When two businesses agree on mutual terms to work together on a project or to procure goods and services for a business, the deal will be finalized through a contract. The commercial contracts form the basis of most of the interaction between the two private sector organisations. The skill with which the contracts are drawn is also important. While successful contracts can increase business revenue, poorly structured contracts can also have a negative financial effect on the business. The commercial contracts are drawn on a standardized system of stages.
What are Commercial Contracts?
Commercial contracts are legally enforceable agreements between two or more parties. At companies, in-house lawyers draft contracts that inform the stakeholders of the Dos and don’ts and terms of upcoming engagements. These contracts assist the buyers in receiving the intended products and services on time and in the agreed quantity. They also aid the sellers in getting appropriate and timely payments.
The properly drafted commercial contracts will help contracts in helping the costly litigation. In the rise of unexpected events, such as the breach of contract, these contracts will act as a guide. They will generally include effective dispute-resolution mechanisms. Typical examples of commercial contracts include acquiring a company, launching a joint enterprise, and outsourcing tasks to another company.
Examples of Commercial Contracts
Commercial contracts run the entire realm of business. Whether the business transacts with small businesses or corporations, commercial contracts set the stage for a very successful and legally sound business relationship. However, commercial contracts might take different forms, and the one you see will depend on the nature of the business relationship and the associated legal requirements. Some of the common examples of commercial contracts are as follows.
Sales Contracts
The sales contract agreements will govern the sale of goods and services between the buyer and the seller. The sales contracts will outline the terms of the sale, including the price, delivery and the terms of the payment.
Service Agreements
The sales contract agreements will govern the sale of goods and services between the buyer and the seller. The sales contracts will outline the terms of the sale, including the price, delivery and the terms of the payment.
Lease Agreements
The lease agreements establish the terms for leasing the property, equipment, and other assets. These agreements cover the rent, maintenance responsibilities, the duration of the lease, termination conditions, etc.
Licensing Agreements
These contracts will grant businesses permission to use intellectual property, such as trademarks, copyrights, patents, etc., under specific terms. They will outline the royalties, enforcement mechanisms, and other usage restrictions.
Partnership Agreements
This agreement establishes the terms of a partnership between two or more businesses and individuals. These contracts define profit sharing, the decision-making process, exit strategies, and dispute resolution mechanisms.
Non-Disclosure Agreements
These contracts help protect confidential information shared between the two parties. They define what information is considered confidential and how it can be used. They also give the terms of the penalties for unauthorized disclosure of information.
Employment Contracts
These contracts define the inherent terms of employment between the employee and the employer. They cover benefits, salary, working hours, and termination conditions and might also include non-compete clauses.
Franchise Agreements
These agreements give you the freedom to run your company using a well-known brand and an established business plan. Fees, marketing prerequisites, operational guidelines, and termination terms are all specified.
Joint Venture Agreements
Joint venture agreements form a collaboration between two or more parties to pursue a certain project or business venture. They describe profit sharing, conflict resolution procedures, and each party’s obligations.
Distribution Agreements
These agreements specify the terms under which a distributor will sell or market a manufacturer’s products. Territories, costs, marketing assistance, and terms of termination are all specified.
Key terms that are to be understood in a commercial contract:
The purpose of the commercial contract will differ depending on whether it is a non-disclosure agreement or a service agreement. Certain terms are to be reviewed and carefully considered when entering into a commercial contract.
Key Commercials
Understanding the details of the key commercial of an agreement is crucial in commercial contracts. It is common for the terms to be agreed over email, before making it into a final contract. The contracts should, therefore, be diligent with the inclusion and the other details of the must-have terms in the key commercials.
Dispute Resolution
Business partnerships can fail even with the greatest of intentions and pleasant beginnings. Without advice from a lawyer who has seen the worst and understands how to prepare for it, this is where template or skimming agreements truly fall apart. Terms pertaining to conflict resolution can provide clarity in the midst of a contentious situation by outlining precisely what must be done and when in the event that a party’s relationship dissolves.
Confidentiailty
Some of the commercial contracts will necessitate the exchange of sensitive commercial information, making sure that any of the confidentiality obligations are clearly outlined and legally enforceable.
Liability
The legal liability of the business is an important component of commercial contracts. With the help of a lawyer, businesses can ensure that the liability terms will be a fair allocation of the risk while negotiating a level of liability that is acceptable to the business, depending on the type of contract that one is entering into.
Intellectual Property Rights
Some commercial contracts will involve the creation of valuable intellectual property. Unless the business is stipulated as to who owns what, there is a risk of either losing the ownership of the business over the work or having limited rights over how that work will be used. As a result, the intellectual property terms would be an area worth going over in fine detail.
Benefits of Commercial Contracts
Commercial contracts are mission-critical and contribute to the organisations’ long-term success, thus establishing business relationships at scale. These commercial contracts not only help to minimise risk but also ensure that the interests of all the parties are protected. The details of commercial contracts are as follows.
It Sets Up the Objectives and Expectations of the Business
Commercial contracts lay out each party’s specific expectations. They detail the terms that the parties involved have agreed upon earlier. They ensure that the requirements are met and provide teams with the much-required legal defence.
Minimises the Business Risk
High-value transactions come with considerable risks. To combat potential losses, the interested parties would require a commercial contract in place. These contracts will formalise the relationships, safeguard the business interests, and help achieve contract compliance.
Adds an Element of Professionalism in Conducting the Business
A written contract will create a massive impact. As a result, the parties would take complete responsibility for any violations of the agreement that they create. The commercial contract would establish a paper trail and help build trust, and it also makes the parties involved in the business appear credible and proficient.
Building Relationships
Commercial contracts will help build trust in the business contracts and foster a positive relationship between the partners by establishing a very clear framework for cooperation. When the business expectations are clearly defined and the risks are allocated fairly, the businesses will likely feel confident and comfortable working together.
Dispute Resolution
The contracts would often include the provisions for resolving disputes, such as arbitration and mediation. This can actually offer a very cost-effective and faster alternative for litigation.
Limitations on Commercial Contracts
Commercial contracts, though essential for business operations, are full of limitations. These limitations are capable of impacting the effectiveness, overall utility and enforceability of the commercial contracts. These limitations are as follows.
Interpretation and Jurisdiction
The interpretation of commercial contracts is complex, especially when they involve parties from different jurisdictions. Varying cultural norms and legal systems can create legal challenges and a sense of uncertainty, thus impacting the effectiveness of the contract.
Limitations on Flexibility
Commercial contracts are legally binding agreements, and once they are signed, they are hard to modify. Changes often require mutual consent and renegotiations, which can be time-consuming. This could also be problematic in dynamic business environments, where circumstances might change rapidly.
Risks
All parties to a commercial contract assume inherent risks. These risks may include financial losses, reputational harm, legal liabilities, and non-performance by one or more parties. Contracts try to reduce these dangers, but they can’t completely remove them.
Changes in Law
Laws and regulations are subject to change, which may have an effect on the enforcement or validity of current contracts. A change in the law may make some clauses illegal or unenforceable, complicating matters legally and necessitating contract termination or renegotiation.
While drafting commercial contracts, it is mandatory to understand that all the terms involved in the contract are correctly placed in the contract. This is where the expert team at MySetAside comes to help. Its in-house team of advisors and legal experts should offer legal expertise and guidance as required. Our expert team will review the contract terms, identify the potential risks, and propose the most viable solutions to mitigate the identified risks.