What are the Essential Clauses of a Contract?

Contracts in India are ruled as per, and in accordance with, the provisions of the Indian Contract Act 1872. It is an act “to define and amend certain parts of the law relating to contracts”.

Contents  hide 

1 Now firstly let us understand – What is a Contract?

2 Contract = Agreement + Enforceability

3 So, an agreement becomes a contract when the following conditions are satisfy-

4 So, what all will come under the ‘Confidential Information’-

5 Reference

5.1 Related

Now firstly let us understand – What is a Contract?

What are the Essential Clauses of a Contract?

For a common man’s understanding, Contracts are agreements, arrangements, promises made between two or more parties for some purpose. The term ‘Contract’ has been defined by various authors in following manner:

According to Salmond – A contract is an agreement creating and defining obligations between the parties[1].

The term contract is defined in Section 2 (h) of the Indian Contract Act 1872 as – “An agreement enforceable by law is a contract”[2]. Now after examining definitions of contract we can say that

Contract = Agreement + Enforceability

What are the Essential Clauses of a Contract?

The above observation would raise a question in our minds as to what is the exact meaning of the word ‘Agreement’. Section 2(e) of the Indian Contract Act 1872 defines an agreement as – ‘every promise or set of promises forming consideration for each other’. An agreement is a settlement between two parties, which contains obligations and promises which both parties need to fulfill.

When such an agreement is made binding by law it becomes a contract. In other words, an agreement that the law will enforce is a contract. It is, therefore, appropriate to say that every contract is an agreement, but every agreement is not a contract. Section 10 defines that, “All agreements are contract if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and not hereby expressly declared to be void.”

So, an agreement becomes a contract when the following conditions are satisfy-

1 There is some consideration for it

2 The parties are competent to contract

3 Their consent is free

4 Their object is lawful

Sot these are the essential elements require in the formation of a valid contract.

A valid and enforceable Contract act as a document between the parties who are entering it, and act as a foundation for every legal relationship. It’s the document that accomplishes the objectives of the parties Contract should be clear and precise so that it explains rights and obligations to both the parties. It contains Clauses that bind the parties to follow the rights and obligations.

Now we will look at some of the very Essential Clauses of a Contract –

1. Confidentiality Clause – When two or more firms enter into a Contract there will be a significant exchange of information from both sides in order to perform there contractually based obligations. In sight to furnish certain information about each side’s financial and business practices, it is imperative for the contract to contain a strongly worded confidentialityclause[3].

This clause should prevent both sides from divulging any and all information that is share during the course of the transaction. To make it enforceable, there should be a clear indication from the disclosing party to the receiving party that this information should remain confidential.

So, what all will come under the ‘Confidential Information’-

• “inventions, ideas, processes, research, formats, formulas, human-readable code on any media, object code, data, programs, specifications, other works of authorship, improvements, discoveries, developments, designs and techniques; 
• product plans, products, services, customers, markets, software, developments, inventions, processes, designs, drawings, engineering, hardware configuration information; 
• non-public market information, product plans; 
• marketing or finances of the company in any form, customer information, business plans and strategies, price lists and market studies; and
• contracts and client database, computer models and programs, research records, statistical methods of doing business, customers, finances, strategic and marketing plans, employee details and such other proprietary information relating to the business of the Disclosing Party and is not in the public domain.
• All copies, notes, analyses, studies, memorandum, compilation, or others document, both in digital and non- digital format which contains, in whole or in part, the information furnished with respect to employment purpose.
• Any information identified as being “privilege” or “confidential” shall be deemed to include all information, irrespective of the method of communication being by way of, but not limited to written documents, disks and electronic mail.[4]”

Breach of Confidentiality – In order to show it 3 conditions should be satisfied –

1. The information has all the parameter to come under ‘Confidential Information’
2. Information was gives keeping under the duty of Confidence
3. The information was misuse

Remedies Provided – To take back profit made by the other party. Under CPC an injunction can be make to stop the party from doing something or continue to do in future. Exemplary Damages, if additional punishment is require.

2. Force Majeure–The French term ‘Force Majeure’ literal meaning is “Greater Force”. Black’s Law dictionary has defined the term as – an event that can neither be anticipated nor can be controlled[5]. This clause should always be included because it can protect parties from circumstances that arise that are beyond anyone’s control. The effect of this clause is it excuses the affected party from performance under the contract as long as the force majeure event continues.

A force majeure clause specifies certain circumstances and events which will come under force majeure events. Some of the events such as – Acts of God, War, Terrorism, Acts of Government, Explosions, Plague, and Epidemics. Force Majeure clause will be applicable when any of such event occur or other acts beyond the control of parties and if the party is able to demonstrate that they made attempts to control the impact of such event then the parties would be relieve to perform their obligations under the contract until the force majeure events continue

Force Majeure clause is the general provisions allocating the risks of disruptions and calamities.

It is govern by Indian Contract Act 1872. But if it is implied or express clause in the contract, it is governed by Chapter III of the Contract[6]. (Article 32 – Contingent Contract: to do or not to do if an uncertain future event happens cannot be enforced until that event occurs. If the event becomes impossible, such contract becomes void). If any force majeure event happens in de ors the contract then it is deal with by a rule of positive law under Section 56 of the Act. (Section 56 – An agreement to do an act impossible in itself is void.

Burden of proof lies upon the party who invokes the clause. Either of the party shall be liable to damages or can terminate this.

• 3. Termination Clause – Termination Clause of the Contract must clearly lay out all the circumstances under which one or both the parties may terminate, end the contract irrespective of the time left under the agreement. All the circumstances regarding when an agreement can be bring end by either of the parties should be mention clearly.
• Methods of Contract Termination: The Indian Contract Act does not provide specific methods; parties can take their call and choose the method that suits their business relationship. We will discuss some of the methods through which a contract can be terminated[7]. 
• Completion of the Contract – This is the most commonly use method when the term of contract mention in the contract get expire the contract get terminated.
• Termination without the Cause –The party agree to terminate the contract without giving the reason just by sending a notice to the other parties.
• Breach of Contract –When the contract is not obey by one party, it is call as Breach of Contract and is grounds for contract termination. Breach of Contract occurs when one party fails to meet his obligations under the contract.
• Other Events Triggering Termination – Insolvency, Bankruptcy, Merger of the other party, Changes in government regulations and failure to meet certain performance levels.

• 4. Jurisdiction Clause – When the contracting parties are located in more than 1 state or country it may not be clear
• which laws will govern the arrangement. So, we should always specify the state that will have jurisdiction over the agreement so that we can understand which states law will be applicable[8].
• Exclusive Jurisdiction – This clause limits disputes to the court of one jurisdiction, discouraging other courts from accepting the jurisdictions
• Non-Exclusive Jurisdiction – This clause nominates the court of one country to have jurisdiction but without prejudice to the party’s rights to commence proceedings in the courts of another jurisdiction where appropriate. In this case the dispute will be hear by the court in the jurisdiction which may not be preferrable by another party.

5. Dispute Resolution – Sometimes well-drafted contracts are susceptible to conflict so it is important to clarify the party’s plan for dispute resolution in the event when an issue arises. The dispute resolution clause sets out

the process by which the parties intend to solve any dispute which may arise out of the contract.[9]

Methods of Dispute Resolution available – There are different types of methods available for dispute resolution but

they broadly fall in 2 categories – Binding and Non-Binding

Non-Binding – It mainly focuses on parties reaching a consensual resolution Examples:

Negotiation –Firstly negotiations take place between the representatives who are responsible for operating contracts if

it is unsuccessful then it takes place between senior executives with authority to settle the dispute.

Mediation – An independent third party mediates between the parties for a compromise. The final call is still takes by parties whether they agree to resolution or not

Binding – In binding forms of dispute resolution, the party submits their dispute to the third party (decision-maker can

be a judge or arbitrator) to make a decision that will be binding upon them.

Examples:

1. Litigation – Best method of dispute resolution is use of National Courts for resolving the dispute
2. Arbitrator – A private process where party agree that their dispute will be resolved by one or more arbitrators instead of court.

So next time when you are drafting a contract make sure to include these 5 essential clauses so that the contract is free

from all the loopholes and are in the interests of the parties.

Reference

What are the Essential Clauses of a Contract?

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[1]Different Persons; Definitions of Contract, Law Teacher ( Feb 2, 2021) https://www.lawteacher.net/free-law-essays/contract-law/different-persons-definition-of-contract-contract-law-essay.php#:~:text=%E2%80%9CEvery%20agreement%20and%20promise%20enforceable,According

[2]Indian Contract Act 1872§ 2(e)

[3]Tara Naughter, 6 Key Clauses Found in Commercial Contracts, Contracts Works ( Feb 2, 2021) https://www.contractworks.com/blog/6-key-clauses-found-in-commercial-contracts

[4]Ayush Verma, Top 5 Case Laws explaining how to enforce a breach of Confidentiality, Ipleaders (Feb 2, 2021) https://blog.ipleaders.in/case-laws-breach-of-confidentiality/

[5]Poorvi Sajanwala and Kashmira Bakliwal, what is Force Majeure? the legal term everyone should know during COVID-19 19 crisis ,ETimes , (Feb 2 , 2021) https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis/articleshow/75152196.cms

[6]Aniketh Nair, Shelter Under ‘ Force Majeure clause in COVID 19 times, LawstreetIndia (Feb 3, 2021)  http://www.lawstreetindia.com/experts/column?sid=393

[7]Cory Mitchell, Termination Clause, Investopedia (Feb3, 2021) https://www.investopedia.com/terms/t/termination-clause.asp#:~:text=Termination%20Clause%20for%20Employees,sort%20of%20payment%20they%20receive.

[8]Alex Bea; An A-Z of Contract Clauses, Mondaq (Feb 3, 2021)  https://www.mondaq.com/uk/contracts-and-commercial-law/110368/an-a-to-z-of-contract-clauses-key-terms-for-your-contracts

[9]Michael Darowski, Daniel Wood, Christopher Richard ,The Basics – What does Dispute Resolution Clause Say , GowlingWlg , (Feb 3, 2021)  https://gowlingwlg.com/en/insights-resources/articles/2018/what-should-a-dispute-resolution-clause-say/#:~:text=clause%20should%20cover%3F-,What%20is%20the%20purpose%20of%20a%20dispute%20resolutio