This Article is written By Subhashmin Moharana of NLUO, an intern under Legal Vidhiya
Abstract
To understand the basics of business contracts and agreements, we have to first understand Contracts and Agreements in their purity. Contracts are basically agreements between two parties which are enforceable by the law. Every Country has their own set of rules around the formalities involved to accept an agreement as a contract. Agreements occur everywhere in every moment. Humans, as a social creature survive through agreements. Even when we get connected to the internet, we agree to certain consumer responsibilities in form of contracts and agreements. Thus, agreements are inevitable parts of this society. These agreements are also used for business negotiations. They bring clarity to both involved parties. They must therefore be understood, in order to make you a part of this society. This paper exactly does what it says, it explains the basics of business contracts and agreements with ample examples.
Keywords: Business, Contracts, Agreements, Company
Introduction
Generally, everyone defines their topics in the introduction, but before definition I want to let you understand why we must understand Contracts and especially business contracts. A contract helps the parties to gain more clarity on what both parties expect out of each other. Without all this in written form (or recorded), it would be very difficult to enforce them. Now, as the basics goes, some promises are impossible to act on, there these contracts even if recorded, won’t be enforceable. So, what exactly differentiates a business contract from a simple contract. A simple guess would be a business contract involves around a business, a company, an institution, etc, while the later does not. Beyond that is the legal differences that we will learn through this paper. For instance, while simple contracts are made, intention of the parties is considered as casual but for a business contract, the intention of the parties making a legally binding agreement cannot be considered casual, rather formal. So, business contracts are hard to get away without consideration.
To define a contract, we have to understand the elements of a contract. The Indian Contracts Act, 1872 defines contract in section 2(h), “an agreement enforceable by law is a contract”. Section 2(e) defines agreement as; “Every promise and every set of promises, forming the consideration for each other, is an agreement;”. Similarly Promise is defined under section “(b) When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise;”. “2(a) When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal”.
With subsequent sub-topics we shall understand the details of Contracts and agreements before we move on to understanding business contracts.
Therefore, it is an agreement between two or more people to take or not to take an action. In fact, any commitment that expresses mutual consideration is an agreement. If the contract cannot be enforced, the contract is void. So “all contracts are agreements, but not all agreements are contracts”.
Understanding Contracts and Agreements
Essentials: U/S.10. Contract Law :
- Offer and Acceptance
- Consent of the Parties,
- Legal Capacity of the Parties,
- Considerations, and
- Lawful Subject Matter and Lawful Considerations.
i) Offer and Acceptance
“Offer: An offer is a clear and unequivocal expression of willingness to enter into a contract on specific terms.
Acceptance: Acceptance is the unconditional agreement to the terms of the offer. It creates a legally binding agreement between the parties.”
ii)Consent of the parties
Consent requires that parties willingly and knowingly agree to the terms of the contract without being unduly influenced, deceived, or coerced. Mistakes, misrepresentation, duress, or undue influence can invalidate consent.
iii) Legal Capacity:
Concurring to S 11 of the Indian Contract Act, it is basic that the parties entering into a contract must have the legitimate capacity to do so. In other words, people who are minors, insane, mentally debilitated, or disqualified by any special law pertinent to them need the vital capacity to enter into a contract. In the event that a contract is formed with a minor, it is void ab initio, meaning it is considered void from the beginning. For the most part, an individual under 18 yrs of age is considered a minor (or 21 a long time for a ward beneath a gatekeeper). This rule was built up within the compelling case of Mohori Bibi v. Dharmadas Ghosh.
iv) Consideration:
An agreement without thought is regarded void beneath Segment 25 of the Contract Act. Thought is characterized in Area 2(d) as an act or restraint, or the guarantee thereof, attempted by the promisee or any other individual at the want of the promisor. Thought shapes the premise for a contract and must be clear, particular, and not deceptive. Whereas it may be lacking, as long as the parties concur with it, the contract will not be rendered void. In any case, the common run the show is “no thought, no contract,” with a few special cases, counting:
Agreements made out of common adore and warmth (e.g., a blessing from a father to a girl), which ought to be in composing and enrolled. Emolument guaranteed for administrations rendered. Past thought can be considered substantial thought.
v) Lawful object:
Section 23 of the Contract Act stipulates that the thought or protest of an agreement must be legal; something else, the contract is void. The object is considered illegal in the event that it:
i) is forbidden by law,
ii) would overcome the provisions of any law in case permitted,
iii) is fraudulent,
iv) implies damage to the individual or property of another, or
v) is immoral or against public policy.
For example, an agreement between parties A, B, and C to divide earnings obtained through fraud would have an unlawful object. Similarly, a lease agreement for a house intended for immoral purposes would also have an unlawful object. By ensuring legal capacity, valid consideration, and a lawful object, parties can establish contracts that are enforceable and provide a foundation for secure business transactions.
Contractual Terms and Conditions
Contracts include various terms and conditions that govern the rights and obligations of the parties involved.
Express and Implied Terms
Express terms are explicitly stated by the parties, either orally or in writing, and form the basis of their agreement. Implied terms are not explicitly stated but are implied by law, custom, or the parties’ conduct. These terms are necessary for the contract to function as intended.
Conditions, Warranties, and Representations
Conditions are fundamental terms that go to the root of the contract. Breach of a condition gives the innocent party the right to terminate the contract and claim damages.
Warranties are secondary terms that are not as crucial as conditions. Breach of a warranty gives the innocent party the right to claim damages but not to terminate the contract.
Representations are statements of fact made by one party to another. If a representation proves to be false and induces the other party to enter into the contract, it can give rise to remedies for misrepresentation.
Exclusion and Limitation Clauses
Exclusion clauses seek to limit or exclude liability for certain breaches or losses. They must be validly incorporated into the contract and not be unconscionable or contrary to public policy.
Limitation clauses aim to cap the number of damages that can be claimed in case of a breach. They must be reasonable and fair, considering the circumstances and nature of the contract.
Understanding these elements and terms is essential for analysing, drafting, and interpreting business contracts and agreements. They form the foundation of contractual relationships and govern the rights and obligations of the parties involved.
Introduction to a business contract
A contract is a legally binding agreement between two or more parties that outlines their obligations and rights. In the business-to-business (B2B) context, contracts can vary in complexity, ranging from simple one-page order forms for selling goods to extensive 1,000-page documents for multinational corporations’ commercial agreements. In general, B2B scenarios typically involve a five-phase trading process, with contract formation being one of the phases:
1. Pre-contract stage: During this phase, customers identify potential sources for products or services.
2. Contract stage: This phase involves establishing a formal relationship between the buyer and seller, which includes the negotiation and verification process of the contract terms.
3. Order and logistics phase: Once the contract is in place, this phase focuses on the ordering and delivery of goods and services.
4. Payment stage: This phase encompasses activities such as billing, payment authorizations, and actual payments.
5. Post-processing phase: In this final phase, information is collected for management reports, such as trade statistics.
The main focus of this document is on the contract stage, specifically regarding the presentation of electronic contracts and the support provided for contract monitoring and enforcement. It is important to ensure that the content of this document is original and free from plagiarism.
Elements of a Business contract[1]
– Party Identification: The contract begins by providing a comprehensive description of the parties involved, including their legal names, addresses, and designated roles within the agreement. This ensures clarity and establishes the identities of the contracting parties.
– Definition and Interpretation: This section aims to precisely define and interpret the key terms used throughout the contract. It eliminates any ambiguity or confusion by providing explicit meanings for the language employed in the agreement.
– Jurisdictional Framework: The contract specifies the jurisdiction under which it operates, determining the applicable laws and the competent courts for resolving disputes and enforcing the terms. This guarantees legal validity and appropriate enforcement procedures.
– Duration and Territory: The contract outlines the duration during which it remains in effect and the geographical territory where its provisions apply. These parameters establish the temporal and spatial boundaries within which the contractual rights and obligations exist.
– Consideration Nature: This section delineates the nature of the consideration exchanged between the parties. Whether it involves fees, services rendered, goods exchanged, or rights granted, the contract meticulously outlines the reciprocal promises and obligations.
– Role-Specific Obligations: The contract articulates the specific obligations associated with each party’s role. It establishes the criteria, conditions, and performance standards that govern the parties’ responsibilities. This encompasses terms and conditions related to invoicing, payment, warranties, delivery, liability, rejection, termination, and accounting provisions.
By incorporating these essential elements into a business contract, it ensures a legally sound framework that facilitates a clear understanding of rights, obligations, and expectations for all parties involved.
Contracts can be invalidated on several grounds. They are explained in the following.
Misrepresentation:
- Making unwarranted statements that are not based on accurate information but are believed to be true.
- Breaching a duty without intending to deceive, while gaining an advantage from it.
- Causing the other party to make a mistake regarding the subject matter of the contract.
- Any of these actions are aimed at inducing the other party to enter into a contract.
However, if the truth could have been discovered through ordinary diligence, no misrepresentation exists.
Fraud:
- A party suggests as a fact something that is untrue and does not believe it to be true.
- Actively concealing facts.
- Making a promise without intending to fulfill it.
- Engaging in any other act that is intended to deceive.
- Performing acts or omissions that are declared fraudulent by law.
Consequences:
- Under fraud or misrepresentation, the contract is voidable at the option of the party whose consent was induced by such actions.
Mistake:
- When both parties are mistaken.
- Regarding a matter of fact.
- That is essential to the agreement.
- In such cases, the contract is void[2].
Types of Business Agreements
Sale and purchase agreements:
Sale and purchase agreements are special agreements between a buyer and a seller. It’s like making a promise to sell something to someone, and they promise to pay for it. You decide on the price, describe what is being sold, and agree on payment terms. These agreements are used for various things like buying a house, a car, or even groceries. They make sure both parties understand and agree on the terms of the sale.
Service Contracts:
A service contract is an agreement where someone promises to do something for another person in exchange for something, like money or goods. For example, imagine you have a neighbour who loves baking cakes, and you want to have a special birthday cake for your party. You can make a service contract with your neighbour, where they agree to make the cake for you, and you will give them some money in return. It’s like making a deal to exchange services.
Employment Contracts:
An employment contract is a special agreement between a person and a company when the person gets a job. When you grow up, you might want to work for a company and have a job there. The employment contract will have important things written in it, like your job responsibilities, how much money you will earn, and the working hours. It’s like a special promise between you and the company that you will work for them, and they will pay you for your work.
Partnership Agreements:
A partnership agreement is like a contract between two or more people who want to work together to do something. Let’s say you and your best friend love making and selling lemonade. You can make a partnership agreement together. In this agreement, you both decide how much money you will put in to buy the lemons, how you will share the work, and how you will share the profit from selling the lemonade. It’s like making a special promise with your friend to be business partners!
Licensing and Franchising Agreements[3]:
Licensing and franchising agreements are like when you give someone permission to use something you made or have. Imagine you have a fantastic recipe for delicious cookies. You can make a licensing agreement with a bakery. In this agreement, the bakery can use your recipe to make and sell the cookies, and you will get some money from them for using your recipe. It’s like letting someone use your special creation and getting something in return!
Non-Disclosure Agreements (NDAs):
A non-disclosure agreement is a special promise to keep something a secret. Sometimes, you might have a great idea for an invention or a story, and you want to share it with someone, but you don’t want them to tell anyone else. So, you can make them sign a non-disclosure agreement. It’s like making a secret pact where they promise not to tell anyone else what you shared with them. It helps protect your ideas and keeps them safe!
Memorandum of Understanding (MOU):
A memorandum of understanding is like a friendly agreement between two or more people or companies. It’s a way to say, “Hey, let’s work together on something, but we are still figuring out all the details.” It’s like making a note to remind yourselves that you want to do something together, and you will decide on the exact plans later.
Remember, these agreements are important because they help people work together, protect their rights, and make sure everyone is treated fairly. Just like when you make a promise to your friend and keep it, these agreements are promises that adults make to each other to do business in a fair and proper way.
Formation of Contracts:
Offer and Acceptance: Offers and acceptances are important elements of contract conclusion. An offer is a clear expression of an intention to enter into a contract on certain terms. Acceptance means unconditional acceptance of the terms of the offer.
Communication of offer and acceptance: Offers and acceptances must be communicated between the parties. Generally, in order to enter into a contract, you must communicate your acceptance to the provider.
Withdrawal and Rejection of Offers: Offers may be withdrawn by the Provider at any time until accepted. Rejecting an offer ends the offer and can no longer be accepted.
Consideration and intent to establish a legal relationship: Consideration is something of value exchanged between parties and is a necessary element of a contract. For a contract to be valid, both parties must intend to establish a legal relationship.
Application and Acceptance of Electronic Contracts: Electronically concluded contracts are basically treated in the same way as traditional paper contracts. The principle of offer, acceptance and consideration applies to electronic contracts.
Bidding and advertising: A treatment invitation is an invitation to make an offer to another person and is not an offer in itself. Ads are not essentially offers, they are invitations to offers.
Validity and Enforceability of Contracts:
Privity of contract[4]:
– Privity of contract refers to the relationship between the parties to a contract.
– Generally, only parties who are in privity of contract can enforce its terms.
– Third parties who are not directly involved in the contract usually do not have the right to enforce its terms.
Capacity and legality:
– Capacity refers to the legal ability of parties to enter into a contract.
– Parties must have the mental capacity and legal authority to understand and consent to the terms of the contract[5].
– Contracts entered into by minors, mentally incapacitated individuals, or individuals under the influence of drugs or alcohol may be voidable.
– Contracts that involve illegal activities or violate public policy are generally unenforceable.
Mistake, misrepresentation, and duress:
– Mistake refers to an erroneous belief about a material fact of the contract.
– Mistakes may be mutual or unilateral and can render a contract void or voidable.
– Misrepresentation occurs when one party makes false statements or conceals material facts, inducing the other party to enter into a contract.
– Duress refers to coercion or threats that force a party to enter into a contract against their will.
Illegality and public policy:
– Contracts that involve illegal activities or violate public policy are considered void or unenforceable.
– Examples include contracts for the commission of a crime or contracts that promote fraud or harm to others.
Unconscionability and unfair terms:
– Unconscionability refers to contract terms that are excessively one-sided or oppressive, giving one party an unfair advantage over the other.
– Courts may refuse to enforce unconscionable terms or may modify them to make the contract fair and equitable.
Termination and discharge of contracts:
– Contracts can be terminated through various means, such as performance, mutual agreement, breach, or frustration of purpose.
– Discharge refers to the release of parties from their contractual obligations.
Breach of Contract Remedies :
Specific performance and Damages :
– Damages are the most common remedy for breach of contract.
– The purpose of damages is to put the non-defaulting party in the position it would have been if the contract had been performed.
– Concrete performance is a remedy in which the court orders the breaching party to perform its contractual obligations specified in the contract.
Rescission and restitution:
– Rescission involves cancelling the contract and returning the parties to their pre-contractual positions.
– Restitution requires the breaching party to return any benefits or payments received from the non-breaching party.
Liquidated damages and penalty clauses:
– Liquidated damages are pre-determined damages specified in the contract that the parties agree to if a breach occurs.
– Penalty clauses are provisions that impose excessive penalties or punishment for a breach and are generally unenforceable.
Equitable remedies:
– Equitable remedies are non-monetary remedies granted by the court to provide fairness and prevent unjust enrichment.
– Examples include injunctions, specific performance, and injunctions to restrain a party from certain actions.
Notable cases
Carlill v. Carbolic Smoke Ball Company (1893)[6]– In this case, the Carbolic Smoke Ball Company advertised a product that claimed to prevent influenza and offered a reward to anyone who contracted influenza after using their product. Mrs. Carlill purchased and used the product but still fell ill. The court held that the advertisement constituted a unilateral contract, and Mrs. Carlill was entitled to the reward.
Hadley v. Baxendale (1854)[7]– This case dealt with the measure of damages in contract law. Baxendale, a carrier, was late in delivering a broken crankshaft to Hadley’s mill, causing Hadley to lose profits. The court held that damages for breach of contract should be based on what was reasonably foreseeable by the breaching party at the time of contract formation.
Apple Inc. v. Samsung Electronics Co. (2012)[8]– This high-profile case involved a patent dispute between Apple and Samsung regarding the design of smartphones and tablets. The court ruled in favor of Apple, finding that Samsung had infringed on Apple’s patents, leading to significant consequences in the smartphone industry.
Balfour v. Balfour (1919)[9] – This case established the concept of domestic agreements and held that a husband and wife’s informal arrangement, even if intended to be legally binding, did not create a legally enforceable contract. The court emphasized the importance of intention to create legal relations in contract formation.
Taylor v. Caldwell (1863)[10] – In this case, a contract was formed between Taylor and Caldwell for the rental of a music hall for concerts. However, before the scheduled events, the music hall was destroyed by fire. The court held that the contract was frustrated due to the destruction of the subject matter, relieving both parties from their contractual obligations.
Conclusion:
Summary of key points:
– Business contracts and agreements are essential legal instruments used to define the rights, obligations, and expectations of parties involved in a commercial transaction.
– They establish the terms and conditions under which parties agree to conduct business, ensuring clarity and certainty in their relationships.
– Key elements of business contracts include parties’ descriptions, terms interpretation, jurisdiction, duration, consideration, and obligations.
– Roles such as the Contract Repository, Notary, Contract Monitor, Contract Enforcer, and Contract Validator play crucial roles in supporting contract establishment, monitoring, and enforcement.
– Validity and enforceability of contracts depend on factors such as privity, capacity, legality, absence of mistakes, misrepresentation, duress, and compliance with public policy.
– Remedies for breach of contract include damages, specific performance, rescission, restitution, liquidated damages, equitable remedies, and alternative dispute resolution methods.
Importance of understanding business contracts and agreements:
– Understanding business contracts is crucial for individuals and organizations engaged in commercial activities.
– It ensures clarity and transparency in business relationships, reducing the risk of misunderstandings, disputes, and potential legal issues.
– Proper comprehension of contracts enables parties to make informed decisions, negotiate favorable terms, and protect their rights and interests.
– It provides a framework for resolving disputes and breaches, allowing parties to seek appropriate remedies and enforce contractual obligations.
– Compliance with legal requirements and best practices in contract formation, validity, and enforcement enhances trust and credibility in business transactions.
– Seeking legal advice or assistance when dealing with complex or significant contracts is advisable to ensure compliance with applicable laws and regulations.
In conclusion, business contracts and agreements are vital tools for establishing and regulating commercial relationships. Understanding their key components, validity requirements, enforceability, and available remedies is essential for conducting business with confidence and minimizing legal risks.
[1] A. Goodchild, C. Herring, & Z. Milosevic, Business Contracts for B2B (Distributed System Technology Center (DSTC), Level 7, GP South, The University of Queensland, QLD, 4072, AUSTRALIA) This paper examines business to business contracts in a simple way which also includes electronic contracts but we wont discuss that here as this is a basics covering document.
[2] Boundy, Charles. Business contracts handbook. CRC Press, 2016.
[3] https://www.upcounsel.com/definition-of-business-contract The definition of a business contract is a legally binding agreement between two parties regarding the buying and selling of goods or services.
[4], J.J. Powell, Essay upon the Law of Contracts and Agreements. No. 2923. Printed at the Press of Thomas & Thomas by David Newhall, 1802. Contracts are made because they are enforceable. There must be some enforcing mechanism to make a contract valid.
[5] https://www.upcounsel.com/basic-information-on-business-contract-law Business contracts and business agreements are an important area of the law, as they keep business owners, customers, and clients from being taken advantage of.
[6] Carlill v Carbolic Smoke Ball Company [1892] EWCA Civ
[7] Hadley & Anor v Baxendale & Ors [1854] EWHC J70
[8] Apple Inc. v. Samsung Elecs. Co. – 786 F.3d 983 (Fed. Cir. 2015)
[9] Balfour v Balfour [1919] 2 KB 571
[10] Taylor v Caldwell (1863). EWHC J1 (QB), 3 B & S 826, 122 ER 309, Court of Queen’s Bench.
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