In this remote working era, things are changing rapidly. Signing a contract or agreement is now a part of any person’s day-to-day life, be it entrepreneur, laymen, businessman or an internet user. Contracts are now central to any business and required explicit negotiation and execution to conclude a successful deal. An error in a contract can be expensive. Hence we have created a simple list of standard clauses an ideal contract should always have:
- Parties to the contract – In today’s cross-cultural business environment, the parties’ clear description and identification are essential. Description of parties includes the complete name and registered address of the parties. Description of parties also clarifies that the contract is extended to the legal heirs, successors or representatives.
- Scope of contract- Scope of contract tells the background and purpose of the contract. Scope plays a vital role in a contract for introducing the nature of the contract, background of contract, the background of parties, parties’ intension, and contribution to the contract. The standard method of drafting scope usually starts with “Whereas”.
- Consideration- The consideration of the contract is another essential clause that should be written explicitly in any contract.
- Payment terms and taxes- Good negotiation and drafting of commercials play an essential part in any contract. Even most of the time, these are the subject matter of disputes between the parties. Payment will be in advance or on credit must be mentioned in a contract. A penalty clause should be added to avoid any dispute. Whether prices are inclusive of taxes or exclusive of taxes. Who will be responsible for paying the taxes must be mentioned in a contract.
- Term and Termination- Like all humans have their age, all contracts should also have their age. This means all agreements should have their validity period. Term clause defines the period during which agreement is effective. The termination clause defines the circumstances under which parties can terminate or end the agreement. A contract can be terminated for the convenience of parties as well.
- Confidentiality- While performing any contract or agreement, parties share their confidential information. In such kind of situations protection of confidential information become crucial. This clause is a legally binding clause in which parties guarantee not to disclose confidential, proprietary, secret information without valid authorisation.
- Indemnity – Indemnity refers to the compensation for loss or damage from the actions of another party. Indemnity falls under those major clauses which usually intensely debated by parties during the contract negotiation. A bad indemnity clause can result in severe consequences. An indemnity clause plays a vital role in managing the risk associate with the contract. An indemnity clause is a contractual transfer of risk and a provision in a contract under which one party commit to compensate the other for any harm, liability or loss arising out of the contract.
- Liability- The liability clause defines the liabilities of parties to the contract. Like indemnity clause, correct negotiation and drafting of liability clause help to mitigate the risk associate with the contract. Whether the liability of any party will be limited or unlimited, parties will also cover all indirect and consequential damages for compensation are some of the crucial points determined during the negotiation of this clause. The liability clause determines the financial liability of parties. This clause stipulates a certain sum of money that is to be paid when the contract is breached.
- Dispute resolution- The dispute resolution clause defines the process to resolve the dispute between the parties that occurred due to the contract. This clause decides whether dispute resolution will take place through litigation or arbitration. Before proceeding toward any court or judicial authority, in how many days parties will try to settle the dispute by mutual discussion. If parties choose to arbitration over litigation, then the applicable rules, i.e. Singapore, India, London etc., must be mentioned in the contract. The place and language of arbitration must be mentioned.
- Governing laws and jurisdiction- Every country has their governing laws. Even in India, various laws are the subject matter of State and varies from State to State. In such situation-appropriate drafting of governing law and jurisdiction clause plays an important role. Governing law set out the legal framework on which the contract will work, and parties will perform their obligations to the contract. To choose the governing law is at the discretion of parties, but parties cannot select any governing law with no nexus with the transaction. Along with governing law, jurisdiction must also be State in the contract.
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Happy Reading!
