Commercial contracts are the backbone of any business, be it software development, manufacturing, or real estate. They can help you nurture business relationships, capture opportunities, and mitigate risks—but only if they’re well-managed. Can you say this about your contracts?
To ensure your business dealings serve your interests and protect you from liabilities, you must be familiar with what makes a contract legally binding. Read on to learn about various types of contracts and the must-have clauses for valid and enforceable agreements.
What is a commercial contract?
Commercial contracts define and regulate business relationships. They shield the parties’ interests and tether them to specific obligations.
A commercial agreement sets the terms and conditions for business transactions, ranging from exchanging goods and services to mergers and acquisitions.
Here are some typical examples of business contracts:
- Joint venture agreement. Two or more businesses agree to pool their resources to achieve common goals. All the parties are responsible and accountable for the project-associated costs, profits, and losses.
- Franchise agreement. One party, a franchiser, allows the other party, a franchisee, to do business under their trademark. In return, the franchisee shall pay franchise fees, royalties, and rent. A franchise agreement sets the scope and limitations of this arrangement, protecting the interests of both parties.
- License agreement. One party allows other parties to use their intellectual property—a patented technology, brand name, trademark, or other IAs—for commercial purposes.
- Supply contract. This contract is signed between a buyer and a seller. The seller commits to supply certain goods or services at a particular time and price. A well-drafted agreement guarantees that the buyer’s requirements will be fully satisfied.
- Collaboration agreement. The parties agree to work together on a commercial project (for example, developers and designers working on one app). A contract specifies the way they will cooperate, their responsibilities and obligations, and the expected benefits.
- Sales and distribution agreement. This contract allows distributors to market and sell the wholesaler’s products in bulk. It details the exclusivity rights, territories, and reporting duties.
These commercial contract examples serve different purposes. But none of the agreements is legally binding unless it has all the elements that make it enforceable.
Elements that make commercial contracts enforceable
Each state or county can have unique requirements, but to be considered valid and enforceable, every contract must include the following basic elements.
Offer
An offer is an invitation to enter into an agreement where one party promises to do something (e.g., provide some service), and the other party commits to act in return (e.g., make a payment). Commercial contracts must specify the terms or what each party commits to provide and expects to gain from the agreement. The contract terms must be precise so that each party knows their obligations.
Acceptance
A party must accept an offer for a contract to be considered valid. The party may respond with a counteroffer (which the other party can accept, counter, or reject), or they can decline the offer outright. The contract is only valid once the offer is accepted with full consent.
Consideration
Contracts are only valid if each party receives something that’s considered valuable. In other words, each must benefit from the agreement in some way. If consideration doesn’t come in the form of money exchanged for goods, the parties must ensure the court will acknowledge the value of each company’s benefit. Consideration may come in many forms, including goods, services, property, or some combination thereof.
Capacity
All parties must have the legal capacity to enter into a contract. That is, they must be of legal age and sound mind to make or accept an offer. They also have to be free of any coercion or duress.
Commercial contracts vary in form and purpose, but they generally fall under one of four main types.
Types of commercial contracts
Commercial contracts cover a wide range of business activities and come in various kinds. Here are the most common ones.
Non-disclosure agreement (NDA)
Also called a confidentiality agreement, an NDA ensures that one or both of its parties won’t divulge any sensitive information.
Business owners work hard to build their company from the ground up. They’re bent on protecting their trade secrets, proprietary processes, and client lists. Before they expose confidential information to employees or business partners, they make them sign an NDA to prevent any leakage. Tech companies use NDAs to ensure they stay ahead of the curve and that none of their latest inventions leaks out.
Purchase and sale agreement (PSA)
A PSA is a binding agreement that sets prices for specific goods or services. It’s particularly helpful for deals that involve large or repeated purchases. One party agrees to pay a particular fee for goods or services the other party provides.
If, say, you’re selling or buying real estate, you’ll need a PSA to lay out the details related to the purchase price, escrow, closing fees, and contingencies.
Service level agreement (SLA)
SLAs set down the required level of service quality, delivery deadlines, and response times businesses expect from vendors. They specify metrics to measure the level of service and outline penalties for poor quality.
In the software industry, SLAs can specify the expected uptime and responsiveness. The SaaS company, for instance, may commit to keeping their servers up and running 99.9% of the time and their customer service available 24/7.
Letter of intent (LOI)
A LOI outlines the main terms of a prospective deal. Its main goal is to clarify the big-picture points to ensure all parties are on the same page before they hash out the details. Still subject to changes, LOIs are largely non-binding, although they may include binding provisions, such as non-disclosure and exclusivity clauses.
For example, you may draft a LOI to formally declare your intention to acquire a business. The document can include the basic terms of the deal and a nonbinding statement about the negotiation process.
Now that you’re familiar with the main types of commercial contracts let’s discuss which clauses ensure that agreements truly safeguard your business interests and mitigate risks.
Clauses building up the backbone of commercial contracts
Commercial contracts can include a wide array of clauses, but certain provisions come up in nearly every business agreement.
Confidentiality
Also called a non-disclosure clause, a confidentiality clause protects a business’ intellectual property, trade secrets, sales strategies, or other sensitive information. It guarantees that the contractual parties take care to secure data.
Damages
If one party fails to keep up with their obligations, the other one is entitled to compensation. The contract must clearly determine the damages to avoid legal battles.
Dispute resolution
Parties should agree on ways to resolve disputes with or without the court. These may include one or more of the following methods:
- Negotiation. Parties work out a resolution independently, with minimal help from a neutral third party. After the talks, they may agree to take the issue to court to get an enforceable judgment.
- Mediation. It works quite similar to negotiation but with the assistance of a professional mediator. The mediator facilitates each party’s understanding of the other party’s issues.
- Arbitration. The most formal of the three, this kind of dispute resolution involves professional arbitrators and rules to be followed. In most cases, the arbitrator considers the arguments of each side and makes a legally binding decision on damages.
Indemnification
There are cases when one party shall be compensated for a loss or harm caused by the other party. Contracts must have a clause to shift liability to the indemnifying party. For instance, if one party fails to deliver a product on schedule because the other party failed to provide the necessary components, the indemnification clause compels the latter to compensate the former for damages.
Jurisdiction and governing law
Many business relationships transcend jurisdictional borders. Agreements must specify which state or country’s laws shall govern the court proceedings arising from contract disputes.
Termination
Whether or not the business relationship is successful, the contract must clearly state when the agreement terminates. Then the parties won’t be bound to their obligations longer than necessary or wanted. This clause may define termination triggers like a breach of contract or completion of a sale or service.
You’ve just learned about the common clauses found in a contract. Now let’s talk about the challenges you might grapple with while managing your contracts.
The challenges of managing commercial contracts
Without a well-designed administrative system, commercial contracts can be a hard nut to crack. This is especially true for businesses juggling hundreds of contracts. Here are some challenges you might confront.
Storage
Contracts can be hard to manage if you’re still filing them away in cabinets. You waste too much time sifting through folders for specific agreements or information. And then there’s the (pricey) real estate they occupy.
Tech-savvy companies are taking their files to the cloud. But even then, managing contracts can still be tricky: you might have a hard time tracking important dates, pulling up specific information, or organizing templates and clauses.
Standardization
Without a system that standardizes your contracts, your company’s departments may work in silos. Duplicate work. Draft agreements using different wording for the same clauses. And then legal has to scrutinize each and every contract, as there are no standardized templates in place. A conclusion? Valuable resources gone down the drain.
What’s even worse, the silos don’t let you gather insights across agreements to improve your contracting.
Transparency
Contracts often involve several departments. Without a proper central repository, accessible to all the stakeholders, some departments might not even be aware that their input is required. As a result, the contracting process slows down. For instance, a contract may sit in the sales department while the procurement team could have been working on it in parallel to save time.
These challenges are less daunting when you have the tools to tackle them. Let’s move on now to the strategies that will help you overcome the pesky roadblocks.
Strategies for managing commercial contracts
With the right strategies, you can meet the challenges head-on.
Store contracts in a centralized repository
Storing all your contracts in a single repository, you can track essential information conveniently and ensure that everyone keeps up with their obligations. You can easily double-check the documents and audit actions taken on them.
Standardize templates and clauses
Your legal team can save hours by standardizing templates and pre-approving contract terms. Using a ready-made library of templates and clauses, various departments can draft contracts quickly—and the legal has to monitor every clause of every agreement.
Track obligations
To honor your contractual obligations, you must stay on top of your contracts before and after signing them. A robust contract management system can help you sort through thousands of active contracts and track your company’s obligations. It lets you set alerts so the right employees are notified of upcoming deadlines and required actions.
As you can see, the right system can make the whole process much smoother. So how can contract lifecycle management (CLM) software streamline contracting for you?
How contract lifecycle management software can help
A contract lifecycle management system simplifies the process by automating the bulk of contracting tasks and organizing files. Teams can create, edit, analyze, sign, and renew contracts digitally on a single platform. It dramatically speeds up the journey from contract initiation and authoring to approval and execution.
With all your files stored in a single repository, you can quickly pull up a suitable template and search for specific information. Standardizing terms and clauses will make everyone’s job easier. You can even make bulk edits on multiple files. Plus, you can set schedules and notifications from a central location.
Various departments can view and edit the same documents at the same time. Changes are visible in real-time, which guarantees that everyone is working on the latest version.
AXDRAFT’s all-in-one contract management platform cuts the time it takes to process contracts by 40%. You can see for yourself by signing up for a demo.
To sum up
Commercial contracts ensure that you enter business relationships working in your favor. But they are only effective if they have all the necessary elements and the right clauses. Staying on top of these details can be difficult when you manage multiple contracts. So, it’s wise to double-check that you are armed with the best-fit strategies and contract lifecycle management software.
Commercial contracts typically include a letter of intent (LOI), a non-disclosure agreement (NDA), a purchase and sale agreement (PSA), and a service level agreement (SLA).
Commercial contracts protect your business interests and lay down the obligations of each contractual party. They protect the parties from liability and describe the approach to dispute resolution.
Commercial contracts must identify the parties, lay out the transaction details, and set the timeframes. They shall also contain standard clauses on confidentiality, damages, and indemnification.