Contracts are an integral part of our life. Contrary to popular belief,
contracts are not only extensively used in business deals but also are in our
everyday lives. You might be surprised to know that one signs numerous contracts
daily! Activities ranging from signing a business deal, buying a movie ticket,
accepting the terms and conditions on a website, boarding a bus- all involve
the use of contracts. Contracts are omnipresent.
What Are Contracts?
Section 2(h) of the Indian Contracts Act,1872 defines contracts as An agreement
enforceable by law is a contract.[i]
To simplify this definition, it can be said that a contract is a written or
spoken agreement regarding an obligation enforceable by law. The parties set out
mutual responsibilities, rights, and duties towards each other regarding the
relevant terms and conditions in a contract. In other words, a contract
regulates the relationship by laying down the conditions of the relationship and
the scope of work.
A contract can be a written contract or an oral contract.
A written contract is a printed document between two parties, stating their
obligations towards each other. Generally, written contracts are preferred over
oral contracts for business deals or other important official agreements. This
is primarily because a written document has more evidentiary value before the
law than mere words. In addition to this, a written contract helps to minimize
the risk involved. It is generally advised to reduce the complicated contracts
to a written one. Section 25 of the Indian Contract Act,1872 states the types of
agreements that must be presented as a written contract.
An oral contract is a type of business contract that is outlined and agreed to
via spoken communication, but not written down.[ii] Oral contracts are generally
considered as valid as written contracts. However, in certain cases, the oral
contract is accepted only if backed by written documents. Other evidence that
can bolster the enforceability of oral contracts can include- testimony of a
witness, bills, emails, etc. Oral contracts are best used for simpler contracts
where the parties are unlikely to go to court. Complex oral contracts should be
avoided as they generally fall apart on scrutiny of the court. This is because
it is an ordeal to reach a consensus regarding the finer points in an oral
Why Do We Need Contracts?
Record Of CommitmentContracts represent the relationship one party enters with the other. Each party
has certain responsibilities and enjoys certain rights towards the other. A
contract is a visual record of this relationship.
A well-drafted contract is likely to state every detail and the extent to which
the parties are bound to each other. A contract defines the relationship between
the parties. If a party breaches the obligation to which it is committed, the
other party can approach the court.
A contract states the:
They bind parties to their obligations: If a party tries to back out
of its obligations, it can cause problems in the relationship. A contract cuts
down the likelihood of a breach.
- The goal or objectives that the parties intend to achieve through the
- The scope of work to be performed by the contracting parties
- In case of a sale deed, the description of the goods to be sold.
- The consideration agreed to be paid and terms of payment.
- The indemnities which each party would give the other as applicable
- The limit of the liability of each person vis-à-vis the other party or a
- Grounds of termination of the contract.
- Governing law.
- Arbitration, if necessary.
Prevents Conflicts And Minimises RiskContracts detail down each party's responsibility. This leads to clarity between
the parties and better understanding among them regarding the deal. Conflicts in
a business are undesirable as they exploit resources that could have otherwise
been used to increase productivity.
In addition to this, contracts also minimize the risk involves by detailing out
the extent of one's liability. For example- a contract may limit one's liability
and save his/her personal property from being liquidated to pay off the debt in
case of dissolution of the business.
Contracts Serve As A Communication ToolContracts are by nature collaborative and relational. By clearly stating the
important clauses for the parties they lead to transparency which enhances
communication. A contract with convoluted language and imprecise terms is likely
to cause a great deal of confusion between the parties.
Contracts that clearly
state their terms and condition are preferred over contracts that don't. All
relationships require clear communication for healthy continuation and so do
business relations. Contracts serve as an efficient communication tool that
ensures that the relationship is a healthy one.
Increases Operational EfficiencyContracts are essentially binding agreements that state that one side will
deliver goods and services for a certain consideration by the other side. A
contract with the appropriate term will help the business to operate
It is important to understand that a blockade in a contract is equivalent to a
blockade in revenue. Conversely, a well-drafted contract leads to a smooth flow
of operation and hence easily helps to generate revenue.
In addition to this, contracts are easier to manage and are comprehensive. This
helps the business operation to save up a lot of revenue that can be diverted to
more productive means.
Contracts Are Used As Legal Tools
Contracts gain such vital importance in our lives because they legally bind the
parties in a relation. Any breach of a contract can be redressed, and the
damages can be liquidated. Besides the basic feature, the contract also contains
other vital legal aspects that boost the relationship between parties.
Legal essentials like jurisdiction, governing law, arbitration, etc. all find
mention in the law of contracts. Contracts boil down the legal principles
contained in the contract to outline rules, which are easy to abide by. This
essentially helps the contracting parties understanding the law.
Working without contracts can lead to complications in a business deal and is
hence inadvisable. In cases where complications arise between parties dealing
outside a contractual relation, the sole remedy is to go to court. The judge
must determine the liability of each party towards the other, and the outcome
may not satisfy either of the parties.
To prevent such hazards from taking place, it is advisable for the parties to
negotiate on the important terms and conditions beforehand. Besides preventing
the above-mentioned risk, a contract leads to better business relations and
efficiency in operation.
Oral Contract Definition - Investopedia
Importance Of Written Contracts In Everyday Business Transactions- mondaq
What are contracts and why do you need them? – Linkilaw
The Case for Contracts in 7 Reasons- Concord
What is a Contract according to Indian Contract Act?- toppr
We all enter contracts every day, so why are they still so hard to understand?-
What Did I Agree To? Contracts in our Everyday Lives- Queen's University
Why Do We Need Contracts: Everything You Need to Know- Upcounsel
- The Indian contract Act,1872