Posted On: September 26, 2022

RELEVANCE OF CONTRACTS FOR CORPORATES

RELEVANCE OF CONTRACTS FOR CORPORATES

Before the word “contract” originated there were agreements between people. People were held personally liable in case of a breach. But today as majority of corporates have legal entities in the form of partnerships, LLPs, private limited company, the need for contracts has been felt more than ever.

A contract is a formal document, accepted by both parties. A contract is a written agreement between two parties that basically lays down the terms of a transaction. In a business, it generally states the work that will be performed, along with important information like due dates and costs. Contracts are a vital part of building relationships and completing business transactions.

A Contract is when both parties are legally compelled to do or refrain from performing specified responsibilities as agreed upon. This term is frequently used to denote any form of transaction, including sales, services, the transfer of property ownership, or a combination of operations. As per the Indian law of contracts, Contracts are basically agreements enforceable by law. Knowledgentia Consultants is one of the best corporate international law firm in India, providing all services relating to contract, agreement drafting for various kinds of organisations and entities.

RELEVANCE OF CONTRACTS FOR CORPORATES
Today, contracts are the main source of revenue and relationship building for any organization. Contracts in business provide better visibility to meet the duties and achieve the objectives as agreed between the parties for a consideration. A contract formally establishes a relationship between two parties who want to enter into a formal agreement and outline their responsibilities and rights under the agreement. Parties to a contract are compelled to fulfil the terms stipulated therein. It serves as a great support for building a good rapport with the customer or the desired party.

CHARACTERISTICS OF A GOOD CONTRACT –
A contract is the foundation on which a corporates relation is established. They serve as a record of commitments for both parties. It is the most fundamental document that an organisation relies upon to establish contractual obligation. If someone breaks a contract, they are liable to face legal consequences.

A contract should have the following characteristics –

  1. Clear in words
  2. Unambiguous
  3. Elaborate
  4. Flexible
  5. Relatable and pervasive
  6. Should contain all essential clauses to avoid scope for doubts, arguments or disputes

BENEFITS OF CONTRACTS FOR CORPORATES

  1. Proof of Details
    The prime purpose of creating a contract is to record details, which both parties have agreed with mutual consent. It provides a precise knowledge of the services provided by the third party or monetary expectations to be met during the course of a business. These details later on serve as legitimate proof and are very important in a contract.
  2. Avoids Misunderstanding
    To avoid such cases of misunderstandings, drafting a contract is important and it is required for both parties to read the consented rules and abide by them. It has a large impact on the corporates as breaching the contract rules can lead to conflicts between the parties and thereby affect the corporates overall.
  3. Provides Security
    A contract document plays a pivotal role in making the parties secure as it clearly specifies the tenure of the contract and set of responsibilities. Here, an employer is lawfully responsible to pay the committed salary on time and the employee is responsible to perform his duties as designated. The contract can act as legal evidence if any of the party files a case against the other.
  4. Provides Confidentiality
    Contractual terms between the parties can also put an obligation to not to reveal confidential business information to third parties.
  5. Acts as a Record of the Corporates
    A written contract is a relevant record which provides more clarity regarding the termination details and other aspects. However, the contract may be terminated in the worst case if the other party is not fulfilling the rules mentioned in the contract or bypassing the terms.

CASE LAWS

  1. The Supreme Court in Kailash Nath Associates v. Delhi Development Authority and Another (2015), observed that, wherein a contract has provisions for liquidated damages, such amount can be received in totality only if the number of damages suffered by the aggrieved party is similar to such pre-established amount of damages. The court further observed that the quantum of damages awarded by the court should at no point exceed the amount mention in the contract in the form of liquidated damages.
  2. In Haryana Telecom Ltd. v. Union of India (2006), when a contractor delayed in supplying cables requiring the Government to purchase the same from other sources, subsequently procuring it at cheaper rates, the award of the arbitrator providing damages for breach was set aside as no loss was caused. Wherein the court finds it difficult to ascertain the quantum of damages to be awarded in liquidated damages, the aggrieved party has to prove losses suffered as a result of contractual breach. Once such loss is proved, the court grants reasonable compensation.
  3. In the case of M/s. Herbicides (India) Ltd. v. M/s. Shashank Pesticides P. Ltd (2011), the court held in case of liquidated damages that “… even if it does not prove the actual loss/damage suffered by it, is entitled to reasonable damages unless it is proved that no loss or damage was caused on account of breach of the contract”
  4. The Supreme Court in Steel Authority of India Limited v. Gupta Brother Steel Tubes Limited (2009) recognised the ambiguity in liquidated damages wherein the contract doesn’t specifically provide for all breaches of contract. The court observed that –”We are not aware of any principle that once the provision of liquidated damages has been made in the contract, in the event of breach by one of the parties, such clause has to be read covering all types of breaches although parties may not have intended and provided for compensation in express terms for all types of breaches.

    Section 73 of the Act incorporates two rules laid down in Hadley & Anor v Baxendale & Ors, (1854). Firstly, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself; and secondly, such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.

  5. The Supreme Court in N. Gangappa v. Atmakur Nagabhushanam Shetty & Co. and Anr., (AIR 1972 SC 696) has observed that in absence of a strict procedure for calculation of damages arising out of breach of contract, damages would be calculated based on the facts and circumstances of each case.
  6. The Supreme Court in T. Brij Paul Singh v. State of Gujarat (1984) has observed in this light that “commercially, works contracts are entered into for the purpose of earning profits and the party committing the breach of the contract would therefore be liable to compensate the affected party for their expected loss of profit.” While adjudicating the case, the court for the very first time relied upon Hudson’s Building and Engineering Contracts that states, “in major contracts subject to competitive tender on a national basis, the evidence given in litigation on many occasions suggests that the head office overheads and profits is between 3 to 7 per cent of the total price of cost”. Further, the court observed that it is not necessary to dive deep into the minute details of the project for adjudicating claims of loss of profit, rather a broad evaluation would be sufficient.
  7. The Delhi High Court in M/s Halliburton Offshore Services Inc v. Vedanta Limited (2020) held that, any violation or non-performance could not be justified or excused solely because Covid-19 was invoked as a force majeure scenario; instead, the Court would have to consider whether the party was taking all possible actions to comply with its contractual obligations and was actually unable to perform due to the pandemic.

CONCLUSION
The above reasons make contracts inevitable for small-scale businesses as well as corporates to keep their information secure. Besides, it can safeguard employees when employers refuse to abide by the contract rules by giving false commitments to employees and misleading them. In this era, the importance of contracts in corporates needs to be understood. However, drafting a contract agreement, taking into account all these factors is a challenging and time-consuming process. So, it is advised to seek the help of an expert law attorney to help you through the process. Knowledgentia Consultants has earned a name as one of the most client focused firm in India providing contract drafting services. We are your one-stop solution for all kinds of legal, compliance and supplemental matters .In case of any query regarding this matter you may email us at info@knowledgentia.com or visit our website –https://knowledgentia.com/.

Aparna Jain
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