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Unlocking The Power Of Written Contract: Maximizing Benefits And Minimizing Risks

'Written contracts are the foundation of trust in business relationships, providing clarity, accountability, and protection for all parties involved.'

In this article, we will learn all about the significance of written contracts. Our goal is to enable readers to confidently negotiate written contractual agreements and understand the advantages of written agreements.

In the field of business transactions and legal agreements, written agreements serve the importance of clarity and certainty. When entering a partnership business or obtaining products and services a well-drafted agreement may protect the interest of all parties and it can prevent misunderstanding.

Essential elements of a contract
Contract: It is defined under Section 2(h) of the Indian Contract Act, 1872, as an agreement enforceable by law is a contract. A contract is anything that is an agreement and is enforceable by law.

Valid agreements + enforceable by law = contract.

It has an order of formation to the contract:
  • Proposal or offer
  • Acceptance
  • Promise
  • Lawful Consideration
  • Agreement
  • Enforceable by law
  • Contract

According to the Indian Contract Act, of 1872, there are the following elements of the contract:
  1. Offer and Acceptance: A contract is the formation of the offer and acceptance. Contract formed by more than two minds. They have a common intention for the same thing to give rise to an agreement. An offer is a declaration of his/her will to do something, and acceptance is an expression by the acceptor of his/her willingness to offer.

    Offer and acceptance are two basic components of any contract. The offer is the first step, and its acceptance is the second step in forming contracts.

    Offer + Acceptance = Promise
  2. Intention to create legal relations: The parties must intend to create a legal relationship for the valid agreements. There must be awareness of legal consequences in the minds of parties.
  3. Lawful consideration and object: Consideration is the basic element of every valid contract. It is the valuable things, exchanged between the parties. A lawful object is the motive or goal of the agreement.

    These are two different terms: consideration is the price for which the promise moves, while the object of an agreement is the motive, purpose, and design for which the agreement is executed or proceeds.

    Both should be lawful; no agreement shall be a good contract unless the consideration and object are lawful.

    For example:
    Object Consideration Agreement
    1 Buying a car; It is legal Giving drugs; It is illegal Illegal Agreement
    2 Gun without license; It is illegal Payment with cheque; It is legal Illegal Agreement
    3 Buying a car; It is legal Payment by cheque; It is legal Legal Agreement

  4. Competency to contact: Every person, irrespective of race and sex is competent to sign the contract. They are:

    Who is of the age of majority according to law, has a sound mind, and is not disqualified from contracting by any law.
  5. Free consent: After competency, another important requirement of a valid contract is free consent. For the agreement, it is required that consent be not only real consent but also free consent. consent is said to be voluntary when it is not caused by: Coercion, undue influence, fraud, misrepresentation, mistake, or effect where there is no free consent.
  6. Possibility of performance: For a valid agreement, a party must agree upon those performances that are real and possible to perform.
These elements of the contract assure the guarantee of legality, enforcement, and protection of each party's rights under a contract. In the absence of any element of the contract, it can be difficult to enforce and can be void.

The purpose and importance of written contracts
The purpose of the written agreements is to serve as protection for all parties involved in the agreements.
  1. The written agreements help to reduce the possibility of miscommunication and disputes between the parties by outlining the terms and conditions, rights and obligations, liability limitations, etc. in the clauses of the agreement.
  2. It provides concrete proof of the agreements. It serves as a legal document in the event of disagreement.
  3. The main purpose of written agreements is the enforceability of agreements, which is difficult in oral agreements before the courts.
Example: Pulkit and Mrinal decide to enter into a business partnership to launch a startup. They negotiate agreements on several topics, including decision-making procedures, profit-sharing plans, ownership percentage, and investment amounts. In the beginning, they have verbal communication of these terms.

But as the company expands and conflicts emerge, Mrinal argues that since he invests more than Pulkit, he should be paid more because of their initial conversation. In response, Pulkit claims that he invests more than Mrinal does. Disputes begin to arise from this point on. Now they begin to realize the importance of written agreements.

If Pulkit and Mrinal had a written partnership agreement where they had mentioned all clauses of the agreement and signed by both parties, it would have provided clarity on their respective rights and obligations. In the event of a dispute, they could refer to the written contract to resolve their differences and protect their interests.

Thus, having a written contract would have protected Pulkit and Mrinal's interests in the partnership business, helped them avoid misunderstandings, and saved their interests in the agreement.

We learn about the importance of written agreements from the above discussion.

The Benefits Of Written Agreements:
  • Clarity about clauses (easy to understand): A written agreement provides clarity on clauses and facts that are mentioned in a written agreement. It clarifies all clauses of agreements like rights and obligations, terms and conditions, payment modes, and all other important details. Written agreements help to understand the intention of parties upon which they agreed to enter into contracts.
  • Agreements are used as legal tools: Written agreements are used as legal tools by both parties. Writing down all points of the initial intention of the parties helps to prevent future disputes. If one party changes its mindset in the future, then the other party has written agreements as a legal tool. It binds the other party to perform their legal obligations.
  • Prevention of risks: Throughout the duration of the agreement, there may be a chance of risk between the parties, which creates many other problems. By writing down the clause of the agreement, it can prevent risk. It is important to mention all clauses that address specific risks, such as drawbacks by parties in between the terms of the agreement (liability limitation), compensation provision, and dispute resolution methods.
  • Legal Enforceability: The first thing courts ask from the claiming party is, do you have anything in writing? So, it is important to have a written agreement to enforce before the court of law. Written agreements can easily be enforceable by courts as compared to oral agreements. It is legally binding on both parties. If any party breaches their duties or denies performing their obligations under the written agreements, then the other party has a written agreement through which he can approach the court of law to seek legal remedies such as specific performance or damages.
  • Records as proof: What was mutually agreed upon between the original parties may not be remembered. When we have written agreements, they serve as records for both parties upon which they agreed. Keeping records of both parties helps in future disputes. Written Documents, have all the records and provide the existence of a legal agreement between the parties.
  • Minimize the conflicts: In written agreements, there is less scope for conflicts between the parties. If any issues or disputes arise throughout the duration of the agreement, then the written agreement serves as a reference point and helps in resolving the conflict between them.

Risks in non-written agreements or verbal agreements:
  1. Lack of clarity and certainty: Non-written agreements may confuse the parties. Without writing clauses of agreement like rights and obligations, terms and conditions, modes of payment, scope of work, and other important details, it can create several issues in the future. It may result in disputes or disagreements between the parties. There is no clarity about the clauses of the agreements upon which they had agreed.
  2. Possibility of Misunderstanding: Non-written agreements or verbal agreements may be misunderstood by parties because of their wrong interpretations of verbal communications. So, it is necessary to write down all important points in agreement to avoid the chance of misunderstanding. For example, there is a contract between parties, to supply fifty phones in consideration of five lakhs by next Saturday. The supplier interprets this as the upcoming Saturday, while the buyer meant the next Saturday. As a result, the supplier rushed to supply the phones by the upcoming Saturday, but the buyer expected it to be completed next Saturday. It creates a misunderstanding between the parties. This misunderstanding can be avoided through written agreements.
  3. Risk of memory fades: over time, what was mutually agreed between the parties may not be remembered. In non-written agreements, a party may forget or misremember the details of the agreements. This led to conflict between parties over what was initially agreed upon, and it became difficult to resolve the dispute without written agreements.
  4. Difficulty in enforceability: It is considered one of the most important points of risk in verbal agreements. Non-written agreements are often difficult to enforce in court. It can be challenging for both parties to prove the terms and conditions of the agreement before the courts. It limited the legal rights of both parties. The courts also face difficulty in finding out that, what was the real agreement between the parties upon which they agreed. On whom does the court rely? Think it. It creates difficulty in legal proceedings. Therefore, to ensure enforceability, written agreements are the foremost required evidence.
  5. Relationship issues: The relationship between individuals, groups, companies, and countries changes over time. After a conflict, there may be issues in the relationship between parties and chances of disagreement. To avoid risk, there should be an agreement in writing.

In conclusion, written agreements furnish several benefits that can protect the interests of all parties involved in business. By writing agreements, it gives clarity and certainty in the event of disagreements or misunderstandings. Written agreements can help to build trust between parties as well as provide a sense of security and assurance that both parties will fulfill their obligation. Overall, having a written agreement ensures a successful relationship, maximizes the benefits, and minimizes the risks.

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