What is Draft Agreement? A Comprehensive Guide
What is a Draft Agreement? A Comprehensive Guide
1. Definition of Draft Agreement
A Draft Agreement is a preliminary written document outlining the terms and conditions agreed upon by parties who intend to enter into a formal contract in the future. It serves as a blueprint or framework for the final agreement.
It contains the essential clauses proposed by one or both parties.
Usually, it is subject to negotiation, modification, and approval.
It is not always legally binding unless the parties intend it to be so.
2. Purpose of a Draft Agreement
To clarify the intent and obligations of the parties before finalizing a contract.
To facilitate negotiations by providing a concrete reference.
To identify potential issues or ambiguities early.
To serve as a base document for drafting the final legally binding agreement.
3. Key Components of a Draft Agreement
Generally, a draft agreement includes:
Title and Date: Identifying the nature and date of the draft.
Parties: Names and details of all parties involved.
Recitals or Preamble: Background/context.
Definitions: Clear meaning of terms used.
Subject Matter: Description of the purpose of the contract.
Terms and Conditions: Rights, duties, and obligations.
Payment Terms: If applicable, the financial details.
Duration and Termination: How long the agreement lasts and termination conditions.
Confidentiality Clause
Dispute Resolution Mechanism
Governing Law and Jurisdiction
Signatures: May or may not be present, depending on the nature.
4. Legal Nature of Draft Agreements
Not always enforceable: A draft agreement typically does not create binding obligations unless it is expressly stated or the parties have clearly shown intent.
It is often treated as a “pre-contract” or “negotiation document”.
However, certain provisions in a draft can be binding (like confidentiality or exclusivity clauses).
Courts analyze whether the draft was intended to be binding or merely a step toward final agreement.
5. Types of Draft Agreements
Preliminary Agreements: Outline essential terms to negotiate later.
Memorandum of Understanding (MoU): Often overlaps with draft agreements but generally non-binding.
Heads of Agreement: A detailed draft specifying core deal points.
Letters of Intent (LoI): Express intention to enter into a contract.
6. Important Case Law on Draft Agreements
a) M/S Steel Authority of India Ltd. v. National Union Water Front Workers (2001) AIR 2463
The Supreme Court held that a draft agreement cannot be treated as a concluded contract unless it is signed by all parties and shows intention to be bound.
Mere negotiation or drafting is insufficient to create contractual obligations.
b) Balaji Kalyana Mandapam (P) Ltd. v. T.G. Venkatesh (2003) 8 SCC 486
It was held that the terms of a draft agreement do not amount to a concluded contract unless parties expressly agree.
Courts look at the conduct of parties and whether the draft was intended to be a final contract.
c) State of West Bengal v. Associated Contractors (1966) 1 SCR 416
The Supreme Court explained that a draft agreement or MoU is not enforceable unless the parties agree on all material terms and show clear intention.
d) Tata Cellular v. Union of India (1994) 6 SCC 651
The court recognized that letters of intent and draft agreements may create binding obligations if the parties intended so.
7. Draft Agreement vs. Final Agreement
| Feature | Draft Agreement | Final Agreement |
|---|---|---|
| Legal Binding | Usually non-binding, unless specified | Legally binding |
| Purpose | For negotiation and clarifications | Definitive contract |
| Content | May be incomplete or tentative | Complete with all terms finalized |
| Signatures | May be unsigned or partly signed | Signed by all parties |
| Enforcement | Generally not enforceable | Enforceable in courts |
8. Precautions When Drafting or Signing Draft Agreements
Clearly state whether the draft is binding or non-binding.
Include a “subject to contract” clause if non-binding.
Ensure all essential terms are covered if intending to bind.
Avoid signing a draft unless you understand its implications.
Use draft agreements to minimize disputes during final contract execution.
9. Conclusion
A Draft Agreement plays a vital role in contract formation by:
Documenting preliminary understanding.
Guiding negotiations.
Clarifying parties’ intentions.
However, it does not always amount to a legally enforceable contract unless the parties clearly intend it to be so.
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