Drafting sales contracts in India

Contract

The Contract Act of 1872 defines contract as 'an agreement enforceable by law'. Thus, for a valid contract, there has to be an agreement, which is enforceable by law. Further, for enforceability, an agreement must possess the essential elements of a valid contract as contained in Contract Act of 1872.

Formation of a valid contract

According to the Contract Act of 1872, the requirements for a valid contract are the Agreement and Enforceability:

Agreement

The first condition of a valid contract is an agreement. Every promise and all set of promises, forming the consideration for each other is an agreement. When a person to whom the proposal is made provides his consent, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.

An agreement is valid when one party makes a proposal or offer and the other party signifies his assent. The following are required for a valid agreement.

• The agreement must be between two persons. It is required to be between an offeror and an offeree. Who accepts the offers becomes an acceptor. Both these parties should be different persons, as one cannot enter into an agreement with himself.
• Both the offeror and offeree in the same sense and at the same time should understand the agreement.

Enforceability

To mature into a contract, an agreement must create legal obligation as per the provision of contract laws that is a duty enforceable by law. Any agreement that does not create any enforceability, i.e. where the parties do not have a right to approach the court of law to avail legal remedy for breach of contract will not be a contract.

Legal requirements for a person entering into a contract

Sec.11 of the Indian Contract Act lists the qualifications that enables a person in India to enter into contract:

• A person should have attained the age of majority as per the law of the country of which they are a citizen.
  In India, the Indian Majority Act of 1875, governs the age of majority. As per Section 3 of the Indian Majority Act, an Indian citizen is said to have attained the age of majority upon completion of eighteen years of age. However, if a person is below the age of 18 years and a guardian has been appointed for him, the guardian shall attain majority at the age of 21 years.

• A person should be of sound mind at the time of entering into a contract.
  As per Section 12 of the Act, a person can be said to be of sound mind when he can assess, understand his actions, and realize the consequences of obligations imposed on him at the time of entering into a contract.

• A person should not be disqualified under any law to get into a contract.

Hence, we can deduce that the following category of persons do not possess the legal capacity to enter into a contract:

• Minor
• Person of unsound mind
• Persons disqualified by Law

Sales contracts

Sales Contract is a formal agreement between a buyer (or purchaser) and seller (or Vendor) laying out the terms and conditions for which sales of goods/services is carried out. Contracts or agreements related to the sale of goods are governed under the Sale of Goods Act of 1930.

Parties to the sales contract

The type of parties involved in a sales contract are sellers, who are responsible for providing the goods, and a buyer (or customer) who buys the products.
A sales agreement will usually capture the name and address of both the seller and the customer.
Sellers and buyers can be individuals or any business entity, depending on how each entity is set up.

Sale and agreement to sell

• A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.
• A contract of sale may be absolute or conditional.
• Where under a contract of sale the property of the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
• An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.

How a contract of sale is made?

A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or payment by instalments, or that the delivery or payment or both shall be postponed.

A contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties.

A good drafting of contract is important as a contract is not merely an agreement but it protects the rights of the two parties and also gives them legal remedies. An agreement binds the two parties with some responsibilities, conditions, manners, issues, etc. Drafting should be fool proof so that there leaves no loose end that may result in exposure.

A legal document shall have certain ingredients in the drafting including simplicity, clarity, futuristic, options, definitions, straight and small sentences.

Companies must ensure competency of each other while entering into a contract

Most companies while entering into contracts with one another must make sure that the other party is competent enough to enter into a contract. This is required to avoid any legal complications in the future. This is mostly done through the inclusion of a representation clause in a contract stating that the company, as per its memorandum and articles of association, can enter into a contract through its authorized representatives. Both parties to confirm the representations made may annex a copy of the articles of association.

If the memorandum and articles provide otherwise, a condition precedent clause is incorporated into the agreement stating that the company shall pass necessary board resolutions to alter its articles of association. A stipulated date called a longstop date is given to the other party to comply with the condition precedent failing which the agreement shall stand terminated. A party might be asked to produce a copy of board resolution so passed/ changes made in the articles of association to the other party to prove its compliance with the condition precedent.

It is expressly mentioned in the agreement that both the parties indemnify each other from any suits, proceedings, or liabilities arising from breach of the representation clause.

General clauses in the sales contracts:

• Parties: Details of seller and buyer, such as name, address, legal representatives
• Details of goods: Details of goods that seller is selling to the buyer with their quantities, price per unit, specification, place of origin
• Price and payments: Consideration agreed by buyer to be paid to seller & the credit terms
• Delivery and shipping: Details of delivery time, place and delivery method, shipping method
• Warranties: Details of warranties that assures the buyer the goods or service is free from defects
• Inspection: Details of Inspection Standards, time, and method
• Termination: Details like by whom, when and what circumstances contract can be terminated
• Representation clause: Stating that Company, as per its memorandum and articles of association, is capable of entering into contract through its authorized representatives
• Signature and date

Liquidated damages

If the terms are clear and unambiguous, liquidated damages shall be stipulated in the agreement, in the event of breach of contract, unless it is held that such estimate of damages/ compensation is unreasonable or a penalty, the party who has committed the infringement is obliged to pay such compensation and that is provided for in Section 73 of the Contract Act of 1872.

Conclusion

• The agreement of the sale must undergo certain stages and procedure to become a valid contract
• Before entering into the contract or finalizing the contract, the parties must check the credibility of the document and finalize it then
• There is no strict format as to the drafting of the contract of sale; it can be moulded as per the needs and requirements of the parties
• However, there are certain clauses mentioned in this article that lays down paramount structure for the important clauses of the contract of sale
• There is no legal framework as to the contents of a contract of sale but mentioning certain clauses makes the contract stronger