In today’s dynamic and complex legal scenario, contracts form the backbone of corporate and commercial relationships, where organisations rely heavily on them to formalize transactions. Every transaction requires a clear and enforceable contract in order to safeguard the interests of the parties and avoid any future risks and disputes. However, when it comes to drafting these legal instruments, businesses often face challenges in determining whether to rely on a readily available contract template or invest in a custom contract which addresses their specific needs and requirements.
Contract templates are a ready-to-use agreement that contain all the standard terms and obligations that can be quickly adopted for execution with minimal modifications. These templates may be available online or provided by legal professionals, and such templates are prevalent among startups and small businesses looking for low-cost solutions to document their commercial relationships such as employment agreements, service agreements, non-disclosure agreements (NDAs) and lease deeds.
Custom drafting on the other hand are agreements that are specifically tailored to meet the specific requirements of a business. These agreements are generally drafted from scratch by a legal professional who is aware of the nature of the transaction, nuances and the commercial understanding between the parties, industry specifications and applicable laws (such as the sector and state-specific laws, labour and employment laws, Companies Act, 2013 and the Indian Contract Act, 1872). Custom drafted agreements are also used in high-risk corporate transactions which require a deep understanding of the business’ operations along with the complex legislation and compliance requirements in India.
Key Differences Among the Two
- Customisation: A template is a pre-formulated document suited for recurring transactions with limited scope for alterations. Whereas customised drafts are highly tailored to meet the specific needs of the business incorporating essential and complex requirements of each transaction.
- Cost and Time Effectiveness: While templates are affordable and easily accessible as the pre-prepared drafts are available through online sources, such templates could also be out-dated and may not be in accordance with the evolving laws and regulations. To the contrary, custom drafts tend to be more costly and resource intensive considering that each agreement undergoes stringent review to avoid legal oversight, it also offers flexibility and minimized legal and regulatory risks as it is drafted and reviewed by legal professionals.
- Enforceability: Templates more often than not contain general and ready to use terms which might not align with the parties’ commercial expectations. This may lead to unfavourable and irrelevant clauses that impact the interpretation and leads to conflicts. Conversely, custom drafting reflects negotiated and agreed terms that are clear, enforceable and in alignment with the parties’ intent thus reducing ambiguity.
What is best for your business in India?
Given the key differences between contract templates and custom drafting that have been highlighted above, the primary question is regarding the choice among the two and the assessment of which suits best for your business in India. The choice largely depends on the nature of the transaction, the risks involved as well as the size of each business.
For businesses that are at their nascent stages that focus on being cost efficient and are growing, contract templates may be the preferred choice for simple and low risk agreements such as NDAs, vendor onboarding letters and employment offer letters. However, even at this early stage, businesses require critical agreements such as partnership agreements, co-founder agreements, funding agreements or even licensing agreements pertaining to intellectual property. In order to mitigate the risks involved in such agreements due to the long-term impact and potential for disputes, it is recommended that a well-curated agreement is executed to safeguard the interests of each party involved.
As businesses scale up, so do the transaction complexity where there is involvement of multiple jurisdictions, large-value transactions and multi-faceted regulatory compliances. In such cases, custom drafting becomes essential as imperative provisions such as indemnity, liability caps, dispute resolution, non-solicitation obligations and related commercials necessitate the need for modification as per the specifications of each matter and risk involved.
The best way to understand which option would be perfect for you is by:
- Evaluating the complexity of your situation and requirements.
- Considering the risk factors of the transaction.
- Analyzing the cost factor and time constraints.
- Understanding long-term and short-term repercussions of the agreement.
Businesses operating in heavily regulated sectors such as fintech, manufacturing or healthcare need custom agreements owing to the regulatory frameworks and sectoral compliance requirements as the businesses are exposed to higher risks. In such cases, contract templates can be significantly insufficient as they would fail to address the specific legal obligation and compliance requirements.
Conclusion
Ultimately businesses in India should evaluate the importance of each transaction, the potential legal exposure and long-term impact of the document before deciding on an approach. As standard practice, many businesses opt for a hybrid approach using templates for regular and standard transactions but seeking legal review and modification for complex transactions. However, whether you use templates or custom drafts, it is strongly recommended to regularly get each contract reviewed by legal professionals to ensure compliance with the evolving applicable laws and regulations.
THus content is originally posted on : https://www.ahlawatassociates.com/blog/contract-template-vs-custom-drafting-what-businesses-need
