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Agreement: Essentials, Types And Risks

An agreement is a formal and legally binding understanding or contract between two or more parties. It outlines the agreed-upon terms, conditions, rights, and obligations for all involved. Agreements can cover various subjects such as purchase, sale, business transactions, employment relationships, leases, partnerships, and more. For an agreement to be enforceable by law, it typically requires an offer, acceptance, consideration (something of value exchanged), and the intention of the parties to create legal relations. While agreements can be either verbal or written, certain types may need to be in writing depending on local laws and the nature of the agreement.

It is compulsory to register a tenancy if the tenancy exceeds 12 months, under Section 17 of the Registration Act 1908.

The disadvantage of not registering the sale agreement was specifically highlighted by the Supreme Court in its judgment in TG Ashok Kumar v. Govindammal (2010). "Unscrupulous property owners enter into contracts of sale and take huge earnest money deposits/advances and then sell the property to others, throwing the original contract holder and subsequent purchaser into litigation. Registration of contracts of sale will reduce the number of such lawsuits."

Essentials of Agreement

Prior to diving into the nitty-gritty details of creating an agreement, it's essential to take into account a number of pivotal factors to guarantee that the agreement is both legally sound and capable of being enforced:
  • Competence of the Parties: To be enforceable, the parties entering into the agreement should be competent in contracting. To be valid, the contract has to be signed by parties who attained majority age when signing the agreement. No binding contract can be entered by minors, persons of unsound mind, and those disqualified by law under various laws.
  • Minor Parties: If one or both of the parties are minors, the agreement should be executed by their respective representatives or guardians, as specified under the Guardians and Wards Act of 1890 or any other applicable law. This ensures that minors are protected and not unfairly bound by contractual obligations.
  • Free Consent: An agreement must be made with the free and genuine consent of all parties involved. Any element of dominance, fraud, or coercion renders the agreement voidable. Parties must enter into the agreement willingly and without undue pressure.
  • Lawful Purpose: There must be a legal basis to every agreement. Contracts that violate a country's policy or any law shall be regarded as null ab initio and hence unenforceable in a court of law.
  • Formalities: An agreement must be well signed, stamped and witnessed by at least two people to bear legal validity. This is important in ensuring that the agreement is real.
  • Immovable Property: Contracts concerning real estate such as real estate conveyance agreement should be registered to be effective. This is achieved when registration makes the contract a matter of public record and offers protection to the parties.
  • Contractual Nature: It's important to understand that every promise that forms part of a consideration constitutes an agreement. However, not all agreements are contracts. Only those agreements that meet the necessary legal requirements and are enforceable by law qualify as contracts.

Types of Agreement:

There are numerous types of agreements, each tailored to specific purposes, situations, and industries.

Here are some common types of agreements:
  • Sales Agreement (Purchase Agreement): This contract involves the terms of sale such as the purchase price, time of payment, the means of transportation and the warranties. It is sometimes applied in sale of commodities or services.
  • Lease Agreement: This document sets up a deal between two people. One person lets the other use their property for a while in return for payment.
  • Employment Agreement: This is a contract between a boss and a worker. It spells out things like how much money the worker will make, what benefits they'll get, what their job involves, and what happens if they need to stop working there.
  • Non-Disclosure Agreement (NDA): An NDA is a promise to keep secret important information shared between people or companies. It says you can't tell anyone or use the information without permission.
  • Non-Compete Agreement: Such agreement binds one of the parties, usually an employee or ex-business associates, not to engage in competing businesses for a specified period of time in designated geographical area once the agreement expires.
  • Partnership Agreement: Partnership agreements are written documents that define the roles, shares, responsibilities, and management of a partnership when individuals or entities decide to embark on a business venture together.
  • Operating Agreement: Such an agreement is applicable for LLCs (Limited Liability Companies), and it defines how the company should operate both internally and in terms of management. The Roles and Responsibilities of Members and Managers are defined in it.
  • Service Agreement: Where a party undertakes and agrees to offer certain services to another party, service agreements are employed. They cover services' scope, the payment terms, and expectations.
  • Loan Agreement: A loan agreement details the various terms and conditions of the loan such as rate of interest, payment schedule, and collateral (where necessary).
  • Franchise Agreement: Franchise agreements are usually the most popular types when it comes to establishing new businesses by franchising. Franchisee obtains right to use franchisor's brand, products and services with agreed fee and royalty rate.
  • Distribution Agreement: This type of agreement applies where a party agrees to market or trade in the other parties' products or services. The agreement defines the distribution conditions, particularly territories and term of payments.
  • Joint Venture Agreement: Joint venture agreement involves an alliance between two or more companies engaged in a particular business or project. The agreement explains the parties' interests, shares, benefits division, and management in the joint venture.
  • Software License Agreement: A Software License Agreement, often referred to as an End-User License Agreement (EULA), is a legal contract between the software developer or licensor and the end user of the software. This agreement outlines the terms and conditions under which the software can be used, specifying the rights, restrictions, and obligations of both parties.
  • Agency Agreement: An agency agreement delineates the extent of an agent's authorisation and responsibilities when one party (principal) allows another (agent) to act on their behalf.
  • Supply Agreement: This is an agreement where someone supplies goods or materials to another party. This involves price-quantity-delivery schedule-quality terms.

These include, among others, just a few types of agreements. Each agreement may contain particular provisions that address the requirements and needs of the parties entering into the transaction or the relationship. The parties need to prepare and review all agreements accurately so as to reflect their intentions and comply with the applicable law and regulations.

Risks of Agreement:
Entering into agreements, whether they are contracts, partnerships, or other types of agreements, carries inherent risks and potential challenges. Understanding these risks is crucial for making informed decisions and mitigating potential negative consequences. Here are some common risks associated with agreements:

Risk Categories

Financial Risks:

  • Non-Payment: In contracts involving the exchange of money, there is a risk that one party may fail to make payments as agreed, leading to financial losses.
  • Cost Overruns: Agreements for projects or services may incur unexpected costs, leading to budget overruns.

Performance Risks:

  • Non-Performance: A party may fail to fulfill its obligations under the agreement, resulting in delays, subpar work, or project failure.
  • Quality Issues: Services or products delivered may not meet the agreed-upon quality standards, leading to dissatisfaction or additional costs for corrections.

Legal and Compliance Risks:

  • Breach of Contract: However, parties may breach the agreement which could cause legal problems, sanctions, and necessitate legal solutions.
  • Regulatory Non-Compliance: Some agreements are governed by regulations or are legally enforceable; violation of those regulatory provisions may carry penalties or lead to litigation.

Operational Risks:

  • Resource Shortages: Agreements may rely on resources (e.g., labor, materials) that become scarce or unavailable, impacting the ability to fulfill obligations.
  • Technological Failures: Agreements related to technology projects may face risks such as system failures, cyberattacks, or data breaches.

Market and Economic Risks

  • Market Fluctuations: Economic conditions and market dynamics can change, affecting the profitability and viability of agreements.
  • Currency Exchange Risks: In international agreements, fluctuations in exchange rates can impact the value of payments and financial outcomes.

Reputation Risks
Damage to Reputation: Failure to meet obligations or ethical concerns within an agreement can harm the reputation of the parties involved.

Dispute Risks
Disputes and Litigation: Disagreements, misunderstandings, or breaches of contract can lead to costly legal disputes, which may take time to resolve.

Environmental and Social Risks

  • Environmental Impact: Some agreements may have environmental consequences or sustainability considerations that can lead to reputational and regulatory risks.
  • Social and Ethical Concerns: Agreements involving ethical considerations may face backlash or public scrutiny if they are perceived as unfair or harmful.

Contractual Risks

  • Ambiguity: Poorly drafted agreements or vague contract terms can lead to misunderstandings and disputes.
  • Inadequate Terms: Omissions or inadequately addressed issues in the agreement can leave parties without protection or recourse.
  • Market Changes: Agreements may be affected by changes in market conditions, technology, or consumer preferences, making the initially agreed-upon terms less favorable.

Precautions required in Agreement
To mitigate these risks, parties entering into agreements should:
  • Conduct thorough due diligence before entering into agreements, including financial, legal, and operational assessments.
  • Clearly define terms and responsibilities in the agreement to minimize misunderstandings.
  • Include dispute resolution mechanisms, such as mediation or arbitration clauses, to resolve conflicts without resorting to costly litigation.
  • Consider insurance options, such as liability insurance or performance bonds, to mitigate financial risks.
  • Stay informed about changes in regulations and market conditions that could impact the agreement.
  • Establish contingency plans to address unforeseen challenges or disruptions.

It's essential for parties to consult with legal and financial advisors, where appropriate, to assess and manage the specific risks associated with their agreements effectively. Additionally, periodic reviews and revisions of agreements can help adapt to changing circumstances and minimize potential risks.

Agreements play a vital role in various aspects of life and business. They serve as the foundation for conducting day-to-day business activities, corporate transactions, and any dealing between competent parties. By formalizing these arrangements in writing, agreements provide legal clarity, explicitly defining what actions are to be taken and the consideration to be exchanged.

In addition, a lot of agreements are used with regard to property lease as they provide essential aspects including the lease amount, lease duration, early ending of the lease conditions, among others. This helps landlord and tenants come into an agreement on the terms of the contracts and thereby avoid the future conflicts or legal problems.

In conclusion, agreements occupy an important niche in the legal sphere, being the cornerstone of all contracts and making it possible for lawful contracts between sides to be held in various spheres, from business transactions to rent agreement.

  2. Advance Legal Drafting, By Abhinav Gaur, Prakash Pandey, Shabdita Singhsdd

Written By: Md.Imran Wahab, IPS, IGP, Provisioning, West Bengal
Email: [email protected], Ph no: 9836576565

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