Be it your Small Medium Enterprises, Start-Ups, or well-settled business, when you get involved in transactions with your service providers or clients, you often wish that you had a written contract with the opposite party.
Even in 2021, most people involved in business transactions, sometimes avoid indulging themselves in the process of drafting and executing a valid contract. It happens usually because people believe that several kinds of business transactions work perfectly on trust, but when things go unfavorable, people realize that it would have been better if there was a written document in place and they would save themselves from the regret.
Generally, the first thought that pops up in mind while entering into any kind of business transactions, one thinks of having a contract to avoid complications but those who do not work on this thought always end up creating more chaos and damages by choosing not to have a contract. Here the big question is, ‘When you are entering into a business transaction that is beneficial for your business, then why not ease the pain of damages by binding this business transaction with a contract’?
Let’s take a brief insight on the importance of contracts in corporate transaction under Indian Laws, with help of its 07 key elements:
1. Perfect record of commitments made by both parties
At their very core, contracts are legal bonds and/or legal relationships between at least two people, two organizations/firms/companies. Under the contract, two parties mutually agree to work together and establish a connection that when fostered well and comes out beneficial on both sides, can be for several years. Here, the Contract works as the visual representation of that business transactional relationship.
Generally, in those cases where parties do not bind their agreements in the form of the contractual relationships, at one point or another, they tend to shift their statements, and the originality of the contract fades away. That’s the first element of a contract that makes it mandatory to form a contractual relationship while entering into business transactions. This way both parties can maintain perfect records of commitment made at the beginning of the relationship.
2. Helpful in preventing conflicts and mitigating risk
Contracts often go through the phases of negotiation before final execution to ensure both parties get the best possible deal. The idea behind negotiating the contract is to lead parties to mutually agreed outcomes that in the future prevents conflicts and forms a strong foundation for a robust partnership.
When a contract is managed correctly, one can find a trail of every change, comment and edits proposed and accepted. Having a proper process contract management removes unnecessary conflicts in businesses.
3. Make every party observe proper compliance
Unless every employee has legal awareness and your organization has a separate legal department, it’s likely to have a conflicting agreement. The moment you set up a proper procedure for executing contracts, things get easier. It is the following and adopting of executing contracts in a proper manner that makes every party observe for its proper compliance in the future.
4. Leads to effective collaboration and result
Contracts are the binding agreement that binds both the parties to deliver their commitments. By their very nature, contracts put a legal obligation to perform duties on parties which leads to effective collaboration among teams. Having a contract for business transactions does not only ensure its performance but also ensures that the result is delivered or damages are paid.
5. Enhances organization’s brand and values
Although you may not first think of this in mind when you think about contracts Contracts are an extension of your organization’s brand. Sending out a party a proper contract is a symbol that your organization cares about details and maintaining the contractual relationship.
These 05 Key reasons make it very clear that having contracts can benefit your organization in several ways. However, Legal provisions in India in reference to contracts have set certain requirements that need to be fulfilled for an agreement to be a valid contract. Once those requirements for the existence of a valid contract are fulfilled, the parties are said to have entered into a legal relationship.
When it comes to forming a contract, it is not mandatory to have the terms of the contract in written form. Indian Contract Act, 1872 also recognizes oral contracts and are common in business transactions. However, oral contracts carry several disadvantages with it, the important ones being:
- In the case of an oral contract, the terms are deduced from the conduct of parties to the contract. Many times, parties do not act in accordance with the agreed terms and that leads to totally different interpretations of the contract.
- In the absence of a written contract, it becomes impossible to enforce certain provisions in case of breach of contract.
It is therefore always advised to avoid oral contracts. Irrespective of whether you are entering into a contract as an individual or incapacity of a business establishment, always prefer that the contractual terms are reduced in writing.
The above reasons make it clear how you can benefit from contracts. Be it a small-scale business or a corporation, contracts keep you secure and protect you from unforeseen damages in regard to the entered business transactions.
So, I believe from now onwards, you will back up your every business transaction with a contract.
