Essential Clauses of a Valid Contract | Bhavya Sharma & Associates

As per the Indian Contract Act, 1872, ‘A contract is an agreement enforceable by law’. A contract is entered between two or more parties. The essential element of contract are offer, acceptance, and consideration, intention to create legal relationship, legality, capacity and certainty. A contract is a reliable proof of offer and its acceptance, it is proof of obligations, consideration, a written contract is easy to get enforced and terms and conditions of the contract could be referred in case of any conflict in future. A well drafted contract states the rights and obligations of the parties entering into a contract. It is advisable that one should carefully read the terms and conditions mentioned in a contract before entering into a contract. In this article, we have discussed the essentials elements of a valid Contract. Following are some of the essential heading which must be there in a well-drafted contract.

1. Title:

Title of a contract should be a short heading which describes the nature of the contract. It helps to identify the type of agreement at the first sight. The title of the agreement denotes nature or type of agreement. 

2. Details of the parties:

The details includes the name, which is the most important part of the details provided by the parties. Details of the parties includes, who are the parties to the agreement, legal identity of the parties, address of the parties, etc. It has some practical importance as well. Like, if either of the party wants to issue a notice then such party can simply refer this clause of the contract. 

3. Recitals:

Recital part states the purpose of execution of a Contract. If the agreement is a supplementary to the earlier executed contract then the reference to the main contract is provided under this clause.

4. Definition Clause:

The definition clause should contain the technical words used in the agreement and most importantly it should contain the definition of those words of which could have more than one interpretation. The practical significance of inserting this clause is that it may be referred in case any dispute arises with respect to interpretation of any word or phrase.

5. Representation and Warranty:

Under this clause the party to the agreement makes assertion of facts which are relevant to the contract and those representations may be the assertions on basis of past or existing fact given by one party to induce another party at the time of entering into a Contract. For example, In a lease deed of a property, assertion by a party that he/ she is the sole owner of the property and the property is free from any kind of encumbrances is a relevant fact for the other party. The representation should also provide that what will be the consequences if either of the party has misrepresented any facts and what right one party has against the other party. And the warranty clause asserts that whatever information is given in representation clause is true. A warranty is a promise that the assertion of existing fact or future facts are or will be true, along with an implied promise of indemnity if the assertion is false.

6. Covenants:

Covenant means a promise to do or to abide from doing certain acts in future, covenants clause basically states that what will be the rights or obligation. For example the covenant clause in a lease deed may be like the lessor may allow the lessee to erect a building in the premises. The lessee will give a 30 days prior notice to the lessor before doing any kind of renovation in the building. The lessee will carry out the necessary repair in the building, etc… Convent of both the parties should be stated separately and clearly.

7. Terms:

The terms should specify, “till what time the agreement will be effective” and under what situation the agreement could be terminated and what will be the consequence in case of termination. This clause also contains the renewal process of the Contract. 

8. Consideration:

Consideration is an important element of a valid contract. Consideration must be of value (at least to the parties), and is exchanged for the performance or promise of performance by the other party (such performance itself is consideration). It is one of the essential reason for a party entering into a contract.

9. Terms of Payment:

Terms of payment should include all the necessary details pertaining to the agreed payment cycle between the parties, it should include the details with respect to agreed amount, timeline for payment, what will be the rate of interest in case of delay in payment, what will be the mode of payment, etc.

10. Confidentiality:

This clause states the terms applicable to confidential data or information exchanged between the parties during the term of the Contract. Generally, this clause imposes a liability on the party that they will not disclose any material information with any third party and what will be the consequences in case of breach of confidentiality by either of the party.

11. Intellectual Property Rights:

This clause could be seen mainly in the assignment and licensing agreements, for such contracts it is a very important clause because it states that who will be the owner of the intellectual property like patent, design or copyright and this clause limits the transfer or the use of the concerned trademark, copyright, patent or design. Whereas, generally this clause states the rights and ownership pertaining to the IP created out of the contract or whether the parties are transferring any IP or not.

12. Indemnification:

An indemnity is a promise by one party to compensate another for the loss suffered as a consequence of a specific event. The indemnification clause could be kept in the contract itself or it could be made separately the indemnification clause (indemnification bond) means that one party undertakes that it will protect the other party or we can say it will bear the loss which may arise in future with respect to litigation, obligation, loss, damage, litigation expense etc. which may occur as a result of a specified event.  

13. Termination:

The termination clause should briefly explain under what circumstance the contract could be terminated, what will be the consequence of termination, what will be the liability of the other party in case of termination, what will be the notice period before terminating an agreement, what will be the amount of compensation to be paid to the effected party in case of termination. 

14. Force Majeure:

A force majeure means the overpowering force itself, which prevents the fulfilment of a contract. Force Majeure clause basically states that what will be the consequence if any unpredicted situation or a natural calamity arises which is beyond the control of the parties. 

15. Notices:

The name of the concerned person, permanent address or email-id of the parties should be provided in this clause for exchange of information between the parties.

16. Severability:

A Severability clause states what will happen to an agreement if part of that agreement is declared unenforceable by a court.

17. Amendment:

The practical significance of this clause is that it could be referred in case the party to the agreement want to alter any part of contract. The Amendment clause stipulates the conditions for changing the terms of an agreement. 

18. Jurisdiction:

Jurisdiction clause basically tells what will be the appropriate court or forum where the affected party may seek redressal in case any dispute arises. There can be more than one jurisdiction in the agreement.

19. Governing Law:

This clause is very important in cases where the parties belong from different countries. The clause basically states the governing law applicable to the Contract. 

20. Dispute Resolution:

The agreement consist of a dispute resolution clause which tells that what will be the dispute resolution mechanism in case of dispute between the parties.

21. Signature of the parties:

A contract will gain more credibility when it is signed by the agreeing parties, so the general practice is that the other party is made to sign on every page of the agreement to make the agreement more credible.

22. Entire Agreement:

The purpose of this clause is that, the agreement is complete in itself, and the parties should strictly adhere to the terms of the agreement and the parties should strictly follow the terms of the present in the agreement only and all other contracts stands void. 

Conclusion: In this article, we discussed the essential clauses of a valid contract and most of the contracts contains the clause as mentioned above. Whereas, one contract may be different from other in terms of rights, obligation or consideration and it may or may not contain some of the above clauses but while entering into a contract or while drafting a contract there should be balance of rights and duties among the parties and it should be drafted in a simple and easy manner so that both the parties could understand each and every clause of the contract along with its implication. Also, the contract should avoid such words or language which could be interpreted in more than one sense. A well drafted contract should foresee all the circumstances which may likely happen in future and it should be drafted carefully describing the consequences or solutions if any dispute or confusion arise.

Article By: Mr Pranav Dixit, Legal Associate at Bhavya Sharma & Associates. In case you need any assistance for drafting of contract, advisory services and related queries you can connect with us. You can contact us at legal@bhavyasharmaandassociates.com or for more details you can visit: www.bhavyasharmaandassociates.com

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