Mastering the Art of Precise and Comprehensive Contract Drafting: Key Points for Commercial and International Agreements

 

INTRODUCTION

An agreement that is legally enforceable is referred to as a contract. When a contract is reduced to writing, the document itself is called an agreement. In order for an agreement to exist, there must be two or more parties who agree to perform certain acts or refrain from doing something. Companies are required to execute numerous commercial agreements and contracts during their business operations. However, it is often challenging for company executives to possess the necessary skills to draft contracts accurately, comprehensively, and unambiguously. Therefore, it is essential to consider certain important points when drafting contracts, especially commercial and international trade contracts.

FORM OF CONTRACT

There is no specific form prescribed for trade contracts, except that they must fulfill all the essential requirements of a valid contract under the applicable law. If the law requires certain contracts to be in writing or registered, those formalities must be complied with. A contract can be handwritten, typewritten, or printed. It can be concise or detailed, depending on the circumstances of the trade transaction. However, it is highly desirable and necessary for companies to incorporate precise and comprehensive terms and conditions related to the subject matter and performance of the contract in both domestic and international contracts. Sale-purchase contracts should include well-defined provisions regarding the quality and quantity of goods, shipment period, price terms (CIF/C&F/FOB, etc.), delivery, port of shipment and destination, packing and marketing, mode of payment, insurance, brokerage/commission, and other relevant provisions. International contracts may require additional provisions concerning applicable law, licenses and permits, taxes, duties and charges, exchange rates, etc. The following are some important considerations that should be included in the contract.

IMPORTANT POINTS IN CONTRACT DRAFTING

Description of Parties to the Contract: Parties to the contract should be clearly defined by stating their names, status, and addresses. In the case of individuals, the father's name should be mentioned, and in the case of companies, the location of the registered office should also be provided. For partnerships and companies, detailed information about the representatives should be given, including comprehensive particulars of the firm.

Example: In a sale-purchase agreement between XYZ Company (Seller), located at 123 Main Street, Mumbai, and ABC Enterprises (Buyer), located at 456 Park Avenue, Delhi, the agreement shall clearly state the full legal names, addresses, and contact details of both parties.

 

Legal Nature of the Contract: The title or introductory part of the contract should clearly indicate the legal nature of the agreement. Whether it is a sale/purchase contract, commercial agency contract, contract for technical assistance and advice, or building construction and erection contract, it is essential to avoid any ambiguity regarding the nature of the contract and the legal position of the parties involved.

Example: A contract between XYZ Company and ABC Enterprises for the sale of goods shall explicitly state that it is a "Sale-Purchase Agreement" to ensure clarity and understanding between the parties.

 

Licenses and Permits: Particularly in international trade contracts, provisions regarding the responsibility for obtaining export/import licenses and the effects of license delays, refusals, or withdrawals by government authorities should be included. It is generally the commercial practice to allow each party to obtain the necessary licenses in their own country.

Example: In an export agreement between XYZ Company (Seller) and ABC Enterprises (Buyer), the contract should clearly specify that XYZ Company will be responsible for obtaining the necessary export licenses from the relevant authorities in India, while ABC Enterprises will be responsible for obtaining import licenses from the relevant authorities in their country.

 

Taxes, Duties, and Charges: The contract should include provisions regarding the responsibility for payment of taxes, duties, and other charges, if applicable. In international contracts, it is generally agreed that the seller will be responsible for taxes, duties, and charges levied in the country of export, and the buyer will bear such charges levied in the country of import. The contract should also address the potential fluctuations in tax rates and specify whether any increases will be borne by the buyer or the seller.

Example: In an international trade contract between XYZ Company (Seller) in India and ABC Enterprises (Buyer) in the United States, the agreement should clearly state that XYZ Company will be responsible for all taxes, duties, and charges levied by the Indian government, while ABC Enterprises will bear any taxes, duties, or charges imposed by the U.S. government upon importation of the goods.

 

Quality, Quantity, and Inspection of Goods: The contract should include provisions regarding the description, inspection, and acceptance of the quality and quantity of goods. Disputes often arise in this area, making it necessary to have suitable provisions to address such issues. The contract can specify whether inspection of goods will take place in the seller's country before shipment or in the buyer's country after delivery. Some tolerance, typically 10% to 15%, may be provided for in terms of quantity. It should be stated whether additional quantity will be calculated at the price quoted in the contract or at a different price.

Example: In a purchase agreement for electronic components between XYZ Company (Buyer) and ABC Enterprises (Seller), the contract should outline the specific quality standards required for the components, inspection procedures to be followed, and the acceptable quantity tolerance.

 

Packing: Proper packaging is crucial, especially for goods that will undergo long voyages. Disputes can arise if goods are damaged during transit due to poor packaging. Therefore, the contract should include provisions specifying the packaging requirements based on the nature of the merchandise. Specialized packaging may be necessary for fragile or inflammable goods or items that need protection from humidity or chemical action. Legal specifications regarding packaging materials, if any, should also be addressed to avoid customs-related issues.

Example: In a contract for the export of perishable fruits between XYZ Company (Seller) and ABC Enterprises (Buyer), the agreement should clearly state the packaging requirements to ensure the fruits remain fresh and undamaged during transportation, adhering to both international standards and any specific packaging regulations imposed by the importing country.

 

Shipment of the Goods: Precise details regarding the rights and obligations of the parties in relation to the shipment of goods should be stipulated. This includes specifying the time, date, and port of shipment, as well as the name of the vessel and other relevant shipping information. It may also be necessary to include provisions regarding allowable delays in shipment. In some cases, penalties for delayed shipment may be included based on the length of the delay.

Example: In an agreement for the export of textiles between XYZ Company (Seller) and ABC Enterprises (Buyer), the contract should clearly state the date of shipment, the name of the vessel, and the port of loading. It should also specify that any delay in shipment exceeding 10 days from the agreed-upon date will result in a penalty of 1% of the total order value per day of delay.

 

Insurance: The contract should include provisions regarding the insurance of goods, particularly for goods being shipped overseas. It should clarify which party is responsible for obtaining the necessary insurance coverage and the type of insurance to be obtained.

Example: In an international trade agreement between XYZ Company (Seller) and ABC Enterprises (Buyer), the contract should clearly state that ABC Enterprises is responsible for arranging comprehensive marine insurance coverage for the goods during transit, including coverage for any loss or damage that may occur.

 

Documentation: In certain business transactions, the seller may need to provide detailed specifications, literature, or technical documentation related to the goods, especially for scientific or technical products. The contract should specify whether such documentation will become the property of the buyer or if it needs to be returned after a certain period. Confidentiality provisions may also be included to protect sensitive information.

Example: In a contract for the sale of software between XYZ Company (Seller) and ABC Enterprises (Buyer), the agreement should state that XYZ Company will provide ABC Enterprises with the necessary technical documentation and specifications for the software, and that such documentation will remain the property of XYZ Company. ABC Enterprises must agree to keep the information confidential and not disclose it to any third party without XYZ Company's permission.

 

Guarantee: In some cases, buyers may require a guarantee regarding the performance or use of the goods for a specific period. The contract should include a guarantee clause, outlining the seller's responsibility for defects appearing in the goods during the guarantee period. It may provide options for the seller to either replace or repair the defective goods.

Example: In a contract for the sale of machinery between XYZ Company (Seller) and ABC Enterprises (Buyer), the agreement should include a guarantee clause stating that XYZ Company guarantees the machinery's performance and functionality for a period of one year from the date of delivery. In case of any defects, XYZ Company will be responsible for repairing or replacing the machinery within a reasonable time.

 

Passing of the Property and Passing of the Risks: It is crucial to specify the exact point in time when the title or property in the goods, as well as the risks associated with the goods, pass from the seller to the buyer. This determines who will be responsible for any damage or loss during transit and who has control over the goods. Clear provisions regarding the passing of property and risks should be included in the contract.

Example: In a contract for the sale of automobiles between XYZ Company (Seller) and ABC Enterprises (Buyer), the agreement should clearly state that the title and risks associated with the automobiles pass from XYZ Company to ABC Enterprises upon delivery of the vehicles to the specified location.

 

Amount, Mode, and Currency of Payment: The contract should specify the amount, mode, and currency in which the price for the goods will be paid. The payment terms may be based on documents against acceptance (D/A) or documents against payment (D/P), a letter of credit, or any other mutually agreed-upon arrangement. In international contracts, it is important to address exchange rate fluctuations to determine the payment obligations of both parties.

Example: In a contract for the export of textiles between XYZ Company (Seller) and ABC Enterprises (Buyer), the agreement should state that the price for the goods will be paid in US dollars via an irrevocable letter of credit opened by ABC Enterprises in favor of XYZ Company within 30 days of the bill of lading date. Any exchange rate fluctuations between the Indian rupee and the US dollar will not affect the payment obligations of ABC Enterprises.

 

Force Majeure: It is essential to include a force majeure clause in commercial contracts, defining the circumstances or events beyond the control of the parties that would excuse them from fulfilling their obligations without incurring liability. The clause should list specific events such as strikes, lockouts, riots, civil commotion, or government prohibitions that may delay or prevent performance. It may also include similar events beyond the control of the parties that could not have been avoided even with due diligence.

Example: In a contract for the supply of raw materials between XYZ Company (Supplier) and ABC Enterprises (Buyer), the agreement should contain a force majeure clause stating that neither party will be held liable for any failure or delay in performance caused by events such as natural disasters, war, acts of terrorism, or any other events beyond their control.

 

Proper Law of Contract: The contract should clearly state the proper law governing the contract and the jurisdiction for resolving any disputes that may arise. This is particularly important in international contracts, as it determines which country's laws will be applied and where any legal proceedings will take place.

Example: In a contract for the provision of consulting services between XYZ Company (Service Provider) in India and ABC Enterprises (Client) in the United Kingdom, the agreement should state that the laws of England and Wales will govern the contract, and any disputes will be subject to the exclusive jurisdiction of the courts of London.

 

Termination and Dispute Resolution: The contract should include provisions regarding the termination of the agreement and the methods for resolving disputes. It may specify the circumstances under which either party can terminate the contract, the notice period required, and any consequences or penalties for early termination. The contract may also outline the steps for resolving disputes through negotiation, mediation, or arbitration before resorting to litigation.

Example: In a contract for the provision of construction services between XYZ Company (Contractor) and ABC Enterprises (Client), the agreement should include provisions stating that either party may terminate the contract in the event of a material breach by the other party with a 30-day written notice. It should also specify that any disputes arising from the contract will be resolved through arbitration in accordance with the rules of the International Chamber of Commerce.

 

CONCLUSION

Drafting agreements and contracts is a complex task that requires careful consideration of various legal and commercial aspects. It is advisable to seek professional legal assistance when preparing important contracts to ensure accuracy, clarity, and enforceability. The points mentioned above are essential considerations when drafting commercial and international trade contracts, but they are not exhaustive. Each contract may have unique requirements depending on the specific nature of the transaction.

 

Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

+91 9582627751

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including newspapers, Journals, Bare Acts, Case Materials , Charted Secretary etc.

 

 

 

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