Is your ‘oral’ contract valid legally? Startups Beware!

20th Feb 2012
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Lawyers at VakilSearch tell you moreAs per the Indian Contract Act, 1872, an oral contract is valid and binding on the parties which entered into it.

But in practice…

For any contract that is even remotely important to your business, make sure that you have it drafted and signed between the parties.

Why? It’s a question of evidence

It all boils down to the evidence that you can present about the contract having been entered into. In most cases where we see oral contracts, there is a dispute because the parties start claiming different things and there is nothing to back up their different understandings.

So what can be done in such cases?

If you have an oral contract and want to enforce it against the other party, one way to do it is by collecting evidence. An SMS sent to you by the other party accepting responsibility for delivering “the 20 units by Saturday” can be used as proof that you had an oral contract for the delivery of those 20 units.

Remember that if the contract was for the delivery of 100 units, but you only have an SMS saying that “20 units” would be delivered on a certain day, you will find it hard to enforce the remaining 80 units.

Additionally, if there are multiple kinds of units, this SMS will not throw any light. For instance, if you are a motorcycle dealer with Hero Motocorp, the SMS could mean 20 Passion motorcycles or 20 scooters.

So how do these issues get resolved?

If the matter goes to Court, it will look into the “totality of circumstances surrounding the contracts. For instance, coming back to the example of the Hero Motocorp dealer, if he regularly purchases only scooters from the company, and does not usually purchase motorcycles, the Court will decide in his favour if he argues that he ordered scooters and not motorcycles.

On the other hand, if he tries to prove that he was actually ordering motorcycles, he will have to show strong evidence to prove his case, and it may not be possible for him to succeed.

Can I convert my oral contract into a written one?

Yes, at anytime, and it is highly recommended as well. It is best to negotiate on potentially contentious issues (you can even negotiate via e-mail) before agreeing on a draft.

Once you have done that, have a contract drafted that captures that understanding in the best possible way, and remember to not sign on the dotted line till you are satisfied with the content of the Agreement completely.

Some closing points

Apart from the above points, there are many other things that you can use as evidence. For instance, if you have an oral rental agreement and want to convert it into a written one, you can show the rent receipts or the regular cash deposits of the rent amount as evidence.

If you have an oral franchise agreement, you can show some pamphlets or promotional material given to you by the Franchisor as evidence that he actually agreed to giving you franchise rights. You can also show the regular payment of the franchise fee as evidence.

If you have so far been working on the basis of an oral agreement, you are not alone. In India, most people work on the basis of oral understandings, and good written agreements are the exception rather than the norm. Having said that, you ought to try to correct the defect if possible.

About VakilSearch

VakilSearch is India’s leading online legal services provider for businesses and individuals. As the official partner of the Confederation of Indian Industry (CII) and knowledge contributor to Sulekha.com, the Hindu Business Line, Entrepreneur Magazine and the All India Rubber Association, VakilSearch reaches out to thousands of businesses, entrepreneurs and individuals on a regular basis. So when you visit vakilsearch.com, you can be assured of quality legal guidance and comprehensive documentation for your business and personal needs, at affordable prices.

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