Commercial Contracts in India

Commercial contracts between businesses play a vital role in boosting growth for all partners who have decided to work together. Commercial contracts used for such tie-ups are basically enforceable agreements between two or more parties that shall define the relationship between them along with the Dos and Don’ts of their partnership.

The contracts used for such partnerships should be drafted with utmost care to ensure there is no potential for conflicts and litigation in the future. It is imperative to do so to save valuable time and money and avoid potential headaches as well.

What are Commercial Contracts?

Although the term ‘Commercial Contracts’ is not defined under any law, they are primarily governed by the Indian Contract Act (ICA), 1872 and the Specific Relief Act (SRA), 1963. While the ICA mainly focuses on the vital essentials of an applicable legal contract, the SRA provides remedies in case of a contract breach.

As per Section 2(h) of ICA, ‘an agreement enforceable by law is known as a contract.’ In addition, Section 2(e) of the Act states, ‘every promise and every set of promises, forming the consideration for each other, is an agreement.’

As per the provisions of the ICA, a legitimate contract must have the following:

• Offer and Acceptance,
• Intention of the parties,
• Lawful consideration,
• Parties competent to contract,
• Free consent of the parties entering the contract.

Commercial contracts signed between companies usually cover a wide range of dealings, govern the rights and obligations of all parties involved and make parties involved liable to make their fair share of contribution and fulfill their obligations. Such contracts may take the form of different agreements such as Service Agreements, Franchise Agreements, Non-Disclosure Agreements, Partnership Agreements, etc.

What is a Commercial Dispute?

The definition of ‘Commercial Disputes’ has been mentioned under the Commercial Courts Act (CC Act), 2015. Section 2(c) of the Act deals with the various types of disputes that fall under the category of a ‘commercial dispute’.

The disputes that fall within the ambit of the Act are basically conflicts that arise from contracts like franchising agreements, joint venture agreements, insurance and re-insurance, agreements for sale of goods or provisions of services, technology development agreements, etc.

Key Clauses of a Commercial Contract

A commercial contract must not only fulfill the requirements of a valid contract as per the provisions of the ICA, but also include certain vital features that are a must for such agreements. There is no fixed form defined by the laws of India for a commercial contract. Thus, both written and oral contracts are considered valid.

Contracts formed through electronic mediums are recognized under Section 10A of the Information Technology Act, 2000, which states –

‘where in a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances, as the case may be, are expressed in electronic form or by means of an electronic records, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for the purpose.’

A commercial contract must include:

• Extensive Details of the business arrangement for which the contract is being signed.
• Representations and warranties by the parties signing the contract.
• Rights and obligations of all parties involved.
• Confidentiality – this clause is related to the business details shared by all parties stating which details cannot be shared with anyone and the instances where such details may be shared.
• Breach of Contract and its Consequences – this clause covers the potential situation of a contract breach and the liquidated damages that may be payable by the defaulting party to the innocent party.
• Force Majeure – this clause insulates all parties from adverse consequences caused by unforeseeable events.
• Indemnity Clause – this clause should be drafted with utmost care and not left open ended in any way. Furthermore, it may have a cap to safeguard the interest of all parties involved.
• The termination clause that covers instances in which the contract may be terminated should be included in the contract.
• Dispute Resolution – This is one of the most important clauses of a commercial contract that includes provisions for how conflicts and differences shall be resolved between the parties. This clause should be particularly categoric and not ambiguous in any sense to prevent any of the parties involved from using legal loopholes and tactics to delay conflict resolution.

Remedies for Commercial Contract Breaches

In case of a breach of contract, the applicable remedies may vary, depending upon the terms of the concerned contract and specifically upon the ‘Dispute Resolution’ clause.

• If the clause states that the parties involved should try to solve the dispute amicably, they must consider this option and attempt to find a peaceful resolution.
• If the clause directs parties to go through arbitration in order to resolve the dispute, the process of arbitration must be followed.
• If there is an arbitration clause in the contract but any involved party approaches a Civil Court by filing a suit, the Court may not be liable to deal with the issue and may direct the parties involved to first resolve the issue through the provisions stated in the contract. The process shall be governed by the Arbitration and Conciliation Act, provisions of which aim to reduce the interference of Courts in arbitration proceedings to make the process quicker.

Note: In case there is no dispute resolution clause mentioned in the contract, either party may approach the Civil Court by filing a suit. Such suits may be concerned to recovery of money, damages, specific performance of the contract, etc.

However, if the dispute falls under the category of a commercial dispute under the CC Act, a suit may be filed under the CC Act, which would be tried by a commercial court. The provisions under the CC Act aim to enable quicker resolution of commercial disputes in India. Such suits need to be adjudicated as per the provisions mentioned under the Code of Civil Procedure (CPC), 1908.

Interpretation of Commercial Contracts by the Courts

Whenever parties involved in a contract approach Courts for adjudication of any dispute pertaining to the terms of their contracts, the Courts try to understand the simplest meaning of the terms of the contract. If while going through this process, it is found that the process leads to ambiguity or deems certain terms of the contract nugatory, the Court shall attempt to interpret the terms of the concerned contract by referring to the potential circumstances and intention of the parties involved at the time of contract signing.

• In the case of Union of India vs D.N. Revri & Co [(1976) 4 SCC 147], the Supreme Court stated that a contract is a commercial document between the parties and it must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate it. Furthermore, it held that it would be inappropriate to apply strict rules of construction which are ordinarily applicable to a conveyance or other formal documents while interpreting a contract signed by two parties. The meaning of such a contract must be gathered by adopting a sensible approach and not be allowed to be thwarted by a narrow, pedantic and legalistic interpretation.
• Further, the Supreme Court in the case of Satya Jain (dead) through LRs vs Anis Ahmed Rushdie (dead) through LRs [(2013) 8 SCC 131] held that the principle of business efficacy is normally invoked to read a term in an agreement or contract so as to achieve the result or the consequence intended by the parties acting as prudent businessmen. Business efficacy means the power to produce intended results. The Court further noted that the test of business efficacy requires that a term can only be implied in a contract if it is necessary to avoid any failure of consideration that the parties cannot, as reasonable businesspersons, have intended. But only the most limited term should then be implied - the bare minimum to achieve this goal.

Conclusion

Commercial contracts play a major role in the world of business, where such agreements are the key to partnering with others and enabling substantial growth through commercial partnerships. However, it is imperative to understand the need to be attentive and careful while drafting such contracts to ensure there are no conflicts or disputes in the future. Even if there are some conflicts, there should be a resolution clause that directs how to proceed in such situations.


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