Business relationships and contracts
May 31 2012, 10:59 | By SME Mentor
Niranjan Vaghela is a practising lawyer and counsel based in Mumbai.
Image: SME Mentor
One of the essentials of running an enterprise, whether small or medium, is the creation of business relations with parties. Either it is for supply of raw materials and other materials and/or services, or it is for sale of your goods, products and/or services. The transactions of the business create the need for setting up business relations with parties on a regular basis. Usually there are regular dealings with the same parties. When dealing with the same party, consistency and confidence are built in the business relations.
The business relationship one creates with a party essentially forms a contractual relationship, where terms and conditions of the relationship are determined from practice adopted between the parties, bills/invoices issued, correspondence between the parties etc. This leaves room for interpretation of the terms of the contractual relationship by either party, which can lead to disputes down the line.
A formal contract setting out the written terms and conditions of a business relationship leaves no room for any interpretation as to the terms and conditions of the contractual relationship. This, consequently, reduces the chances of disputes between the parties. It is, therefore, advisable to draw up a formal written Contract containing the terms and conditions of the conduct of the business, which is signed and executed by the parties.
Some Contracts provide only basic terms and conditions, sketching out the main terms and conditions of the contractual relationship. This can happen when the parties are not too sure how the business relationship will shape up. But again this can lead to interpretation of aspects of the business relationship not provided for in the Contract.
Hence, it would be wise that the parties endeavour to ascertain the terms and conditions based on the entire transaction. If the parties can contemplate and envisage the entire contractual relationship right at the time of negotiating the transaction, it will help in preventing a lot of problems later. The different aspects of the transaction, which may be regarding raw materials, products, specification of goods or services, quality, warranties, testing of the goods, delivery, transportation, time of performance, payment terms, government policy, taxes etc. should be well thought out. There may be some room created for practical difficulties which can be faced. Where there can be no compromise, the same should be specifically stated. After looking into all the aspects of the transaction and what is needed to be provided for each aspect, the terms and conditions should be drawn up.
Formal contracts usually start with the date and place of the contract and the names and descriptions of the parties to the contract. This is followed by the recitals, which usually introduce the parties and may provide for the background, surrounding circumstances and reasons for entering into the business relationship. Then comes the operative part of the contract, which provides for the contractual terms and conditions etc, between the parties. The contract ends with the execution clause, where the parties and witnesses place their signatures, stamps and seals. There may also be a Schedule to the Contract providing the details of the subject matter of the contract. For example, the subject matter could be the description of the goods to be dealt in.
While readily available formats of written contracts have been used for business transactions, there is a danger in using such formats without taking legal advice, as these may not provide for the specific needs of your transaction. Since every transaction is unique, the terms of a ready format cannot match every transaction. Such formats may provide terms different to those desirable for the contemplated transaction and may not provide the terms required for the transaction. It is thus recommended that you seek the advice and/or assistance of an Advocate for drawing up a contract.
When finalising a contract, carefully read and check the draft contract. It would be prudent to show it to your other partners, directors, managers and/or key persons involved with the running of your business etc, for their inputs. In this manner you will be able to cover most of the requirements of the business relationship in the contract.
Contracts can also provide for Jurisdiction in the case of disputes, i.e. the place where the parties can file a case in the event of a dispute. In law, parties can choose one place of jurisdiction, where the Jurisdiction would ordinarily be at more than one place i.e. the place where the cause of action arose or where the contract was entered into or where the proposed Defendant of the proposed Suit ordinarily has his address (residence/where carrying on business) etc., as the case may be. One cannot choose a place for instituting a Suit where the Jurisdiction will not ordinarily be.
You could add a clause for disputes to be adjudicated by Arbitration, i.e. under the Arbitration and Conciliation Act, 1996. Arbitration is an alternative disputes resolution forum where the parties can appoint the Arbitrator (i.e. The Person who will adjudicate regarding the dispute) and the dispute can be adjudicated quickly. This process is usually much faster than going to an ordinary Court. This practice is usually adopted in commercial transactions.
Execution of the contract is generally done by signing the Contract. The signatories to the contract should be the proper persons, i.e. a Proprietor of a business, an authorized signatory of a Company or a Partner acting on behalf of a Partnership Firm etc. An authority to the signatory representing a Company should have a Resolution passed by the Company authorising the signatory to sign and execute the Contract on behalf of the Company. A person can also be authorised to sign the contract by virtue of a Power of Attorney granted in favour of the signatory by the Business entity. Where signatories are signing on behalf of Business entities, the stamp and/or seal of the business entity is also placed along with the signature. Usually you may have independent witnesses to sign the contract, as witnesses to the execution of the Contract.
You can enter into a written contract at any stage and even in on-going business relationships. There are instances when you are testing waters with a new party and start transacting some business with them, and may not have felt the need to enter into a written contract. However, if the business continues, it will be prudent to enter into a written contract setting out the terms and conditions of the business.
After creating a business relationship and even after entering into a written contract in respect of the business transactions, there may be need for changes or modification of the terms and conditions of the contract. Such changes may be due to exigencies or practical difficulties faced by the parties or the change in government policy or for some other reason. Mutually, the terms and conditions of the contract can be changed or modified to meet the needs of the parties. Such changes can be drawn-up in writing and formally signed and executed by the parties. There may be a modification or change of some of the terms of the contract or addition of terms of the contract, in which case the other original terms remain in force and binding between the parties and it may be so stated in the writing by the parties to modify the contract. Such writing will act as an addendum to the original contract. In a few cases it may envisaged and mutually agreed that an entirely new contract should be entered into, in which case the original contract would no longer subsist. In such cases it may be prudent to state that the original contract has been terminated etc.
(Disclaimer - This Article is of general nature and not legal advice/opinion and not solicitation or advertisement for work. The Author will not be responsible for consequences, costs, losses or damages of any kind or nature, arising from the use of, or inability to use, the contents of the Article.)
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