Module 7

MODULE 7

UNDERSTANDING CONTRACT PURPOSE AND FORM

“Until the contract is signed, nothing is real”

- Glenn Danzig Contract law is based on the
principle ‘pacta sunt
Contract law can be classified, as is habitual in civil
law systems, as part of a general law of obligations, servanda’, which literally means
along with tort, unjust enrichment, and restitution. The "pacts must be kept".
common law of contract originated with the writ of assumpsit,
which was originally a tort action based on reliance.1

Jurisdictions vary in their principles of freedom of contract. In
common law jurisdictions such as England and Wales and the United States, a high degree
of freedom is expected. For example, in American law, it was determined in the 1901 case
of Hurley v. Eddingfield that a physician was permitted to deny treatment to a patient
despite the lack of other available medical assistance and the patient's subsequent
death.2 This is in contrast to the civil law, which typically applies certain overarching
principles to disputes arising out of contract, as in the French Civil Code. Other legal systems

such as Islamic law, socialist legal systems, and
customary law have their own variations.

Not all agreements are necessarily However in the case of the United States, the principle
contractual, as the parties generally of freedom of contract has eroded over time due to
must have an intention to be legally judicial deference to legislation affecting contracts.3 For
example, the Civil Rights Act of 1964 restricted private
bound. In American English, racial discrimination against African-Americans.4 In the
a gentlemen's agreement is one which is early 20th century the United States underwent the
not intended to be legally enforceable; "Lochner era", in which the Supreme Court of the
the equivalent concept can be expressed United States struck down economic regulations on the
an agreement "binding in honour only." basis of freedom of contract and the Due Process
Clause; these decisions were eventually overturned and

1 Atiyah PS. (1986) Medical Malpractice and Contract/Tort Boundary. Law and Contemporary Problems.
2 Blake V. (2012). When Is a Patient-Physician Relationship Established?. Virtual Mentor.
3 Bernstein DE. (2008). Freedom of Contract. George Mason Law & Economics Research Paper No. 08-51.
4 Douglas D. (2002). Contract Rights and Civil Rights. Michigan Law Review.

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the Supreme Court established a deference to legislative statutes and regulations which
restrict freedom of contract.5 The U.S. Constitution contains a Contract Clause, but this has
been interpreted as only restricting the retroactive impairment of contracts.6

2.1 CONTRACT MEANING

If anyone (be it the parties to the contract/lawyer/manager) is shown a document and
asked whether it is a contract on not? He/she would check few things:

þ ARE ALL THE POINTS OF BUSINESS OR THE POINTS NECESSARY FOR THEIR FORMAL RELATIONSHIP
INCLUDED ON NOT?

þ DOES THE DOCUMENT INCLUDE POINTS WHEREIN IT IS MENTIONED THAT IF THE POINTS
MENTIONED IN 1 ARE NOT FULFILLED WHAT WILL HAPPEN?

þ DOES THE DOCUMENT CREATE ANY KIND OF RIGHT/OBLIGATIONS FOR HIM/HER?

þ IS IT SIGNED BY BOTH THE PARTIES?

þ IS THE DOCUMENT ON STAMP PAPER?

If the answer to all the above questions is yes, the person will immediately recognize the
document as a contract. A contract is a pact or promise between two or more persons, that
the conditions mentioned in the document would be fulfilled and these promises are legally
binding upon the parties.

Legally it can be defined as a voluntary, deliberate and legally binding agreement between
two or more competent parties is known as contract.7 It is an agreement that creates
obligations which are enforceable by law.

2.2 CONTRACTUAL
RELATIONSHIP

For the contractual As both the parties sign the contract they get some
relationship to come into duties and rights corresponding to the duties and
existence there are some
rights of the other party. Both the parties now
become legitimately bound by a contractual

relationship

5 Bernstein DE. (2008). Freedom of Contract. George Mason Law & Economics Research Paper No. 08-51.
6 Bernstein DE. (2008). Freedom of Contract. George Mason Law & Economics Research Paper No. 08-51.
7 http://www.businessdictionary.com/definition/contract.html

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PARAMETERS basic elements which have to be fulfilled:
OF
Ø Consideration
CONTRACTUAL Ø Common acceptance
RELATIONSHIP Ø Capacity
Ø Consent
CONSIDERATION Ø Authenticity
COMMON Ø Intention
ACCEPTANCE
CAPACITY CONSIDERATION: Consideration can be understood as
CONSENT a benefit or detriment which a party receives which
AUTHENTICITY reasonably and fairly induces them to make the
INTENTION promise/contract.8 Consideration is the value that induces
the parties to enter into the contract.

For e.g.: if A promises to B to give him a Ferrari on
receiving payment of Rs.1 Cr. Herein, the payment is the
valid consideration. Whereas, if A promises to gift B a
Ferrari on his 25th birthday does not require any
consideration and is not a contract. Because, the personal
satisfaction the grantor of the promise may receive from
the act of giving is normally not considered adequate
consideration.9

Courts will typically not weigh the "adequacy" of
consideration as long as the consideration is determined
to be "sufficient", with sufficiency defined as meeting the
test of law, whereas "adequacy" is the subjective fairness
or equivalence. For instance, agreeing to sell a car for a
penny may constitute a binding contract if a party desires

Cthe penny.10
OMMON ACCEPTANCE: The most important criteria
of a contract is the mutual assent between the
contracting parties. The question here arises how will
this position be reached? The answer is simple; it can be
reached through offer and acceptance. If one party offers
something and the second party accepts that offer, then

8 http://www.law.cornell.edu/wex/contract
9 http://www.law.cornell.edu/wex/contract
10 Chappell & Co Ltd v. Nestle Co Ltd [1959] 2 All ER 701 in which the wrappers from three chocolate bars was
held to be part of the consideration for the sale and purchase of a musical recording.

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PARAMETERS OF the situation of the meeting of minds arises and this
CONTRACTUAL criteria is fulfilled.
RELATIONSHIP
For e.g.: A offers to sell his car for Rs. 70,000. B accepts the
CONSIDERATION offer and pays the money and buys the car. Herein, A
COMMON
ACCEPTANCE made an offer which B accepted. Hence, the mutual
CAPACITY consent of parties is shown.
CONSENT
AUTHENTICITY Meeting of minds means the parties understood and
INTENTION agreed to the basic substance and terms of the contract.11
Mutual Assent requires the presence of the following
factors:

Ø Both parties must exhibit a “contractual intent”
Ø The terms of the offer must be clear and definite

Ø The acceptance must be clearly communicated

CAPACITY: Capacity can be understood as a person’s
legal ability to enter into a contract. The parties
making the contract must be legally competent in
the sense that each must be of the age of majority, of a
sound mind, and not expressly disqualified from
contracting.12 According to Indian contract law, lunatic
person, a person under the age of 18, an insolvent person
cannot enter into a contract. Any contracts that are made
by persons who are lacking in legal capacity are voidable.

For e.g.: A 16 year girl decides to sell her property for Rs. 3
lakh. The other party not knowing her correct age buys the
property from her and pays her the money. In this case,
though all the other elements are met, may not be

sufficient to form a legally binding contract.

CONSENT13: The contracting parties must give their
consent freely. 'Consent' means that the parties
must agree about the subject matter of the

11 http://jec.unm.edu/education/online-training/contract-law-tutorial/contract-fundamentals-part-2
12 http://business.gov.in/manage_business/contracts_elements.php
13 http://business.gov.in/manage_business/contracts_elements.php

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PARAMETERS agreement in the same sense and at the same time.
OF Consent is said to be free if it is not induced by coercion,
undue influence, fraud, misrepresentation or mistake. The
CONTRACTUAL absence of free consent would affect the legal
enforceability of a contract.
ARELATIONSHIP
AUTHENTICITY: The motive of the contract should be
CONSIDERATION lawful. It should be a legally valid i.e. according to the laws
COMMON of the jurisdiction. An agreement is unlawful, if it is:-
ACCEPTANCE
CAPACITY Ø illegal
CONSENT Ø immoral
AUTHENTICITY Ø fraudulent
INTENTION
o of a nature that, if permitted, it would
defeat the provisions of any law

o causes injury to the person or property of
another

o opposed to public policy

INTENTION14: It is generally presumed that in a
commercial transaction, the contracting parties must
have the intention to create a legally binding contract. In
other words, if you have signed a contract for business-
related activities, then you will be able to sue the other
party if that party does not fulfil the contractual
provisions, and vice versa.

This presumption can only be rejected if the parties
expressly state that they do not intend to make a legally
binding contract. Sometimes you may see the words
"subject to contract" printed on a document. These words
have the legal meaning that the document is not a
contract and that all of the contents will be bound by a
subsequent contract (if the parties sign that contract). A
party that is acting “subject to contract” can withdraw
from the negotiation at any time before the contract is
concluded. In the case of dispute, the burden of proof that
the intention was to create a binding contract rests on the

14http://www.hkclic.org/en/topics/businessAndCommerce/setting_up_business_in_Hong_Kong/making_a_bu
siness_contract/q1.shtml

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person who wishes to rely on the contract.

2.3 TYPES

There are different types of contract:
v CONTRACTS UNDER SEAL15: Traditionally, a contract was an enforceable
legal document only if it was stamped with a seal. The seal represented that the
parties intended the agreement to entail legal consequences. No legal benefit or
detriment to any party was required, as the seal was a symbol of the solemn
acceptance of the legal effect and consequences of the agreement. In the past, all
contracts were required to be under seal in order to be valid, but the seal has lost
some or all of its effect by statute in many jurisdictions. Recognition by the courts of
informal contracts, such as implied contracts, has also diminished the importance
and employment of formal contracts under seal.

v BILATERAL CONTRACT: When each party makes promise or set of promise in the
response of promise or set of promises made by the other party. A bilateral contract
is sometimes called a two-sided contract because two promises that constitute it.
The promise that one party makes constitutes sufficient consideration for or the
promise made by the other.16
For e.g.: A promises to pay Rs. 3 Lakh to B in response of his promise to deliver title of
her property.

v UNILATERAL CONTRACT: In this type of contract, only one party makes a promise.
The
unilateral contract involves a promise that is made by only one party. The offeror (i.e
. the person who makes a proposal) promises to do a certain thing if the offeree
performs a requested act that he or she knows is the basis of a legally enforceable
contract. The performance constitutes an acceptance of the offer, and the contract
then becomes executed.17
For e.g.: A person who has lost a dog could promise a reward if the dog is found,
through publication or orally. The payment could be additionally conditioned on the
dog being returned alive. Those who learn of the reward are not required to search

15 http://legal-dictionary.thefreedictionary.com/Elements+of+a+Contract
16 http://legal-dictionary.thefreedictionary.com/Elements+of+a+Contract
17 http://legal-dictionary.thefreedictionary.com/Elements+of+a+Contract

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for the dog, but if someone finds the dog and delivers it, the promisor is required to
pay.18

v IMPLIED CONTRACT: This type of contract the parties perform certain acts which
specifically suggest the existence of a contract. A contract implied in fact is not
expressed by the parties but, rather, suggested from facts and circumstances that
indicate a mutual intention to contract.
For e.g.: A visits a dentist for the pain in his tooth. The dentist cures his toothache. A
pays and leaves dentist’s premises. Here, the act of going to the dentist and treating
the problem is the act suggesting the making of the contract.

v VOID AND VOIDABLE CONTRACTS: Any contract that is void enforces no legal rights
or duties to any of the contracting parties. It is not at all enforceable by the court of
law. It would not be wrong in saying that it is no contract at all.
For e.g.: A contract made without the consent of parties.
A voidable contract though is enforceable lawfully, but it is not binding on the
parties due to some legitimate disability.
For e.g.: A contract made with the minor.

2.4 FORM OF CONTRACT

Contracts are generally in written W ritten contract ones are the ones which are
or oral form. properly written, complied and signed by the
parties whereas the oral contract is the one

where both the parties make a contract by

words but do not express it in writing. With some important

exceptions, it does not matter whether a contract is written or oral. If the basic elements

are present, an oral agreement is just as valid as a written agreement and enforceable in the

same ways.19 But, it is always better to have written contracts, as they are easy to be

proven in the court of law as compared to that of an oral contract.

A written agreement is written ceremoniously and signed by the contracting parties. All the
terms mentioned in the contract becomes lawfully binding on the parties. Prior to signing, a
written contract must20:

ü Be presented to and understood by all parties to be valid;

18 http://en.wikipedia.org/wiki/Contract
19 http://www.fangerlaw.com/understanding-contracts.php
20 http://toolkit.smallbiz.nsw.gov.au/part/5/35/165

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ü Be recognised by all parties as a contract, that is, it must look like a contract and not
simply a receipt or docket

Also, once a contract is signed, it is assumed that all the terms have been read and agreed
to.

As already mentioned, that oral contracts are tough to be proven in the court of law still it is
not an impossible task. The following are some ways in which verbal agreements can be
supported21:

Ø The conduct of the other party both before and after the agreement
Ø Specific actions of the other party
Ø Past dealings with the other party

In general, there is no requirement that a contract should be in writing. But there are some
contracts under the law which have to be mandatorily in writing by the law.

2.5 CONTRACTUAL TERMS OR TERMS OF A CONTRACT

Contractual terms are classified differently depending upon the context or jurisdiction.
Terms establish conditions precedent. English (but not necessarily non-English)
common law distinguishes between important conditions and warranties, with a
breach of a condition by one party allowing the other to repudiate and be discharged while
a warranty allows for remedies and damages but not complete discharge. In a less technical
sense, however, a condition is a generic term and a
warranty is a promise.22

The points clearly intend to define the rights, Every contract has some points which are
liabilities and duties of each party related to the the reasons for its existence. Each point
contract. There are many kinds of contract, and the deals with an explicit feature related to
subject matter for each one of it differs, therefore
the subject matter of the contract.

there can be no set format on which it can be based.

Every contract depends on the exact requirements of the parties. Every clause is tailor made

to suit their specific wants. But there are certain clauses which are there majorly in almost

every contract.

For the purpose of common clauses, a contract can be divided into three sections:

21 http://toolkit.smallbiz.nsw.gov.au/part/5/35/165
22 Gillies P. (1988). Concise Contract Law, p. 105. Federation Press.

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Like any other important document, the

SECTION 1: PREAMBLE preamble is the most important section of a
contract. It is like an introduction and gives a

bird’s eye view of the whole contract. It tells

about who are the parties entering into the agreement and why are they doing so? It

explains the purpose and scope of the contract and includes some most important details of

it.

These are the conditions which both the SECTION 2: TERMS OF THE CONTRACT
parties agree to and have to perform for
successful completion of the contract.
Some of the common conditions which are
found in almost every contract are:

ü NAMES OF THE PARTIES: Every contract has certain parties who promise each other
something. Thus, it becomes important to know who they are to avoid any
confusion. Therefore, the very first thing that the contract should have is the names
and full details, like address, there job portfolio etc., of the contracting parties.

ü CONDITIONS OF PERFORMANCE: This clause includes the mandatory terms which
the parties have to fulfil. Not fulfilment of these terms would result in a breach of
contract and the party at fault can be sued in the court of law for non-performance
or a breach of contract. It also mentions the “time of essence” i.e. the time frame in
which the terms have to be fulfilled.

ü LIABILITIES: Every contract gives certain rights to the parties. But as it is known that
every right comes with a duty. A duty to fulfil their responsibility with honesty. This
clause contains complete details of the legal obligations of the parties that they have
to comply with to avoid any kind of action against them.

ü JURISDICTION: In this clause the parties mutually submit themselves to a particular
jurisdiction. They agree on laws of a specific state according to which there contract
would be interpreted. In the case of any dispute, which forum would be chosen is
the main object of this clause. To be enforceable, they should not be in conflict with
the general requirements of the law.

ü REMEDIES FOR BREACH: This portion of the contract contains all the remedies that
the parties mutually agree to get at the time of a proven violation or breach of
contract. These can be compensation, injunction etc.

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ü LIMITATION CLAUSE: According to the law of the land, there is a fixed period for
filing of any case in the court of law. Therefore, this clause mentions the time frame
in which a lawsuit can be filed after a breach of contract or any other violation.

ü INTELLECTUAL PROPERTY CLAUSES: If the subject matter of the contract contains
anything that can be protected by intellectual property law i.e. trademarks,
copyrights, trade secrets or patents, then the contract should have a clause wherein
full details of the subject-matter is given and the kind of intellectual property it is.
Since, violation of IP is a different dispute altogether and is dealt with in completely
different manner.

ü CONFIDENTIALITY23: What is confidential, and what is not-confidential?

ü INDEMNIFICATION CLAUSE24: These agreements indemnify (release from liability) the
other party in the event that losses or expenses are incurred. These should be used
with caution, as they could limit the ability to recover damages for losses.

ü DISPUTE RESOLUTION CLAUSE: ADR stands for Alternate dispute resolution. It is a
speedy and quasi-judicial process of solving a dispute. If both the parties agree, then
in the case of a dispute it can be resolved through ADR methods like arbitration
rather than litigation.

ü DETAILS OF PAYMENT: If the contract requires any payment to be made by one party
to the other, then this clause becomes important as it will contain all the necessary
details, like where, when, on the fulfilment of which prerequisite condition etc., of
the payment to be made.

ü TERMINATION: If any party wants to cancel the contract at any point of time then,
they can do so under this clause. This clause mentions all the situations under which
a contract can be terminated or cancelled and also if this option is opted for then the
cost the terminating has to pay to legally end the contract.

ü SCOPE FOR REFORMATION: Reformation means rectification. Therefore, if at any
point of time there is any kind of time any party feels that something is lacking in the
contract or they want to add to delete something or revise the contract, then this
clause comes into play and it can be done after proper discussion with the other
party or parties.

23http://www.mondaq.com/india/x/193518/Contract+Law/Contract+Review+amp+Drafting+Rules+One+Shoul
d+Know
24 http://www.acquisition.gov/far/html/Subpart%2016_6.html#wp1080953

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ü REPRESENTATIONS & WARRANTIES CLAUSE: This clause is added to the agreement to
ensure that the rights, duties and obligations of parties under the contract are
adequately captured.

ü SURVIVABILITY CLAUSE: This clause is inserted into the agreement to capture the
intent of the parties as to which clauses would survive the termination/expiry of the
contract. Usually, the clauses that survive the expiry/termination of the agreement
are Confidentiality clauses, IP clauses, representations and warranties clause,
indemnification clauses. The other clauses that the parties would like to survive the
expiry/termination of the agreement should be expressly mentioned in the
agreement

SECTION 3: END This is the last section of the contract. The parties to the
contract put their signature here which tells that they
have properly read and understood the contract and
agree to each and every point and clause mentioned in it.

2.6 READ, WRITE AND UNDERSTAND CONTRACT

Contracts pervade our daily lives. When we buy food or clothing we are under
contract, when we buy a home and have gas, electricity, and water furnished to the
house, we sign separate contracts. When we marry, we enter into a contract. When
we write a cheque we act under a contract with our bank to honour the cheque, and the
cheque itself may fulfil our obligation under another contract. When we go to the doctor or
dentist, we act under contracts. We earn our livelihood under contract. The daily business of
not only our households, but of the world, is conducted under a series of contracts.

2.6.1 DRAFTING A CONTRACT

Writing a contract is an art. It is a step by step process. It should be done with great
amount of care and caution. Drafting comes with huge responsibility since
everything that is important and related to the agreement is dependent on the final
written draft presented in the form of written contract. While writing the contract
the writer should keep in mind following points:

v To start with it is good to make a complete outline structure of the contract.
The first step should be determining the scope of the contract and how
important is it?

v Simple English should be used. Avoid jargons.
v There should be clarity in writing. Be precise (accurate, complete and, exact),

specific, and focused.

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v Sequence logically by a chronology of events.25
v Terms of contract should not be drafted vaguely. It should appear to be free

of ambiguity and uncertainty.
v Think from the reader’s point of view while writing the contract.

Terms of contract should be reasonable and capable of performance. It should not
be an impossible act. To decide the possibility certain question that would be helpful
can be26:

þ ARE ALL THE CONDITIONS POSSIBLE FOR YOUR ORGANIZATION - I.E. CAN YOU CARRY
THEM OUT AS DESCRIBED IN THE CONTRACT? CAN YOU DO IT IN THE TIME SPECIFIED, FOR
INSTANCE?

þ IS ANYTHING IN THE CONTRACT DANGEROUS TO THE FUNCTIONING OR THE LIFE OF YOUR
ORGANIZATION? WILL IT COST YOU MONEY YOU DON'T HAVE? DOES IT PUT YOU IN
CONFLICT WITH THE PRINCIPLES OF YOUR ORGANIZATION, OR REQUIRE YOU TO USE A
METHOD YOU DON'T BELIEVE IN?

þ ARE THE RESOURCES SPECIFIED IN THE CONTRACT - FUNDING OR OTHERWISE - ADEQUATE
FOR YOU TO BE ABLE TO DO THE WORK? IS COMPENSATION ADEQUATE TO PAY FOR
EVERYTHING YOU HAVE TO DO? IF YOU HAVE TO SPEND THE MONEY FIRST, THEN SUBMIT
A BILL TO BE REIMBURSED, CAN YOU HANDLE THE CASH FLOW?

þ ARE THERE PROTECTIONS WRITTEN IN FOR YOU, AS WELL AS FOR THE FUNDER, IN THE
CASE OF DISAGREEMENT, OR CHARGES OF VIOLATING THE CONTRACT?

þ ARE THE RESTRICTIONS AND REGULATIONS, IF THERE ARE ANY, REASONABLE AND NOT
DISRUPTIVE TO THE OVERALL OPERATION OF YOUR ORGANIZATION? ARE THERE LIMITS
ON WHOM YOU CAN SERVE, FOR INSTANCE, THAT WOULD MAKE OTHER PARTS OF YOUR
WORK DIFFICULT?

þ IS ANYTHING IN THE CONTRACT DIFFERENT FROM WHAT YOU'VE BEEN TOLD
PREVIOUSLY?

þ THE LENGTH OF CONTRACT SHOULD NOT BE A MATTER OF CONCERN. IT CAN BE LONG OR
SHORT. RATHER IT SHOULD BE OF A REASONABLE LENGTH AS IT’S THE CONTENT THAT
MATTERS.

þ THE TIME LIMIT OF THE EXISTENCE OF THE CONTRACT SHOULD BE STATED CLEARLY.
þ THE OBLIGATIONS OF THE PARTIES SHOULD BE EXPLAINED CLEARLY AND HOW THEIR

PERFORMANCE IS EVALUATED. ALSO, WHAT WILL HAPPEN IF ANY PARTY FAILS TO
DELIVER WHAT IT HAS AGREED TO?

2.6.2 READING AND UNDERSTANDING

A contract is read, understood and interpreted as a whole and not in parts. Generally,
the meaning of a contract is determined by looking at the intentions of the parties at

25 http://www.con-tracts.com/id29.html
26 http://ctb.ku.edu/en//tablecontents/sub_section_main_1873.htm

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the time of the contract’s creation. When the intention of the parties is unclear,
courts look to any custom and usage in a particular business and in a particular locale
that might help determine the intention.27
It becomes important to read a contract and understand it before signing it. Because
once it is signed the person is bound by it. Therefore, it is important to know what
exactly is mentioned in it. Some points that can be helpful in understanding the
contract are:

ü To start with it is good to get a draft copy, a quiet place and a pencil. So that
the possibility of making mistakes or skipping a term is diminished to the
minimum.

ü Read each and every word clearly.
ü Get explanations from a writer or the attorney in case any point is not

understood rather than misinterpreting it.
ü Make sure that all the points are acceptable.
ü If any point is mentioned which is unacceptable then discuss and negotiate

that point with the other party and make changes accordingly.
ü Performance must be read and understood undoubtedly. As this is something

that the parties are bound to do and decides there liability.
ü Be sure of the time limit of the existence of the contract and the limitation

for filing a lawsuit in the case of a dispute.
ü Finally after signing it make sure that both the parties have a copy of contract

each.

27 http://jec.unm.edu/education/online-training/contract-law-tutorial/contract-fundamentals-part-2
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