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7 Key Clauses In Commercial Contracts
Every business will need to get into commercial contracts with different stakeholders like their vendors, suppliers, partners, customers, or others.
In some cases, the commercial contracts are quite simple to process and in other cases, they can get quite complex.
Have you wondered what clauses are found in most commercial contracts?
In this article, let me break down for you the different types of contractual clauses that you are likely to find in most commercial contracts that you’ll encounter.
Keep reading as the seventh key clause that I have here may surprise you!
The confidentiality clause is probably one of the most common clauses found in commercial contracts.
In any commercial relationship, individuals and companies are likely to share confidential or sensitive information with one another.
The confidentiality clause allows the parties contractually define what they mean by “confidential information”, how it may be shared, and how the parties are to protect the confidential information.
The more the companies are to exchange internal information relating to their business, clients, pricing, practices, methodologies, or others, the more they have an interest in protecting their business information by using a confidentiality clause.
Companies and businesses enter into a commercial engagement to achieve a benefit and accomplish their mission.
Unfortunately, sometimes things do not work out as they were originally intended.
To avoid disputes and conflict, the parties to a commercial contract will include termination for cause provisions where they contractually define what they consider to be their termination triggers.
Sometimes, the parties will include a termination for convenience clause allowing them to terminate a contract without any particular reason.
In most cases, the parties will include termination for cause clause where the parties contractually define what they consider to be a contractual breach giving the non-breaching party the right to terminate.
Since more and more contracts are signed by parties in different jurisdictions and countries, having a governing law clause because more and more relevant.
To avoid any ambiguity and costly legal debate over what law applies to a cross-border contract, the parties will mutually agree on what law will govern their contractual relationship.
As a result, most commercial contracts will have a governing law clause by default where the parties make it clear what laws are applicable.
Having a contract in place is primarily intended to clarify the legal relationship between the parties and provide the necessary mechanics to resolve any dispute should one arise.
In this context, commercial contracts will often have dispute resolution clauses where the parties agree on how to handle a potential dispute between them.
It is quite common to see commercial contracts require that parties go through mediation or arbitration to resolve their dispute rather than filing a lawsuit before the common courts.
The dispute resolution clause can be as simple as setting out basic rules to handle a potential dispute or complex procedures in resolving conflict.
Liability Cap Clause
The liability cap clause is very important for most businesses entering into different types of commercial contracts.
To succeed in business, you must engage in commercial activity that provides you value without exposing yourself to unwanted liability.
To avoid getting caught with a significant liability exposure, companies will include a liability cap to clearly determine how much liability they will each assume in the course of their contractual relationship.
Very often, the liability cap is quantified based on a multiplier of the value of the contract.
For example, a party may stipulate that their total aggregate liability under the contract cannot exceed 100% or 200% of the value of the contract upon signature.
Probably one of the most heavily negotiated clauses in a commercial contract is the indemnification clause.
The indemnification clause is a contractual provision allowing the parties to shift risk from one party to another.
Typically, the indemnification provision is triggered when a party breaches the terms of the contract or violates the rights of the other party.
The indemnification clause will generally stipulate what are the indemnification triggers, the indemnification procedure, and whether or not the indemnification obligation is capped or unlimited.
A merger clause, or an integration clause, is a contractual provision that is often taken for granted but appears in nearly all commercial contracts.
A merger clause stipulates that prior agreements between the parties are consolidated and brought together under the current contract.
This has an important legal implication as you do not want to have multiple contracts governing the same transaction as it may create confusion and costly legal disputes.
If you have a side deal that you want to protect, you must make sure that you exclude that from the merger clause to avoid consolidating prior contracts under the current one.
So there you have it folks!
No matter what industry you operate in or how big or small your company is, you will need to master the art of dealing with commercial contracts.
Understanding how commercial agreements work, adopting best practices, and understanding their key clauses in commercial contracts will certainly give you an edge.
In this article, I have outlined seven key contractual clauses that you will come across in your business that you should take some time to study and understand.
Now that you know what to expect in your business contract, good luck with your negotiations or contract drafting!
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