BY DINESH JOTWANI, FACULTY, INDIAN ACADEMY OF LAW & MANAGEMENT (www.ialm.academy)
Need for a Contract
A need for legally binding contract arises at every step in a commercial relationship. When two or more non-trusting parties need to work together to make a transaction successful, they need to enter into a contract.
Whether it is big Joint Venture Agreement running into thousands of pages, or a small contract of hiring a cab, the parties involved need clarity in knowing 1) Scope of Work; 2) Financials Involved; and 3) Consequences of a default by a party.
Need for contracts is humongous. Some modern day examples of large contracts are – a patient being admitted to a hospital, purchasing goods from e-commerce sites, getting a cab on apps like Uber & Ola, ordering food on phone, sending a courier, opening a bank account, installing software or even big treaties between nations such as TRIPS, GATT, NPT, NAFTA, etc.
While death is a certainty, there exists another certainty in commercial transactions, it is existence of a contract.
Types of contracts
Contracts can be classified in several ways. They can be categorized on the basis of their 1) Intentions, 2) goals & impact, or even 3) involvement of parties
- Intentions: Examples include, Memorandum of Understanding (MoUs), Letter of Intent (LoI), Master Agreement & Statement of Work (SoW), Agreement, Contract. Offer Letters, Request for Proposals (RFPs), and many more.
- Goals and Impact: Examples include Lease Agreements, License Deeds, Joint Ventures, Shareholder Agreements, Franchise Agreements, Assignment Deeds, Patent Co-operation Treaty (PCT), Nuclear Proliferation Treaty (NPT), and many more.
- Involvement of Parties: Examples include Indo-US Trade Agreement, NAFTA (North Atlantic Free Trade Agreement), Trans Pacific Partnership Free Trade Agreement (TPPA), and many more.
Parts of Contract
A contract can be a single line and no law provides for any formal structure of a contract. However, global accepted practice is to have a contract divided into three parts:
- Parties: Define the parties clearly, including the successor. heirs and subsequent assignee of each party.
- Background/ Recitals: What is the background for need to have this contract. Generally, these statements in a contract start with “Whereas”.
- Operative: The operation part of a contract should have some basic elements, such as (1) offer; (2) acceptance; (3) consideration; (4) mutuality of obligation; (5) competency and capacity; and, in certain circumstances, (6) a written instrument.
Negotiation a contract
Contracts are manifestation of business activities or procurement needs of an organization. Therefore, it is a responsibility of business team or procurement department to negotiate a contract, and bring it to a closure.
However, we see more and more lawyers/ legal department doing the negotiating of a contract. (and not necessary business/ procurement departments).
This is because of increasing complexity in a contract and use of legal jargon that prohibits business teams to provide effective inputs during negotiating a contract with contracting party.
An effective contract negotiation requires collective inputs from business units, procurement department and also legal team of an organization.
Managing a contract.
The modern day contracts require a lot of back and forth. This back and forth is required not only from the opposite negotiating party, but also from internal teams specializing in a particular area touched by the contract.
For example, a typical modern day contract requires input from Business teams, Tax professionals, Procurement, Legal, Intellectual Property team and Finance Department.
The multiple eyes looking into the same document creates challenges of version control and track-change. Thankfully, IT- tools are available to handle these complex problems of multiple teams (perhaps spread across multiple locations) and effectively negotiate, execute and manage a contract.
Career as Transactional Lawyers
The contract drafting lawyers in corporations and law firms are more often referred to as ‘Transactional Lawyers’. Their main role and responsibility remains to draft, negotiate and manage contracts.
A typical multinational organization executes 1000-1500 contracts each day. These may be range from offer letters for employees, real estate contracts, consultant appointments, Financial & Banking documentations, Procurement agreements and many more.
All high valued contracts need to be vetted through Transactional Lawyers in an organization.
I encourage all law students and young lawyers to explore the potential of being Transactional Lawyers as one of the finest career choice in corporate law.
Check IALM’s course on corporate contracts here.