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What are commercial contracts in simple terms?
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What Are Commercial Contracts
Commercial contracts are contracts or agreements regulating the relationship between different parties doing business with one another.
Commercial contracts will typically outline the parties’ rights and obligations in a specific type of business transaction.
In most cases, a commercial agreement is in writing so that the terms of the contract are clear, the parties know what duties to perform, and what to expect in return.
In essence, a commercial contract is a legally binding document where the contracting parties mutually agree to do or not do something for a certain period of time.
Why Enter Into Commercial Agreements
Operating a successful business requires that you enter into contracts with your clients, employees, suppliers, vendors, banks, investors, and other stakeholders.
A business cannot operate, grow, or maintain itself without commercial agreements.
The success of your business depends on your ability to enter into the right commercial contract, at the right time, with the right parties.
When signing a commercial agreement, you are able to purchase goods, materials, resources, or rights enabling you to produce your goods and services for your clients, thereby earning a profit by creating value.
The main reason why a business enters into a commercial contract is to define its rights and obligations, protect its business interests, and define how to manage conflict and dispute.
Companies enter into commercial contracts to ensure that their business arrangement is well-defined, the legal arrangements are suitable, and that they are effectively receiving a benefit.
Types of Commercial Contracts
Commercial contracts can be drafted in such a way to address virtually any business transaction or relationship.
Although it’s not possible to list every single type of commercial contract here, I’ve prepared a list of common types of commercial contracts to illustrate the point:
- Agency Agreements
- Confidentiality Agreements
- Cost Sharing Agreements
- Development Agreements
- Distribution Agreements
- Employee Stock Option Plans
- Employment Contracts
- Escrow Agreements
- Finders and Commission Agreements
- Franchise Agreements
- Guarantee Agreements
- Joint Venture Agreements
- Lease Agreements
- Licensing Agreements
- Loan Agreements ‘
- Mergers and Acquisitions Agreements
- Non-Competition Agreements
- Options Puts and Calls Agreements
- Partnership Agreements
- Real Estate Agreements
- Sale Agreements
- Service Agreements
- Share Transfer Agreements
- Shareholder Agreements
- Supply Agreements
Every business will need to consider the risks and rewards for each transaction and enter into a commercial agreement that properly documents the expected benefits, clarifies the commercial contract law applicable to the agreement, and adequately protects the parties.
Commercial Contract Terms
What are the key terms of a commercial contract?
In every commercial contract, you generally have contractual terms that are unique to the transaction in question and general terms that are likely to be present in most contracts.
The standard terms that you will find in a commercial contracts are typically the following:
- Confidentiality terms to protect any information shared during the performance of the contract
- Intellectual property provision clearly spell out what are the parties’ trade secrets, know-how, and intellectual property and ensures that those rights are protected
- Dispute resolution mechanism to define how the parties can resolve any potential conflict and disputes
- Understanding on the governing law and jurisdiction to ensure that the parties understand what law will apply to the contract
- Termination triggers defining how the parties can terminate or put an end to the contract
- Assignment provisions regulating if and how the contract can be assigned
- Provisions relating to the extent of the parties’ liability under the contract
- Force majeure provision defining how the parties define a “force majeure” or a “greater force” preventing the parties to perform their obligations
There are some standard terms that I have outlined to present to you some commercial contract terms that you’re likely to see in a wide variety of business transactions.
Keep in mind that you must enter into a commercial contracts by including the terms and conditions that make sense for the specific nature of the business transaction so you are well protected.
Key Clauses In Commercial Contracts
What are the main clauses that you are likely to find in a commercial contract?
Contractual clauses are individual components composing a commercial contract.
Consider a contractual clause as an individual brick used to build a house.
Understanding the different types of clauses in a contract is crucial in ensuring that you are well-protected and clearly define what you expect to receive.
Contractual clauses should complement one another, build on top of one another, and cover the essential elements of a business transaction.
Here are the key clauses you will find in a commercial contract:
- Confidentiality clause
- Disclaimer provisions
- Dispute resolution clause
- Force majeure clause
- Governing law and jurisdiction clause
- Indemnification and hold harmless clause
- Intellectual property clause
- Limitation of liability clause
- Term and termination clause
- Warranties and Representations
Now, let’s look at some examples of different types of commercial contracts.
Commercial Contracts Examples
Let’s look at a few examples of commercial contracts to better understand the concept.
Although there are many different types of commercial contracts suited for the specific type of transaction, let’s look at some commercial agreements that most people may have heard of or will come across:
- Asset purchase agreement
- Distribution agreement
- Employment agreement
- Franchise agreement
- Intellectual property license agreement
- Joint venture agreement
- Letter of Intent (LOI)
- Mortgage agreement
- Non-disclosure agreement (NDA)
- Non-solicitation agreement
- Partnership agreement
- Procurement agreement
- Purchase and Sale Agreement (PSA)
- Sale agreement
- Service Level Agreement (SLA)
- Shareholders agreement
- Stock purchase agreement
Drafting A Commercial Contract
What are the key elements you need to consider when drafting a commercial contract?
It’s important that you do your homework before drafting a commercial contract and signing a legally binding agreement.
No matter what type of commercial contract you are contemplating to sign, here the key aspects that you should consider when drafting and negotiating the commercial agreement.
The first element to consider is to ensure that you properly identify the parties with whom you are intending to contract with.
If the signing parties are legal entities, these entities must be legally formed, in good standing, and the right person should be authorized to bind the company.
Essentials of the Deal
The second key element to consider is to ensure that you capture the fundamental elements of the transaction.
For example, if you are signing a supply agreement, make sure that you adequately define what is to be supplied, at what price, for how long, and so on.
This will prevent a lot of surprises.
Price And Payment
The price and payment terms should clearly spell out who is paying for what, how long do you have to pay, what happens if you pay late, and so on.
This will make sure that the parties know when and how to receive payment for performing their obligations.
Term And Termination
Term and termination define how long you are looking to enter into a commercial contract.
Are you looking to enter into a long-term contract, is it for a certain number of years, a few months?
How can you terminate the contract, what happens if a party does not deliver as promised, what is the procedure for terminating a contract, and so on?
Allocation of Risk
Probably one of the most important reason why companies and businesses sign commercial contracts is to mitigate risk.
You should make sure that you include the right provisions in the contract specifically designed to mitigate risk for the specific business transaction.
Can the parties seek damages from one another, what type of damages, are there penalties, will certain types of liability be excluded, are there warranties and representations given, what happens if there is a third-party claim?
Having identified the contracting parties, the essentials of the deal, the pricing and payments, term and termination, and allocated risk, you now need to address dispute resolution.
Dispute resolution is the process that you contractually define for the parties to comply with in the event of a dispute, conflict, or breach of contract.
What happens if a party promised to deliver something and did not do it, or did not do it properly?
What happens if a party has violated the terms of the contract, can you file a lawsuit before the courts, do you need to go through an arbitration proceeding, what courts are competent to hear the matter, what is the law applicable to the contract, and so on.
Commercial Contract Takeaways
So there you have it folks!
Understanding Commercial Contracts
Commercial contracts cover a wide variety of agreements and contracts entered into between individuals and businesses in the course of their commercial activities.
Startups, small businesses, medium-sized businesses, large companies, multinationals, or international firms all use commercial contracts to achieve their business mission.
Commercial agreements will cover the most important aspects of the transaction in such a way that the parties to the contract have a clear understanding of the benefits they receive in exchange for the duties they undertake to perform.
When commercial contracts are entered into properly, businesses will achieve the intended benefit and continue to grow.
However, when the proper commercial contracts are not in place or they do not cover the essential terms for the intended transaction, businesses can end up losing on the intended benefit and potentially lose money in conflict resolution and disputes.
Now that you know what are commercial contracts, why they are used, the clauses they contain, what to consider when drafting them, and more, good luck in dealing with your commercial contract!
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