Contracts are intrinsic to virtually all practical aspects of our lives. Extending it further, the entire commercial ecosystem works on the basis of contracts. Contracts are the mode and medium to channelise different parties’ resources into their agreed commercial relationship and translate the understanding into tangible/intangible goods, services, technology and what not.
The need for capitulating the parties’ understanding in writing cannot be written enough about, so let us not go into that here. However, law students and professionals are invariably inquisitive about what all should be captured in a contract and how.
Contract drafting is not a mechanical act in isolation—to begin the process, we, the draftsman (gender neutral, please) must be aware of various aspects—one from isolated perspectives of different stakeholders—their needs, expectations, resources, mindset, compulsions, flexibility, aggression, negotiation power, clout, etc. and secondly, from a common perspective i.e. what is the parties’ common intent, what kind of relationship or the transaction have the parties made up their mind for? So, essentially, we need to see the common points as well as the areas of divergence between the parties.
A good contract would be one which can be understood, implemented, and enforced effectively without any hassles and ambiguity. How do we get to such a contract?
Let us discuss a few points that could hold good in drafting any kind of commercial contract.
Homework: Prepare a preliminary checklist of information you require to draft a contract. Collate as much information as you can by yourself, from the client or other available public information about the parties (including your client), the proposed business/transaction/relationship. Tally it with the likely legislations having a bearing on the contractual relationship. Here, you need to assess what information can be provided by which source —are you allowed to approach that source (say, the other party or its advisers).
Template: Whatever be the malaise attached to cut, copy, paste, using a template is inevitable. However, a lot goes into working on a template in drafting a good contract. First things first, get hold of a good template. See if it is applicable in the present transaction. See if the template would work in the parties’ jurisdiction, circumstances and other aspects. Then only you should go ahead.
Customisation of the template: Just accessing a good template is no good, it should work in the transaction at hand in consonance with the parties’ requirements and expectations as well. Therefore, customisation is the key here. You must review the entire template thoroughly and, among others:
(i) retain what works;
(ii) discard what is not applicable;
(iii) amend what needs a change, given the mandate;
(iv) update considering the latest legal provisions/case law; and
(v) add what is missing as per your assessment.
Remember, a client comes to you for your specific attention to its mandate—only cut, copy, paste would not work. Had that been the case, the client would access innumerable templates available on so many platforms and need not approach you.
Equal attention to every provision: An ambiguity or a dispute between the parties can arise out of any word, sentence, paragraph (even a punctuation mark) of a contract. Therefore, you do not have the luxury of treating any provisions as unimportant or less important. You need to pay equal attention to all the sections of the contract, be it the background information, operative clauses, boilerplate clauses or even annexures. This applies whether you are drafting a contract, reviewing, or negotiating one.
An effective contract should, inter alia, incorporate the following:
(1) Index: Why do we prefer to go to supermarkets instead of roadside vendors or conventional shops nowadays? One benefit is that you have much more variety and more space for everything—another and may be more important is that there are designated sections for different products, and you need not waste time in locating what products would be lying where. A well-organised index guides the reader to locate the provision at a particular place and no time needs to be spent in trying to scan the entire contract to find anything.
(2) Subject-matter: The subject-matter of the contract i.e. invariably the transaction or the relationship between the parties must be clearly mentioned. We should examine and apprise the client whether it is so called, and perceived “partnership” is a partnership, joint venture, consortium, distributorship, franchise, licensing, etc. from a legal perspective and what are the respective roles as well as the rights and obligations attached to such roles.
(3) Preconditions: If a contract requires some preconditions to be complied with before a contract can be put into effect, specifying these preconditions is necessary. Further, the consequence for not meeting these preconditions should also be stipulated—like, whether the contract will be terminated or truncated or could the deadline for meeting these preconditions be extended to enable the parties to comply, etc.
(4) Rights and obligations: Rights and obligations of different parties invariably run simultaneously and are two sides of a coin, proverbially. One party’s right is the other party’s obligation and vice versa. These should be clearly mentioned. Every party’s advisor would like to enhance their client’s rights, entitlements, benefits, powers, etc. and reduce its exposure, liabilities, duties, obligations and the like. Therefore, your stand on each of such clauses would depend on which party you are representing.
(5) Working framework: This ensures as to how the parties’ respective rights and obligations are to be exercised and enforced respectively. This is the system, the method, the functionality as to how the parties’ relationship will work —the flow of goods, services, promises, money and so on.
(6) Time frame: Commercial contracts are mostly entered into for exchange of goods, services and money. The frequency of transactions, delivery, payments as well as the timeline of the contract need to be specified clearly. Otherwise, it is no good. As a prospective employ would you be fine with a contract of employment without working hours, leaves, wages and bonus payment frequency, a timeline for probation/confirmation/appraisal?
(7) Representations and warranties: Most to the times, parties need to convince each other about their experience, expertise, resources, conduct, past and present status and many other aspects to enable them to take a considered call whether to go ahead with the contemplated transaction or not. The objective of making representations is to make the other party comfortable and entice it into entering a commercial deal. A warranty, on the other hand is a promise to compensate the other party if any of the representations were to go wrong. The extent, timing, exceptions, etc. pertaining to these representations and warranties should be meticulously captured in a contract.
(8) Remedies: Nothing is perfect in this life with anyone. How can contracts be any different? Therefore, a good contract should contemplate what can go wrong between the parties and what would be the remedies available to the suffering party? Monetary compensation, replacement, repair, refund, injunction, indemnity, damages (liquidated or otherwise), limitation of liability, termination of the contract—the spectrum is very wide. You must see what a just and fair solution for your client would be if the other party does not fulfil its part of the bargain in the contract.
(9) Dispute resolution: An effective contract tries to minimise ambiguities and disputes between the parties. However, as said earlier, we do not live in a perfect world, so no one can ensure that no disputes will ever arise between the parties. Howsoever good a contract you may strive to draft, you cannot avoid disputes between the parties. Here again, what you can do is to create an economical, effective and expeditious ecosystem for overcoming such disputes—be it discussion, conciliation, mediation, arbitration….
(10) Termination: All good things come to an end—contracts too, if they must. If the parties think they cannot live in harmony with each other anymore due to any reason whatsoever, it is better to part (amicably, if possible). Include a comprehensive system of termination listing eventualities, consequences, time frame and mechanism, surviving provisions, etc.
Read and reread your draft contract several times, proofreading leads to a lot of discoveries (!) or silly mistakes, as you may call it.
What do you do if you observe that any one of the above ingredients is missing from your draft contract? Simple, go back to the contract, fine-tune it and it is done.
Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at firstname.lastname@example.org.