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MODULE - 2
PURPOSE AND FORM
“Until the contract is signed, nothing is real” Not all agreements are necessarily contractual, as
the parties generally must have an intention to be
- Glenn Danzig legally bound. In American English, a gentlemen's
Contract law can be classified, as is habitual in civil agreement is one which is not intended to be
law systems, as part of a general law of obligations, legally enforceable; the equivalent concept can be
along with tort, unjust enrichment, and restitution. expressed an agreement "binding in honour only."
The common law of contract originated with the
writ of assumpsit, which was originally in American law, it was determined in the 1901 case
a tort action based on reliance.1 of Hurley v. Eddingfield that a physician was
permitted to deny treatment to a patient despite
Contract law is based on the principle ‘pacta sunt the lack of other available medical assistance and
servanda’, which literally means "pacts must be the patient's subsequent death.2 This is in contrast
to the civil law, which typically applies certain
kept". overarching principles to disputes arising out of
contract, as in the French Civil Code. Other legal
Jurisdictions vary in their principles of freedom of systems such as Islamic law, socialist legal systems,
contract. In common law jurisdictions such and customary law have their own variations.
as England and Wales and the United States, a high
degree of freedom is expected. For example,
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.
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However in the case of the United States, the States struck down economic regulations on the
principle of freedom of contract has eroded over basis of freedom of contract and the Due Process
time due to judicial deference to legislation Clause; these decisions were eventually overturned
affecting contracts.3 For example, the Civil Rights and the Supreme Court established a deference to
Act of 1964 restricted private racial discrimination legislative statutes and regulations which restrict
against African-Americans.4 In the early 20th freedom of contract.5 The U.S. Constitution contains
century the United States underwent the "Lochner a Contract Clause, but this has been interpreted as
era", in which the Supreme Court of the United only restricting the retroactive impairment of
2.2 CONTRACT MEANING
If anyone (be it the parties to the þ DOES THE DOCUMENT INCLUDE POINTS WHEREIN IT
contract/lawyer/manager) is shown a document
and asked whether it is a contract on not? He/she IS MENTIONED THAT IF THE POINTS MENTIONED IN
would check few things:
1 ARE NOT FULFILLED WHAT WILL HAPPEN?
þ ARE ALL THE POINTS OF BUSINESS OR THE POINTS
þ DOES THE DOCUMENT CREATE ANY KIND OF
NECESSARY FOR THEIR FORMAL RELATIONSHIP RIGHT/OBLIGATIONS FOR HIM/HER?
INCLUDED ON NOT? þ IS IT SIGNED BY BOTH THE PARTIES?
If the answer to all the above questions is þ IS THE DOCUMENT ON STAMP PAPER?
yes, the person will immediately recognize
the document as a contract. A contract is a promises are legally binding upon the
pact or promise between two or more parties.
persons, that the conditions mentioned in Legally it can be defined as a voluntary,
the document would be fulfilled and these deliberate and legally binding agreement
between two or more competent parties is
known as contract.7 It is an agreement that
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.
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.
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creates obligations which are enforceable by
2.3 CONTRACTUAL RELATIONSHIP
As both the parties sign the contract they get some induces them to make the promise/contract.8
duties and rights corresponding to the duties and Consideration is the value that induces the
parties to enter into the contract.
rights of the other party. Both the parties now
become legitimately bound by a contractual For e.g.: if A promises to B to give him a
Ferrari on receiving payment of Rs.1 Cr.
relationship Herein, the payment is the valid
consideration. Whereas, if A promises to gift
For the contractual relationship to come into B a Ferrari on his 25th birthday does not
existence there are some basic elements which have require any consideration and is not a
to be fulfilled: contract. Because, the personal satisfaction
the grantor of the promise may receive from
Ø Consideration the act of giving is normally not considered
Ø Common acceptance adequate consideration.9
Ø Consent Courts will typically not weigh the "adequacy" of
Ø Authenticity consideration as long as the consideration is
Ø Intention determined to be "sufficient", with sufficiency
defined as meeting the test of law, whereas
CONSIDERATION: Consideration can be "adequacy" is the subjective fairness or equivalence.
understood as a benefit or detriment which a For instance, agreeing to sell a car for a penny may
party receives which reasonably and fairly
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constitute a binding contract if a party desires the CAPACITY: Capacity can be understood as a
penny.10 person’s legal ability to enter into a contract. The
parties making the contract must be legally
COMMON ACCEPTANCE: The most important competent in the sense that each must be of the age
criteria of a contract is the mutual assent between of majority, of a sound mind, and not expressly
the contracting parties. The question here arises disqualified from contracting.12 According to Indian
how will this position be reached? The answer is contract law, lunatic person, a person under the age
simple; it can be reached through offer and of 18, an insolvent person cannot enter into a
acceptance. If one party offers something and the contract. Any contracts that are made by persons
second party accepts that offer, then the situation who are lacking in legal capacity are voidable.
of the meeting of minds arises and these criteria is
fulfilled. For e.g.: A 16 year girl decides to sell her property for
Rs. 3 lakh. The other party not knowing her correct
For e.g.: A offers to sell his car for Rs. 70,000. age buys the property from her and pays her the
B accepts the offer and pays the money and money. In this case, though all the other elements
buys the car. Herein, A made an offer which are met, may not be sufficient to form a legally
B accepted. Hence, the mutual consent of binding contract.
parties is shown.
CONSENT13: The contracting parties must give their
Meeting of minds means the parties consent freely. 'Consent' means that the parties
understood and agreed to the basic substance must agree about the subject matter of the
and terms of the contract.11 Mutual Assent agreement in the same sense and at the same time.
requires the presence of the following factors: Consent is said to be free if it is not induced by
coercion, undue influence, fraud, misrepresentation
Ø Both parties must exhibit a “contractual or mistake. The absence of free consent would
intent” affect the legal enforceability of a contract.
Ø The terms of the offer must be clear and AUTHENTICITY: The motive of the contract should
definite be lawful. It should be a legally valid i.e. according
Ø The acceptance must be clearly
10 Chappell & Co Ltd v. Nestle Co Ltd  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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to the laws of the jurisdiction. An agreement is will be able to sue the other party if that party does
unlawful, if it is:- not fulfil the contractual provisions, and vice versa.
Ø illegal This presumption can only be rejected if the parties
Ø immoral expressly state that they do not intend to make a
Ø fraudulent legally binding contract. Sometimes you may see the
words "subject to contract" printed on a document.
o of a nature that, if permitted, it would These words have the legal meaning that the
defeat the provisions of any law document is not a contract and that all of the
contents will be bound by a subsequent contract (if
o causes injury to the person or property the parties sign that contract). A party that is acting
of another “subject to contract” can withdraw from the
negotiation at any time before the contract is
o opposed to public policy concluded. In the case of dispute, the burden of
proof that the intention was to create a binding
INTENTION14: It is generally presumed that in a contract rests on the person who wishes to rely on
commercial transaction, the contracting parties the contract.
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
There are different types of contract: symbol of the solemn acceptance of the legal
effect and consequences of the agreement.
v CONTRACTS UNDER SEAL15: Traditionally, a In the past, all contracts were required to be
contract was an enforceable legal under seal in order to be valid, but the seal
document only if it was stamped with a has lost some or all of its effect by statute in
seal. The seal represented that the parties many jurisdictions. Recognition by the courts
intended the agreement to entail legal of informal contracts, such as implied
consequences. No legal benefit or detriment contracts, has also diminished the
to any party was required, as the seal was a
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importance and employment of formal publication or orally. The payment could be
contracts under seal. additionally conditioned on the dog being
returned alive. Those who learn of the
v BILATERAL CONTRACT: When each party reward are not required to search for the
makes promise or set of promise in the dog, but if someone finds the dog and
response of promise or set of promises made delivers it, the promisor is required to pay.18
by the other party. A bilateral contract is
sometimes called a two-sided contract v IMPLIED CONTRACT: This type of contract
because two promises that constitute it. the parties perform certain acts which
The promise that one party specifically suggest the existence of a
makes constitutes sufficient consideration contract. A contract implied in fact is not
for or the promise made by the other.16 expressed by the parties but, rather,
For e.g.: A promises to pay Rs. 3 Lakh to B in suggested from facts and circumstances that
response of his promise to deliver title of her indicate a mutual intention to contract.
property. For e.g.: A visits a dentist for the pain in his
tooth. The dentist cures his toothache. A
v UNILATERAL CONTRACT: In this type of pays and leaves dentist’s premises. Here, the
contract, only one party makes a promise. act of going to the dentist and treating the
The problem is the act suggesting the making of
unilateral contract involves a promise that i the contract.
s made by only one party. The offeror (i.e.
the person who makes a proposal) promises v VOID AND VOIDABLE CONTRACTS: Any
to do a certain thing if the offeree performs contract that is void enforces no legal rights
a requested act that he or she knows is the or duties to any of the contracting parties.
basis of a legally enforceable contract. The It is not at all enforceable by the court of law.
performance constitutes an acceptance of It would not be wrong in saying that it is no
the offer, and the contract then becomes contract at all.
executed.17 For e.g.: A contract made without the
consent of parties.
For e.g.: A person who has lost a dog could
promise a reward if the dog is found, through
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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.
2.5 FORM OF CONTRACT
Contracts are generally in written or oral form. on the parties. Prior to signing, a written contract
Written contract ones are the ones which are
properly written, complied and signed by the parties ü Be presented to and understood by all
whereas the oral contract is the one where both the parties to be valid;
parties make a contract by words but do not express
it in writing. With some important exceptions, it ü Be recognized by all parties as a contract,
does not matter whether a contract is written or that is, it must look like a contract and not
oral. If the basic elements are present, an oral simply a receipt or docket
agreement is just as valid as a written agreement Also, once a contract is signed, it is assumed that all
and enforceable in the same ways.19 But, it is the terms have been read and agreed to.
always better to have written contracts, as they are
easy to be proven in the court of law as compared As already mentioned, that oral contracts are tough
to that of an oral contract. to be proven in the court of law still it is not an
impossible task. The following are some ways in
A written agreement is written ceremoniously and which verbal agreements can be supported21:
signed by the contracting parties. All the terms
mentioned in the contract becomes lawfully binding Ø The conduct of the other party both before
and after the agreement
20 http://toolkit.smallbiz.nsw.gov.au/part/5/35/165 Ø Specific actions of the other party
21 http://toolkit.smallbiz.nsw.gov.au/part/5/35/165 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
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under the law which have to be mandatorily in
writing by the law.
2.6 CONTRACTUAL TERMS OR
TERMS OF A CONTRACT
Every contract has some points which are the SECTION 1: PREAMBLE
reasons for its existence. Each point deals with an
Every contract depends on the exact requirements
explicit feature related to the subject matter of of the parties. Every clause is tailor made to suit their
the contract. specific wants. But there are certain clauses which
are there majorly in almost every contract.
Contractual terms are classified differently
depending upon the context or jurisdiction. Terms For the purpose of common clauses, a contract can
establish conditions precedent. English (but not be divided into three sections:
necessarily non-English) common law distinguishes
between important conditions and warranties, with Like any other important document, the preamble is
a breach of a condition by one party allowing the the most important section of a contract. It is like an
other to repudiate and be discharged while a introduction and gives a bird’s eye view of the
warranty allows for remedies and damages but not whole contract. It tells about who are the parties
complete discharge. In a less technical sense, entering into the agreement and why are they doing
however, a condition is a generic term and a so? It explains the purpose and scope of the contract
warranty is a promise.22 and includes some most important details of it.
The points clearly intend to define the rights, SECTION 2: TERMS OF THE CONTRACT
liabilities and duties of each party related to the
contract. There are many kinds of contract, and the These are the conditions which both the parties
subject matter for each one of it differs, therefore agree to and have to perform for successful
there can be no set format on which it can be based.
22 Gillies P. (1988). Concise Contract Law, p. 105. Federation Press.
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completion of the contract. Some of the common state according to which their contract
conditions which are found in almost every contract would be interpreted. In the case of any
are: dispute, which forum would be chosen is the
main object of this clause. To be
ü NAMES OF THE PARTIES: Every contract has enforceable, they should not be in conflict
certain parties who promise each other with the general requirements of the law.
something. Thus, it becomes important to
know who they are to avoid any confusion. ü REMEDIES FOR BREACH: This portion of the
Therefore, the very first thing that the contract contains all the remedies that the
contract should have is the names and full parties mutually agree to get at the time of a
details, like address, there job portfolio etc., proven violation or breach of contract. These
of the contracting parties. can be compensation, injunction etc.
ü CONDITIONS OF PERFORMANCE: This clause ü LIMITATION CLAUSE: According to the law of
includes the mandatory terms which the the land, there is a fixed period for filing of
parties have to fulfil. Not fulfilment of these any case in the court of law. Therefore, this
terms would result in a breach of contract clause mentions the time frame in which a
and the party at fault can be sued in the lawsuit can be filed after a breach of contract
court of law for non-performance or a or any other violation.
breach of contract. It also mentions the
“time of essence” i.e. the time frame in ü INTELLECTUAL PROPERTY CLAUSES: If the
which the terms have to be fulfilled. subject matter of the contract contains
anything that can be protected by
ü LIABILITIES: Every contract gives certain intellectual property law i.e. trademarks,
rights to the parties. But as it is known that copyrights, trade secrets or patents, then
every right comes with a duty. A duty to fulfil the contract should have a clause wherein
their responsibility with honesty. This clause full details of the subject-matter is given and
contains complete details of the legal the kind of intellectual property it is. Since,
obligations of the parties that they have to violation of IP is a different dispute
comply with to avoid any kind of action altogether and is dealt with in completely
against them. different manner.
ü JURISDICTION: In this clause the parties
mutually submit themselves to a particular
jurisdiction. They agree on laws of a specific
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ü CONFIDENTIALITY23: What is confidential, mentions all the situations under which a
and what is not-confidential? contract can be terminated or cancelled and
also if this option is opted for then the cost
ü INDEMNIFICATION CLAUSE24: These the terminating has to pay to legally end the
agreements indemnify (release from contract.
liability) the other party in the event that
losses or expenses are incurred. These ü SCOPE FOR REFORMATION: Reformation
should be used with caution, as they could means rectification. Therefore, if at any
limit the ability to recover damages for point of time there is any kind of time any
losses. party feels that something is lacking in the
contract or they want to add to delete
ü DISPUTE RESOLUTION CLAUSE: ADR stands something or revise the contract, then this
for Alternate dispute resolution. It is a clause comes into play and it can be done
speedy and quasi-judicial process of solving after proper discussion with the other party
a dispute. If both the parties agree, then in or parties.
the case of a dispute it can be resolved
through ADR methods like arbitration rather ü REPRESENTATIONS & WARRANTIES CLAUSE:
than litigation. This clause is added to the agreement to
ensure that the rights, duties and obligations
ü DETAILS OF PAYMENT: If the contract of parties under the contract are adequately
requires any payment to be made by one captured.
party to the other, then this clause becomes
important as it will contain all the necessary ü SURVIVABILITY CLAUSE: This clause is
details, like where, when, on the fulfilment inserted into the agreement to capture the
of which prerequisite condition etc., of the intent of the parties as to which clauses
payment to be made. would survive the termination/expiry of the
contract. Usually, the clauses that survive
ü TERMINATION: If any party wants to cancel the expiry/termination of the agreement are
the contract at any point of time then, they Confidentiality clauses, IP clauses,
can do so under this clause. This clause
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ü representations and warranties clause, SECTION 3: END
indemnification clauses. The other clauses
that the parties would like to survive the This is the last section of the contract. The parties to
expiry/termination of the agreement should the contract put their signature here which tells that
be expressly mentioned in the agreement they have properly read and understood the
contract and agree to each and every point and
clause mentioned in it.
2.7 READ, WRITE AND
Contracts pervade our daily lives. When we buy food 2.6.1 DRAFTING A CONTRACT
or clothing we are under contract, when we buy a
home and have gas, electricity, and water furnished Writing a contract is an art. It is a step by step
to the house, we sign separate contracts. When we process. It should be done with great amount of care
and caution. Drafting comes with huge
marry, we enter into a contract. When we write a responsibility since everything that is important and
check, we act under a contract with our bank to related to the agreement is dependent on the final
honour the check, and the check itself may fulfil our written draft presented in the form of written
obligation under another contract. When we go to contract. While writing the contract the writer
the doctor or dentist, we act under contracts. We should keep in mind following points:
earn our livelihood under contract. The daily
business of not only our households, but of the v To start with it is good to make a complete
world, is conducted under a series of contracts. 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.
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v There should be clarity in writing. Be precise þ ARE THERE PROTECTIONS WRITTEN IN FOR YOU, AS
(accurate, complete and, exact), specific, and WELL AS FOR THE FUNDER, IN THE CASE OF
focused. DISAGREEMENT, OR CHARGES OF VIOLATING THE
v Sequence logically by a chronology of events.25
v Terms of contract should not be drafted vaguely. þ ARE THE RESTRICTIONS AND REGULATIONS, IF THERE
ARE ANY, REASONABLE AND NOT DISRUPTIVE TO THE
It should appear to be free of ambiguity and OVERALL OPERATION OF YOUR ORGANIZATION? ARE
uncertainty. THERE LIMITS ON WHOM YOU CAN SERVE, FOR
v Think from the reader’s point of view while INSTANCE, THAT WOULD MAKE OTHER PARTS OF YOUR
writing the contract. WORK DIFFICULT?
Terms of contract should be reasonable and capable þ IS ANYTHING IN THE CONTRACT DIFFERENT FROM WHAT
of performance. It should not be an impossible act. YOU'VE BEEN TOLD PREVIOUSLY?
To decide the possibility certain question that would
be helpful can be26: þ THE LENGTH OF CONTRACT SHOULD NOT BE A MATTER
OF CONCERN. IT CAN BE LONG OR SHORT. RATHER IT
þ ARE ALL THE CONDITIONS POSSIBLE FOR YOUR SHOULD BE OF A REASONABLE LENGTH AS IT’S THE
ORGANIZATION - I.E. CAN YOU CARRY THEM OUT AS CONTENT THAT MATTERS.
DESCRIBED IN THE CONTRACT? CAN YOU DO IT IN THE
TIME SPECIFIED, FOR INSTANCE? þ THE TIME LIMIT OF THE EXISTENCE OF THE CONTRACT
SHOULD BE STATED CLEARLY.
þ IS ANYTHING IN THE CONTRACT DANGEROUS TO THE
þ THE OBLIGATIONS OF THE PARTIES SHOULD BE
FUNCTIONING OR THE LIFE OF YOUR
EXPLAINED CLEARLY AND HOW THEIR PERFORMANCE IS
ORGANIZATION? WILL IT COST YOU MONEY YOU DON'T
HAVE? DOES IT PUT YOU IN CONFLICT WITH THE EVALUATED. ALSO, WHAT WILL HAPPEN IF ANY PARTY
PRINCIPLES OF YOUR ORGANIZATION, OR REQUIRE YOU FAILS TO DELIVER WHAT IT HAS AGREED TO?
TO USE A METHOD YOU DON'T BELIEVE IN?
þ ARE THE RESOURCES SPECIFIED IN THE CONTRACT - 2.6.2 READING AND UNDERSTANDING
FUNDING OR OTHERWISE - ADEQUATE FOR YOU TO BE
ABLE TO DO THE WORK? IS COMPENSATION ADEQUATE A contract is read, understood and interpreted as a
TO PAY FOR EVERYTHING YOU HAVE TO DO? IF YOU whole and not in parts. Generally, the meaning of a
HAVE TO SPEND THE MONEY FIRST, THEN SUBMIT A BILL contract is determined by looking at the intentions
TO BE REIMBURSED, CAN YOU HANDLE THE CASH FLOW? of the parties at 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
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business and in a particular locale that might help ü Get explanations from a writer or the attorney
determine the intention.27 in case any point is not understood rather than
It becomes important to read a contract and
understand it before signing it. Because once it is ü Make sure that all the points are acceptable.
signed the person is bound by it. Therefore, it is ü If any point is mentioned which is unacceptable
important to know what exactly is mentioned in it.
Some points that can be helpful in understanding then discuss and negotiate that point with the
the contract are: other party and make changes accordingly.
ü Performance must be read and understood
ü To start with it is good to get a draft copy, a quiet undoubtedly. As this is something that the
place and a pencil. So that the possibility of parties are bound to do and decides their
making mistakes or skipping a term is liability.
diminished to the minimum. ü Be sure of the time limit of the existence of the
contract and the limitation for filing a lawsuit in
ü Read each and every word clearly. the case of a dispute.
ü Finally, after signing it make sure that both the
parties have a copy of contract each.
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