS Necessary Clauses for forming a Contract

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