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Key Points to Consider When Drafting a Contract (Agreement)

September 7, 20220

It is known that the basis of every legal relationship between two or more parties is a contract (agreement) concluded between them. A contract (agreement) is a document drafting by individuals, companies, as well as other legal entities, containing a number of terms and conditions that define and regulate the relations that will arise between such persons in the future. It is no coincidence that according to the Civil Code of the Republic of Azerbaijan, one of the main principles of civil legislation is the freedom of will of the parties, as well as the principle of freedom of contract. The Code establishes that individuals and legal entities are free to determine their rights and obligations on the basis of the contract and to set any contractual conditions that do not contradict the law.

As mentioned above, drafting of the contract (agreement) is understood as the phased inclusion of relevant clauses, terms and provisions in accordance with the requirements and wishes of the parties to the contract. At this time, it is certainly not possible to create the final version of the contract at the initial stage. First, a “draft contract (agreement)” should be drawn up and each clause included in it should be negotiated between the parties. When preparing the draft contract, the subject of the contract, the rights and obligations of the parties, settlement rules, the duration of the contract, dispute resolution, etc. different aspects should be taken into account.

I. Essential Elements of the Agreement (Contract)

We can liken contracts to an engine that runs your business. However, if a contract is like an engine, then it must be made up of various parts and components that allow it to do its job. This begs the question: if the main elements of the engine are the block, pistons, crankshaft, camshaft and cylinder head, then what are the main elements of the contract?

Although there is no single rule defining these elements in national legislation, we can draw the following conclusion based on international practice:

The main elements of each contract are as follows:

  1. Legality of the contract;
  2. Dispositove capacity of the parties;
  3. Accuracy of the contract;
  4. Offer;
  5. Acceptance;
  6. Intention of the Parties.

It is appropriate to explain each listed element separately.

A. Legality of Contract (Agreement)

We noted that according to the Civil Code of the Republic of Azerbaijan, “natural and legal entities can freely enter into contracts and determine the content of these contracts.” They can also conclude contracts that are not provided for in this Code, but do not contradict it. As can be seen from the meaning of the norm, the parties can conclude contracts freely and according to their will, provided they do not conflict with the law.

Regardless of the subject matter of your contract, i.e. what it is about, it must be within the requirements of applicable law. Otherwise, the contract will be considered invalid and cannot be partially or completely executed.

We know that each state has its own different laws and regulatory mechanisms, which in turn affect how contracts are drafted and enforced. For example, electronic signatures are allowed in the legislation of some countries, but not in others. In this regard, if the contract is signed in a country that allows digital signatures, both parties can sign digitally. However, if the legislation requires handwritten signatures on a paper document, then the contract must be signed physically, on a paper document by hand.

B. Dispositive capacity of the Parties

Simply put, the dispositive capacity of the parties is their “capacity to contract”. A person’s ability to act usually depends on his age, mental abilities, consciousness, etc. In most cases, the contracting parties must be over 18 years of age. In the Republic of Azerbaijan, the age of maturity is set at 18 years.

In addition, in all cases the parties to the contract must be considered mentally fit to sign it. This is due to not being under the influence of alcohol or other drugs at the time of signing. It should also be noted that no coercion or pressure can be used against a person to induce him to sign the contract.

On the other hand, when contracts are signed by individuals on behalf of companies, it is extremely important that the signatories have this authority. This authority of individuals is reflected in the power of attorney given to them by the company.

C. Certainty of Contract

Clarity means, first of all, that the main (and additional) terms of the contract, including the parties, are clearly indicated. These terms form the basis of the contract, and the more clearly and precisely defined they are, the less likely it is to accidentally break the contract.

To increase precision, the relevant provisions of the contract may include a description of the goods or services provided by each party to the other party. It should also be noted that the contract can be made more accurate by including additional identifying details such as the individual’s date of birth, tax identification number or passport number.

D. Offer and Acceptance

A contract starts when a person wants something and there are people or companies that can fulfill that request. So, one of the integral elements of every contract is offer and acceptance. In the Civil Code of the Republic of Azerbaijan, an offer is defined as an “proposal to conclude a contract”. The response of the person to whom the offer is addressed to accept the offer is considered acceptance. It should be noted that the offer and acceptance are the components that determine the moment of conclusion of the contract. Thus, according to Article 407.1 of the Civil Code, the contract is considered concluded when the person who sent the offer receives its acceptance. In addition, the contract is considered concluded when the parties agree on all the important terms of the contract in the required form. When we say the required form here, it is clear that the contract form is meant. Thus, the parties can agree on the form of the contract based on their will. Nevertheless, in some cases, the legislation may prescribe a certain form for the relevant type of contract, which the parties are obliged to comply with. For example, the Civil Code states that if the amount of the subject of the debt contract exceeds three thousand manats or if the participant of the contract is a legal entity, regardless of the amount, the debt contract must be concluded in writing.

E. Intent of the Parties

Intention, also known as “reciprocity”, simply means that all parties want to do business together. In order for the contract to be legally binding, all parties must agree. The easiest way to prove the intention is to conclude the contract in writing.

II. Nuances to consider when drawing up a Contract (Agreement)

First, the contract drafter/reviewer must be aware of the purpose of the contract. That is, it is necessary to fully understand what the subject and object of the contract is, as well as to express it clearly and precisely in writing.

In addition, the contract should include the rights and obligations of the parties in relation to each other, including provisions on the liability of the parties in case of non-fulfillment of these obligations. We know that each party is there to fulfill a specific purpose and that purpose and role should be clearly stated when drafting the contract.

Next, the expediency of contract implementation should be considered. In this regard, to determine the feasibility of the contract, you can answer the following questions:

  1. Are the terms specified in the contract enforceable?
  2. Do the parties to the contract have the ability to fulfill their rights and duties? (here, the ability of both persons to act, as well as material, availability of resources necessary for implementation, etc., should be taken into account);
  3. which party/parties earns more and which takes on more obligations during the term of the contract.

On the other hand, individuals should have the ability to foresee problems or disputes that may arise from the contract. The person drafting the contract should clarify which terms and conditions may cause disputes between the parties in the future and make appropriate adjustments to them. In addition, it should be noted that when reviewing the contract, it is necessary to identify gaps in it and eliminate them.

Finally, special attention should be paid to privacy issues when drafting the contract. Thus, if trade secrets or other confidential information are included in the contract, then it is recommended to sign a confidentiality agreement (conract) between the parties in addition to the main contract. Commercial secret means information related to the production, technological, management, financial and other activities of legal and natural persons, the disclosure of which without the consent of the owner may harm their legal interests. In this regard, having such an agreement (conract) between the parties will ensure the security of their confidential information.

III. The importance of consulting commercial lawyers with contract law matters

As we mentioned above, the contract defines legally enforceable obligations between the parties. In this regard, contacting professionals in that field, i.e. commercial lawyers, will play an important role in protecting your interests as well as helping you to ensure that any contracts you enter into are properly executed. A commercial lawyer will review your contract from several aspects: legality, accuracy, comprehensibility, potential risks, etc. will appreciate.

As we know, law is a very dynamic field. So laws and industry regulations are constantly changing. Tracking these trends is a rather time-consuming and difficult task. That’s why it’s important to consult with professionals to determine whether your contract meets current requirements.

Commercial lawyers can also ensure that your business is protected from potential risks and threats by drafting the contract correctly and legally, as well as identifying loopholes in the contract. In addition, they will include the most favorable terms in the contract in order to ensure your best interests as a customer.

Finally, when you are faced with a breach of contract case, you can still effectively protect your legal interests by contacting commercial lawyers.

As ACON legal team, our commercial lawyers are pleased to provide our clients with contract drafting, legal expertise (review), legal opinions, and representation services related to contract disputes in Azerbaijan!

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