Category: Contracts

Dear Readers,

In previous posts we discussed the meaning and definition of Contract, Agreement and Consideration. Subsequent posts briefly touched Contracts Laws and Principles. To read last posts again, please click on link below;

http://www.rkstrainings.com/contract-principles-equity-justice-and-reasonableness/

In this post, let us discuss Contract Life Cycle and its 4 distinct stages as mentioned below

A) Stage 1 of Contract Life Cycle – Identifying Contract Objectives

This is first stage of Contract Life Cycle. This deals with WHY to enter into a contract and WHAT is the purpose of signing a binding agreement. This stage addresses questions such as: what a person want or desire to have. Accordingly, this want or need, when worded in the form of a statement, becomes the purpose or goal to achieve. Subsequently, the purpose emerges into clearly defined and measurable requirements called objectives. Accordingly, Contract Life Cycle starts when a person has certain need or desire and he wishes to fulfil the same

Let us illustrate the above with a simple example

Let us assume Raj wants to see his house painted before Diwali and Diwali falls 90 days from now. Therefore, Raj’s need or purpose is to get the house painted within next 90 days. In order to achieve the purpose, Raj needs to find out the followings

1. Detailed Scope for Painting Work (work items / quantities)
2. Paint specifications, manufacturer & color and application requirements
3. Amount of money he want to spend
4. Time available to plan and execute the Work

From the above, we see that the purpose of having the house painted gets translated into followings “specific requirements”

1. Scope of work (SCOPE)
2. Color/manufacturer/specification (QUALITY)
3. Budget and Funds Allocation (COST)
4. Time for completion for entire Works (TIME)

Above requirements in term of Scope, Cost, Time & Quality are called Contract Objectives. These objectives shall become the basis of forming a contract with the eventual painter

Stage 2 of Contract Life Cycle – Contract Formation

It is second stage of a Contract Life Cycle. It starts upon finalization of contract objectives. Here Raj needs to identify a person/painter who can meet the above mentioned contract objectives. Subsequently, he will sign a legally binding agreement with selected agency

Above stage which ends with signing of agreement between the parties is called Contract Formation. Such signed contract shall become the basis of work execution. Here both parties commit to execute the work as per contract

It is also called planning stage because here;

1. Works execution planned
2. Requirements and responsibilities of parties frozen
3. Price and payment terms agreed and
4. Time period for work execution fixed

Stage 3- Contract Administration

The word administration means to execute, follow up, enforce or implement what has been stated in a policy or law or a rule book. This is third stage of Contract Life Cycle and is known as work execution stage. Work is actually performed and delivered here. During this stage, parties execute the work and discharge their responsibilities as per contract

For painting example, painter execute the work in accordance with agreed technical requirements and timelines. Accordingly, Raj see that, job has been performed as per the contract. Also, Raj make due payment as agreed. Here owner receives the painting services and painter receives the agreed money. Hence, parties receive what they wanted & intended contract objectives are met

Stage 4 – Contract Closure

This is final stage of the Contract Life Cycle. Here parties intend to come out of the binding relationship. This is because, there is no need to continue the contractual relationships anymore when

• Owner gets the painting services to his full satisfaction and
• Painter receive due payment
• Intended contract objectives met for both parties

Once both parties have discharged their responsibilities under the contract, they need to formally close the contract. This is necessary so that parties are free from any further obligation towards each other. The cycle ends here upon formal contract closure

=======================================================================

Next Post – Contract Administration versus Management

=======================================================================

Disclaimer Statements: http://www.rkstrainings.com/disclaimer-statements/

=======================================================================

Dear Readers

In the earlier posts we covered two important acts related to Contracts and Procurements i.e. Indian Contract Act and Sale of Goods Act. To read this post again, please click the link below:

http://www.rkstrainings.com/sale-of-goods-act-law-governing-supply-contracts/

In this post we are going to discuss Contract Principles. These principles not only are the basis of enacting such laws, but, courts also apply them while deciding a case and arriving at the fair judgement

Contract Principles

Contracts and procurements transactions between the parties are governed by Indian Contract Act and Sale of Goods Act. Therefore, we should draft and administer a Contract in accordance with certain fundamental principle which applies to other laws. Any law whether civil or criminal is based on the principle of natural justice and equity. Accordingly, we need to give due importance to the following principles both during contract formation and administration stage

A) Equity

Equity means equal or even or fair. This essentially means each party of a contract have same status and no one is bigger or smaller. Accordingly, all parties should be treated equally, without any prejudice, bias or discrimination

A contract document is paramount with respect to rights and obligations of the parties. Hence, each party is liable to fulfil its respective obligations for the other one strictly as per the contract and no one deemed to be superior or inferior. All general duties (e.g. applicable laws; general defaults, indemnities and other) of a party towards other one and consequences for breach shall also apply on reciprocal basis

B) Justice

Justice means fair treatment for all and punishment for wrong doing. In context to contractual relationship, it implies that the defaulting person, who has broken the promises, should not be able to escape freely. Also, the genuine person (victim), who has been complying with the agreement in good faith, should get compensation for loss or damages suffered. Defaulting person who has failed to fulfil its obligations under the contract shall face consequences under the law

A contract writer needs to give due importance to this principle while drafting an Agreement. Accordingly, he should incorporate remedial provision in the contract for all possible breach of promises. This is necessary to compensate the party who has sustained loss or damage due to other party. Similarly, during Contract Administration stage, both parties should attempt to resolve their disputes by applying the sense of right and wrong and fair play

C) Reasonableness

Reasonableness means what is actual, factual and true rather than assumptions, perceptions and feelings. It also signifies: logical, rational and sensible. This means that both parties need be genuine and should act based on facts and reasons. No one should be taking undue advantage of the situation or mis-using its dominating position

It signifies that no party should raise any demand or claim on other unless it has really incurred cost because of the reason of other party. Also, other party is liable to compensate the loss actual suffered and proved through documentary evidences. Both parties should act towards other with good conscience and mutual trust

Significance of Applying Contract Principles

Let us apply above principles during contract formation, interpretation and administration. This is necessary to avoid any dispute at later stage. The cost one may incur in contractual dispute could be multi-fold in comparison to the cost of applying such principles.

In the event a contract goes to litigation, court gives the justice based on above principles only. So, writing certain clauses and getting these accepted by other party may not hold well in the court, if such clauses violates above principles

=======================================================================

Disclaimer Statements: http://www.rkstrainings.com/disclaimer-statements/

Please click on the link above to read disclaimer statements

Dear Readers,

In the last post, we discussed the following four (4) key ingredients of a valid contract. Please click on the link below to read this post again;

A) Offer and Acceptance B) Intention to Create Legal Relationships C) Lawful Consideration D) Lawful Object

http://www.rkstrainings.com/8-essential-elements-of-a-valid-contracts-1/

In view of the above, let us now discuss balance 4 Essential Elements of a Valid Contract: 

E) Certainty & Possibility of Performance F) Capacity of the Parties G) Agreement not declared Void H) Free Consent

Essential Elements of a Valid Contract

E) Certainty and Possibility of Performance

E1 – Certainty of Performance

An agreement is ‘certain’ when Scope of Work and Timelines are mentioned specifically rather than generally. Scope means what to do and timelines means when to do. Accordingly, a contract writer must specify the goods or services expressly and clearly. This is necessary so that both parties draw the same understanding out of it. Otherwise, requirements will be subject to multiple interpretation with lot of subjectivity

Accordingly, certainty is important parameter of a valid contract. On the contrary, if the requirements are not definite (i.e. difficult to understand), such contracts become vague & difficult to enforce.

As per section 29 of Indian Contract Act, agreement, the meaning of which is not certain, or capable of being made certain, are void

E2 Possibility of Performance

If it is not possible for a party to fulfil the promises made under the agreement, the contract is invalid. As per section 56 of Indian Contact Act, an agreement to do an act impossible in itself is void. So, If an act is deemed to be impossible, such agreement is void. Similarly, If an act  become impossible afterwards, such agreement become void when the act become impossible

F) Capacity of the parties (competency)

As per Section 11 of Indian Contract Act, a party is competent to contract, if;

1) it has attained the age of majority accordingly to applicable law and

2) who is of sound mind and;

3) not disqualified from contracting by any law to which he is subject

In view of the above, all parties should be competent to enter into a contract. Accordingly, entering into a contract with a minor (age less than as stipulated under relevant law) is void

Further, Section 12 of Indian Contract Act says that a person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interest. Moreover, entering into a contract with a person who is disqualified from contracting by any law is void

G) Agreement not declared void

Few agreements are expressly declared as void by the law in force in the country. Consequently, one cannot enter into such agreements with other party. For example, under Indian Contract Act, followings agreements are expressly declared as void;

• Section 26 (Agreement in restraint of marriage) – Every agreement in restrain of marriage of any person, other than a minor, is void
• Section 27 (Agreement in restraint of trade) – Every agreement by which any one is restrained from exercising a lawful profession, trade or business, is void
• Section 28 (Agreement in restraint of legal proceedings – Every agreement by which any party is restricted from enforcing his right under any contract or which limit the time within which he may enforce his rights are void

D) Free Consent

Parties must enter into a contract freely and with genuine consent. This means the parties accept the terms of the agreement with their own free will rather than under force. Section 13 of Indian Contract Act, says that two or more parties have consent when they agree upon the same thing in the same sense.

As per section 14 of Indian Contract Act, consent is free when it is not caused by any of the followings:

1. Coercion – as defined in section 15, or
2. Undue influence – as defined in section 16, or
3. Fraud – as defined by section 17, or
4. Misrepresentation– as defined by section 18
5. Mistake subject to provision of section 20, 21 and 22

=======================================================================

Disclaimer Statements: http://www.rkstrainings.com/disclaimer-statements/

Please read and accept disclaimer statements by clicking here: http://www.rkstrainings.com/disclaimer-statements/

Dear Readers,

In the previous posts, we covered the meaning and definition of key terms such as: Contract, Agreement and Consideration. Also, we discussed that an agreement without consideration is void. Please click on below link to read this post again

http://www.rkstrainings.com/what-do-we-mean-by-consideration/

Hence, one may wonder whether these are the only two necessary ingredients of a valid contract. In other words, if a contract satisfies these two requirements, whether, it is a legally binding and enforceable contract. The simple answer is NO. This is because there are few more things which are essential for a contract to be valid

All requirements, which make a contract legally enforceable, are called Essential Elements of a Valid Contract. An Agreement shall remain valid, if it contains all such compulsory ingredients. Otherwise, it becomes void and cannot be enforced

Indian Contract Act provides the followings as Essential Elements of a Valid Contract

In this post, we shall be discussing 4 elements with brief explanation and examples. Balance 4 shall be discussed in next blog

Essential Elements of a valid Contract

A) Offer and Acceptance

This is the first and foremost requirements of a valid contract. Agreement said to arise between the parties when one party submits the offer and other one accept it. Provided the acceptance by other party is unconditional, absolute & unqualified and without any reservation or rider

In the event, other party gives conditional acceptance, the same constitute a counter offer rather than an agreement. As long as parties’ gives offer and counter offers, there is no agreement until they meet at mutually acceptable common point. We know this concept fully and deal with it daily while procuring goods or services from our vendors/contractors

B) Intention to create legal relations

This is the most fundamental requirement of a valid Contract. For a contract to be legally enforceable, parties to an agreement must have intention to create legal relationships. This means each party acknowledges that it is not only answerable to other party but also to the applicable law for its promises. Both parties understand that they are legally bound to fulfil their obligations as per agreed terms; otherwise, it may face legal consequences under the law.

However, if parties to an agreement do not intend to be bound legally, such an agreement is a mere MOU rather than a contract. Such agreements are void and cannot be enforceable by law. A document named as contract does not make it contract if it does not fulfil this requirement

C) Lawful Consideration

There must be some advantage or benefit moving from one party to another. Also, parties must be permitted under law to receive such advantage or benefit. As per section 25 of Indian Contract Act, agreement without consideration is void. Also, as per section 23, the agreement for which consideration is unlawful is void

In business transactions, one party provides the goods and other party make payment against the same. Similar one party provides services or executes work and other party makes the agreed payment. So, goods, services or work is consideration for one party and payment in lieu of the same is consideration for other party. All such considerations are lawful and permitted under law

However, law does not allow certain considerations. For example, if A & B agree that A will give a threat to C (A’s neighbour) against payment of Rs-10,000.00. Though money consideration available for A for carrying out the work for B, but, act of threat is neither legally permitted or nor morally correct. Hence, the consideration is illegal in nature and such contracts are VOID

D) Lawful Object

For a valid contract, the objective of the agreement should be lawful. If the purpose of an agreement is illegal, such agreement is void. As per section 23 of Indian Contract Act, the objective is said to lawful unless;

1. It is forbidden by law or
2. Is of such a nature that if permitted, it would defeat the provisions of any law; or is fraudulent; or
3. Involves or implies, injury to a person or property of another; or
4. The Court regards it as immoral, or opposed to public policy

=======================================================================

Disclaimer Statements: http://www.rkstrainings.com/disclaimer-statements/

Please read and accept disclaimer statements by clicking: http://www.rkstrainings.com/disclaimer-statements/

Dear Readers,

In the second post, we covered meaning of important term called Agreement. We discussed that an agreement is defined as every promise and every set of promises forming consideration for each other. Please click on link below to read the post again

http://www.rkstrainings.com/agreement-meaning-and-definition/

In view of the above, it is imperative to know what is Consideration, in order to understanding definition of Agreement. The purpose of this post is to discuss the meaning of Consideration and to explain its significance for a valid Contract

How we define Consideration

The term Consideration means an advantage or benefit or things of value in lieu of doing something for someone. Let us assume there is an Agreement between Party A and Party B. Whereas, Party A promises to provide (or do) something of value to the Party B, and in return, Party B provides certain advantages or benefit to B. All such benefits, rewards, and advantages moving from one party to the other and creating value for each other under the agreement are called Consideration

As per Section 25 of Indian Contract Act, 1872, an agreement without consideration is VOID. Hence, an agreement is legally enforceable only when both parties give something and get something in return. Therefore, Consideration is a necessary ingredient of a valid Contract and it must be there for all parties to the Contract. Consideration may be in cash or kind or a promise for doing or not doing something

Examples under commercial agreements

1. Under Purchase Agreement, Buyer receives Goods and Seller receives the agreed Money. So, Goods are consideration for Buyer and money for the Seller
2. In Service Contract, one party gets Services & other the agreed Money. So, Services are consideration for Service Receiver and agreed Money for Service Provide

=======================================================================

Disclaimer Statements: http://www.rkstrainings.com/disclaimer-statements/

Please read and accept disclaimer statements by clicking on above links

=======================================================================

Next Post – Contract Laws and Principles

Dear Readers

In the first post we discussed the meaning and definition of key term called Contract. Please click on below link to read it again

http://www.rkstrainings.com/what-is-a-contract-should-it-be-in-writing/

We have observed that the definition of Contract revolves around the term Agreement. Therefore, in order to have in-depth understanding of the term Contract, it is important to know what is Agreement. The purpose of this blog is to discuss the meaning and definition of the term Agreement

What do we mean by the term Agreement

As per Section 2(e) of Indian Contract Act, an agreement is defined as every promise and every set of promises forming consideration for each other

There is an Agreement between parties when one party give the proposal and other party accept it. The only pre-requisite is that the acceptance by other party is unconditional. If the other party provides conditional acceptance, it is called a counter offer rather than acceptance. As long as both parties keep on giving/receiving offers and counter offers, there is no agreement. All such negotiations only reduced to an Agreement when all parties meet at a common point and mutually accept the same

Agreement = [offer by one party] + [acceptance by other]

Which agreements among the followings are contracts

Based on above definitions of contract and agreement, please tick which of the following agreements is contracts and why:

1. You visit a restaurant to have dinner. Restaurant Manager gave you the menu with description of food items with price tag. Staff served food with decent services and charged bill as per price list
2. Rakesh intends to hire a taxi to go to airport next day to catch a flight. Taxi Company quoted to charge @Rs 20/Km, which you agreed. Taxi driver came on time, dropped Rakesh at airport and collected fare as agreed
3. You purchased a Samsung Handset Model of your choice as per product description, specifications and terms of sale. You made payment as agreed between you and shopkeeper
4. A need to go to another city for interview. So, he approached his friend B and requested his car for one day, which B agreed. Later B refused as he needs his car due to some family urgency. Accordingly, A missed the interview and he held B responsible for breaching the agreement
5. When Mohan lost his job due to economic slowdown, his friend Raj agreed that he will give INR 10,000/-per month to Mohan for meeting necessary expenses until Mohan find another job. After, one year, when Mohan was still unemployed, Raj discontinued the support. Mohan, who was already disturbed, refused to accept Raj’s refusal and asked him to continue the support as per agreement between them

We will discuss the answers of above question in next blog. This will help you could cross check which question your answered correctly

Whether all agreements are contracts or vice versa

Agreements which are not enforceable by law are not contracts. Such agreement does not bind the parties legally

In our day to day life we make certain promises to our family, neighbors, friends or society at large. Such social/personal agreements are purely intended to do a favor or to support others. People provide such helps as goodwill gesture or for human values or moral duty and without seeking anything in return. These agreements are not intended to legally bind each other and take the other party to court for not fulfilling the promise made

Hence the above agreements of social or moral nature are not contracts

However, all commercial agreements, where both parties strive to seek certain benefits and decide to enter into an agreement for the purpose of business, trade or industry are contracts. This is because here parties are willing to take other party to court if it failed to fulfil its promises as per the agreement

However, all commercial agreements, where both parties strive to seek certain benefits and decide to enter into an agreement for the purpose of business, trade or industry are contracts. This is because here parties are willing to take other party to court if it failed to fulfil its promises as per the agreement. So, all agreements are not contracts, however, all contracts are agreements

Therefore, all agreements are not contracts, however, all contracts are agreements

Next Post – Meaning of Consideration

=======================================================================

Disclaimer Statements: http://www.rkstrainings.com/disclaimer-statements/

Please read and accept disclaimer statements by clicking above link

=======================================================================

Welcome to www.rkstrainings.com. Here I wish to share my knowledge and experience on Contracts with prospective readers. I wish to do this by writing series of blog post based on my understanding on the subject. I request your participation and believe that your valuable comments on posts could bring further enrichment to the subject.

This being the first post, so, let us starts the journey by discussing the meaning and definition of the term Contract. We all know about contracts and dealing with the same on day-to-day basis in our work life. However, we cannot enjoy the subsequent posts without briefly touching it again

What is a Contract – Meaning and Definition

Contract is an agreement between two or more parties which the law will enforce. As per section 2(h) of Indian Contract Act, 1872 an agreement enforceable by law is a contract.

In view of the above, an agreement is a contract only when: promises between the parties creates a legally binding, and; the agreed terms are recognized by law for enforcement.  Agreements which does not give rise to legal obligation are not contracts

Accordingly, the term Contract has two elements as mentioned below;

1. An agreement between the parties and

2. Parties are legally bound for their promises under the agreement

Contract = [Agreement] + [enforceability by law]

Valid, Void and Voidable Contracts

Intention of the parties to enter into a legally binding relationship is a pre-requisite for the Court of Law to enforce any agreement. In the event parties desire not to seek the intervention of court for eventual disputes, such agreement becomes invalid and un-enforceable. Therefore, depending upon whether an agreement could be legally enforced or not, there are three kinds of agreements: Void, Valid & Voidable

As per section 2(g) of Indian Contract Act, an agreement not enforceable by law is said to be Void. However, agreements which are enforceable by law are called Valid Contracts. As per section 2(i) of the Act, an agreement which is enforced by law at the option of one or more parties, but, not at the option of other or others, is a voidable contract

Agreement of rights and obligations 

Contract is an agreement creating rights and obligations between the parties. Right of one party becomes the obligation of other and vice versa. In supply or service Contracts, one party provides goods or services and other party pay the agreed price. Receiving goods or services is the right of buyer and getting payment a right of supplier. Similarly, supplying goods or services as agreed is the obligation of supplier and making payment is the obligation of the buyer

Whether Contract must be in writing

As a general rule it is not necessary for a contract to be in writing. Verbal contracts are also recognized by law. However, this general rule shall not apply to those contracts which must be in writing as per prevailing laws and regulations

As per Chapter II of Sale of Goods Act, 1930, a contract of sale of goods may be made in writing or by the words of mouth, or partly in writing and partly by words of mouth

However, as per the prevailing industry practice, contracts are mostly made in writing. Further, contracts are signed by the concerned parties. This is necessary to keep a record of mutual agreements. And, such records could be used as a proof for an eventual dispute at later stage. Moreover, this is important because for commercial transactions, the dealing person may change over time. Therefore, in the absence of signed agreement, it would be difficult to ascertain what has been agreed by the parties

=======================================================================

NEXT POST – What is Agreement

=======================================================================

Disclaimer Statements: http://www.rkstrainings.com/disclaimer-statements/

Please click on above link to read and accept disclaimer statements

=======================================================================