Negotiating a commercial agreement

Contract

The Contract Act of 1872 states that ''an agreement enforceable by law is a contract''. Thus, for contract to be valid 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 the Contract Act of 1872. Contract negotiation should be positively beneficial to both parties in every area to achieve an equitable and fair deal. A well-negotiated contract lays down a solid foundation for a long-term relationship between both parties.

Commercial agreement

A commercial agreement is a legally binding contract between parties where both are required to do particular activities or refrain from doing something.The negotiation between parties regarding the commercial aspects of product or services are recorded in commercial agreements in writing. The agreements define the obligations of each party and the benefits the parties will get in return from the agreement.

The initial part of the contract typically requires the most work as it will:

• identify the parties
• define terms, purpose, and duration of agreement
• discuss the details of the contract, including specifics like the product or service being sold, delivery options
• define commercial benefits
• define obligations of the parties to the agreement

The next part of the commercial agreement is that it should address specifics of non- performance. In each contract, you might find the use of boilerplate legal wording that covers specifics like the following:

• Warranties,
• Indemnification
• Termination
• Liquidated damages

You need an area for signatures at the bottom where a representative of each party will sign. Signature of parties on stamp paper is also necessary to prove consent to the agreement. It is crucial to verify that the representatives are truy authorized to sign on behalf of the contracting party; otherwise, an unauthorized signature can invalidate the agreement and result in an unrecoverable loss.

Executing a valid and legal contract essentially has three phases:

• Phase one: Contemplate the deal and evaluate pros and cons (risks) and future repercussions
• Phase two: Reach the agreement through negotiations; complete a formal agreement that outlines the terms of the agreement
• Phase three: Performance and enforcement of the contract; seek legal advice for breach and pursuit of damages

The law on stamping and registration

Agreements being the soul and heart of businesses need to be enforceable by law.

The Indian Stamp Act, 1899 deals with stamping of agreements/documents in India. Stamping of agreements and documents is desirable as it ensures legality and validity, enforceability, and admissibility in court since such agreements can be registered under the Indian Registration Act, 1908, which in turn ensures its enforceability.

The Indian Registration Act provides for registration of documents thereby recording the contents of the document. Registration is required to conserve evidence and title. There are certain agreements mentioned under section 17 of the Indian Registration Act, which are to be compulsorily registered and thus, cannot be made without stamp paper. Some of these are:

• Instruments pertaining to immovable property i.e. sale deed, agreement to sell, gift deed, lease, and others
• Lease deed of an immovable property, where the lease exceeds a year
• Instruments that transfer or assign a decree or order of Court for a value exceeding INR 100 and immovable property

According to the Indian Stamp Act of 1889, stamp duty must be paid in order to record and keep track of all the transactions. Thus, the stamp duty is a proof that the deal has taken place between the parties.

Stamp duty means an additional charge levied on certain legal documents by purchasing a stamp to be placed on said document.

Points to remember regarding stamp duty:

• Stamp duty is valid for six months
• Whenever on foreign documents stamp duty is paid, it is valid for three months
• Unless stamp duty is paid, the agreement will not be enforceable in court
• Non-payment of the required stamp duty is a criminal offence, as per the Indian Penal Code
• Delay in payment of stamp duty can make the individual liable to pay a fine ranging from 2% to 200% of the total payable amount
• The stamp duty is to be made by the purchaser or buyer and not the seller

Whether all agreements should be on stamp paper?

The answer is no. Agreements can be made on both the stamp paper and on non-stamp paper. According to the Indian Contract Act, 1872 an agreement can be enforceable if it fulfils all the essential conditions like offer, acceptance, lawful object, consideration, competent parties, and free consent.

It is important to note that in India; even oral agreements are valid and enforceable under the Contract Act, provided they fulfil all the essential conditions of a contract. The Indian Contract Act of 1872 does not contain any provision that makes stamping of agreements compulsory or declaring any unstamped agreement as invalid or unenforceable.

Stamp duty implication on e-agreement

E-Agreements are those that are not paper based and are electronic in nature. These contracts are generally made for quickly entering into a contract or for the convenience of the parties. They are best made between parties who live in two different parts of the world and have to enter into an agreement.

Under the Indian Stamp Act, there is no provision that deals with electronic agreements or stamp duty payable on such agreements.

Most of the state stamp legislation does not have any provision related to electronic records except some states like in Maharashtra, Delhi, Uttar Pradesh, Karnataka, Gujarat, and Rajasthan, which mentions electronic records in the definition of "instrument', thus imposing stamp duty on electronic records.

Examples of commercial agreements include the following:

• Licensing and Franchise agreements
• Loan and finance agreements
• Supply of goods and services
• Shareholders and Joint Venture agreements
• Contracts for employment

Commercial agreement disputes

Disputes and disagreements surrounding commercial agreements typically centre on how the contract is interpreted. Seek legal advice prior to signing any contracts for further explanation about what you are agreeing to and what the consequences are, if you breach the contract.

Requirements in a valid and enforceable contract

For any contract to be legal and enforceable, some basic details must be present.

• Agreement: There must be an agreement that includes an offer and acceptance, and the parties must be on the same page when it comes to the elements of the agreement.
• Lawful consideration: Each party has to give something in the exchange. It is also vital for the validity of the contract. A promise to do something or to provide something without anything in return will not be enforceable at law and, therefore, will not be valid.
• Legal capacity: All parties must have the legal capacity to enter into a contract. There are certain circumstances, such as when one party is under the age of majority or was intoxicated at the time, that can render the contract void 
• Free consent: Another essential of the valid contract is the consent of parties, which should be free. As per the Contract Act, two or more parties are said to consent when they agree upon the same things in the same sense. The consent is considered free when any of the following things do not induce it:
  1. Coercion
  2. Misrepresentation
  3. Fraud
  4. Undue influence
  5. Mistake
• Writing and registration: The agreements may be oral or in writing. When the agreement is in writing it should comply with all legal formalities as to attestation and registration. If the agreement does not abide by the requisite legal formalities, the law cannot enforce it.
• Certainty: To give rise to the valid contracts, the terms of the agreement must not be vague or uncertain.
• Possibility of performance: A valid contract must be capable of performing. An agreement to do an act impossible in itself are void. If the act is impossible in itself, physically, practically or legally then the agreement is not enforceable.
• Lawful objects: According to the Contract Act, an agreement may become a valid contract, only if it is for a lawful consideration and lawful object. The below-mentioned considerations and objects are not lawful as per the Contract Act:
  1. If it is forbidden by law
  2. If it is against the provision of any other laws
  3. If it is fraudulent
  4. If it damages another person or property
  5. If it is the opinion of courts, immoral or against the public policies.

If an agreement is illegal, immoral or against public policy, such agreement becomes an invalid contract.