The Law of Contract and its role in Business Transactions

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Since the dawn of human society, there have been many laws and policies that people have practiced. These rules and regulations are referred to as ‘Legislations’ which were created or established by an appointed agency and which were regulated or implemented by a supervisory authority. During the barter exchange era, when people began to exchange goods, among others, in order to meet their needs, they came up with the concept of money and starting a company. Nowadays, fast economic growth in the world accelerates corporate transactions and business results and this is facilitated with the help of a legal instrument for building a foundation of a rock-solid deal, known as ‘Contract’.

Law of Contract.

The word ‘contract’ is interpreted as an arrangement between two or more parties, which is of a contractual (binding) nature. As a matter fact, an agreement with legal enforceability is said to be a contract. It specifies and describes the responsibilities and commitments of the parties concerned. In each contract, the ‘offeror’ makes an offer to enter into a contract with the ‘offeree’. The offeror agrees to do something in particular (or to refrain from doing something in particular) and, if the offeror accepts this offer, a contract is made. The contract itself, must prove to have certain elements.

Essential elements of a Contract.

A contract is lawfully enforceable, which ensures that if one party fails to do what he or she has agreed to do, the other party may proceed to the courts to enforce the arrangement or offer damages for injuries suffered as a result of a violation of the contract because a commitment made under the contract has not been fulfilled or an act has not been carried out. However, a contract can only be executed if it satisfies the following conditions:

  • Agreement: There must be at least two parties to constitute a contract, i.e. one who proposes and another accepts the same The primary factor which establishes a contract between the parties is an agreement which is the product of an offer and approval and which constitutes a consideration for the parties involved. 
  • Free Consent: Consensus of the parties is another essential feature of the contract, which ensures that the parties to the contract must agree on the same issue in the same way. The consent of the parties is said to be free if it is not compromised by coercion, unreasonable force, deceit, misappropriation and error. It must be in writing.
  • Competence: Competence applies to the ability of the parties to enter into a contract, i.e. he/she has attained the age of adulthood, he/she must be of a sound mind, and he/she is not excluded from entering into a contract in compliance with the law.
  • Consideration: This means the price agreed to be paid for the transaction. It must be both sufficient and lawful.
  • Legal objective: The objective on which the contract is rendered must be legitimate and lawful, or otherwise it must be declared void.
  • Contract is not expressly declared null and void: The statute does not expressly declare the contract null and void, such as a contract for the restriction of marriage, commerce or legal proceedings.

Importance of contracts in Business.

The contract is a written agreement agreed by all participants, the employer and the employee, and is the basis for any profitable enterprise. Contracts provide greater accountability for the execution of the tasks and the fulfilment of the goals as agreed in the agreement. It acts as a fantastic help for establishing a positive relationship with the clients.

In this respect, contract management or administration is a technique applied to the management of contracts lawfully negotiated with clients, partners or staff. Contract management means managing or adjusting the terms and conditions of the contracts and ensuring consistency with the rules as set out in the contract. Contracts guarantee a standard commercial practice, giving clarification to the specifications. It helps to accomplish the desired results quickly and acts as evidence in the event that the wishes of one group are not met, it is seen as a breach of the contract and the individual has to suffer the cost of the service. It is necessary to get the contract drawn up and accepted by a lawyer lawfully. According to the following factors, contracts become extremely important:

  • Detailed proof of information: The primary aim of the contract is to document the specifics decided by both sides through mutual consent. It offers a detailed awareness of the services rendered by a third party or the monetary requirements to be fulfilled by a third party. This information will serve as legal facts and are very relevant to the deal.
  • Prevention of miscommunication and misunderstanding: Miscommunication or misunderstanding is a common issue encountered in any company for a variety of reasons. The preparation of a contract is a mandate in order to deter such situations. It is important for the two sides to read and obey the negotiated laws. It has a huge effect on the corporation because infringements of the contract laws will lead to disputes among the parties and thus affect the whole firm.
  • Offers protection: A legal agreement plays an important role in providing security between the parties as it explicitly points out the contract tenure and collection of obligations. Any departure is a violation of contract and each of them has the absolute right to recognize it. If either of the parties bring an action against the other side at the time of a contract violation, the contract could be legitimate proof.
  • Ensures confidentiality: It requires a non-disclosure agreement (NDA) which covers sensitive information. Pursuant to this agreement, the parties involved are not entitled to disclose the business and to have a monetary exchange between them and any third party. In the event of disclosure by any party, they may be liable to a violation of contract law.
  • Works as a corporate record: The written contract shall be the relevant documentation of the mutual consent of the proceedings agreed to in the arrangement. It can be used for potential comparison purposes and provides information on the time-limit for completion of any job assigned as per contract. The length of the deal is also highlighted in the document, which gives additional guidance on the terms of the termination. In the worst case, though, the contract may be cancelled if the other side fails to comply with the rules set out in the contract or bypasses the terms.

At one time, transacting business was easy. Two people agreed to make a trade, and both parties honoured their word. But in the 21st century, professionals are all too aware of the long history of deal-breaking and lawsuits that have taken place all around them. In business, contracts are important because they outline expectations for both parties, protect both parties if those expectations are not met and lock in the price that will be paid for services. Contract law is critical because it permeates our culture. Without it, life as we knew it may not have happened. Consider this topic for a moment from the point of view of the business, nearly any deal it makes includes a contract. For example, purchasing raw materials, renting property, employing equipment, selling its goods or services, and using banking and similar processes to make or collect payments. Likewise, most customer purchases require the procurement of products or services facilitated by the deal. As for companies, it is impossible to think of many purchases made by customers that are not of this type. Finally, from the point of view of government, since much of what they do stems from the intervention of the relevant Parliament, gradually the services they offer are privatized and provided in compliance with the contract.

Previous research in this area focuses on how the contract is used to replace the loss of confidence between the parties. The confusion faced by one side also applies to potential situations and some of them are specifically linked to the other party in the business partnership. The trouble with this is that it is difficult, and often almost impossible, to protect against all potential future eventualities. This is especially problematic as the participants aim to defend themselves in a potential relationship that involves multifaceted and exceptional exchanges. Contract negotiations are evaluated on the basis of five phases: bid, debate, adaptation, preparation and final process of negotiation. Each process is studied on the basis of its duration, the topics under consideration and the interaction between the parties. The contract negotiations are not expected to have any direct effect on the eventual use of the contract, although it is believed that they will largely affect the contract and the closeness that will be formed between the parties. This has been found that when one of the parties involved is dominant and the other weak, the stronger bargaining party always sets both the agenda and the contract plan. This, in essence, has an effect on the outcome of the talks. The outcome is likely to be a unilateral deal. There is also a possible reciprocal connection between the length of the talks and the closeness of the parties. Long-term talks, for example, are likely to result in greater closeness as the sides learn to know each other better. In the other side, if the sides already have a close relationship, the talks can be short-lived.


The above factors made contracts inevitable for companies to keep their details safe and to shield them from the crooked. In addition, it will shield workers where employers fail to abide by the terms of the contract by making misleading promises to employees and misguiding them. In addition, we maintain that the centre of the analysis is the negotiating process, the contract and its use. Consequently, the contract itself has a significant effect on the use of the contract. A unilateral contract that may have been written by the giving party in a right-of-use arrangement is used to regulate persons within the company of the opposing party. This very contract is often used in a more differentiated manner than otherwise. It is found that a typical contract leads to a non-differentiated use. A contract which is less comprehensive is seen in a more distinguished manner than a contract that is lengthy. A contract with a broad operational content is used to manage the distribution processes of all sides, whereas a contract with a considerable technical content tends to be used to monitor the output activities of the group. Relations between the parties have a clear effect on the implementation of the contract. The transactional relationship tends to lead to a distinct use of the deal, whereas the relational relationship leads to a non-differentiated use. However, drawing up a contract, taking all these considerations into account, is a difficult and time-consuming operation. It is also recommended to pursue the assistance of an expert counsel.


Author: Aabir Shoaib, Chandigarh University

Editor: Kanishka VaishSenior Editor, LexLife India.

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