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What should be included in a commercial agreement?

A contract, enforceable by law, establishes a legal relationship of rights and duties between two or more parties. Commercial contracts are legal documents outlining the rights and obligations of each contractual party and delineating the nature of their business relationship. Despite being a critical component of the business world, commercial contracts are often overlooked or misunderstood by many professionals in this region. These contracts encompass various terms, including those related to employee safety, wages, hiring, loans, and other pertinent matters. It’s important to note that all agreed terms and conditions are equally binding on both parties involved.

There are different types of the commercial contract such as:

  1. Fixed Price Commercial Contract
  2. Time and material commercial contract
  3. Definite commercial contract and others.

 

When drafting a comprehensive commercial contract, there are several key clauses that should be included:

  • Title: The title or header of the contract should clearly state the nature of the agreement and the names of the parties entering into the contract. This helps identify the contract.
  • Effective date: The contract can start with the date of the agreement. If there is to be any linkage to any activity, take care to stipulate it clearly. On completion of the activity, incorporate the effective date(if necessary by mutual consent.
  • Parties: This section should provide the full legal names and addresses of all parties entering into the agreement. If any parties are business entities rather than individuals, include the type of business entity (corporation, LLC, partnership, etc.) and state of incorporation or organization.
  • Recitals: The recitals provide background about the purposes and goals of the contract. This section describes the interests of each party and what they hope to accomplish through the agreement. The recitals help provide context for the terms of the contract.
  • Definitions: Define any key terms that will be used throughout the contract. This prevents confusion or disputes later on regarding important words or phrases.
  • Goods/Services Description: Provide a detailed description of the goods being sold or services being provided. Details like quantity, model numbers, size, weight, colour, materials, and timeline should be included.
  • Payment Terms: This section should outline how much is being paid, when payment is due, how payment will be made, and consequences for late payments. Payment schedules, instalments, deposits, and refund policies should be addressed.
  • Delivery/Performance Terms: Specify details regarding delivery of goods or performance of services, such as timeframes, locations, responsible parties, and required conditions. Describe performance standards and inspection rights. An extension can only be through a formal amendment to the contract.
  • Warranties: A warranty clause in contract drafting is a legal provision that outlines the representations and promises made by one party to another regarding the quality, condition, or performance of goods, services, or other elements of the contract. The purpose of a warranty clause is to establish the expectations and responsibilities of the parties involved and to provide a basis for remedies if these expectations are not met. State any warranties being provided, disclaimers, and remedies available to the buyer if goods/services are defective or do not meet stated warranties.
  • Default and Liquidated damages: The clause should also provide the right of termination in the event of long-term default and the consequences of termination. The consequences would be repayment of all the advances and the rate of interest on those payments. The clause should also ideally provide for risk purchase. State what each party is responsible for in the event things go wrong. Limitations of liability, indemnification clauses, and dispute resolution procedures may be included. If there is a price variation clause, liquidated damages should also be levied as per the changes in the price.
  • Confidentiality: If confidential business information is involved, include confidentiality/non-disclosure provisions to protect trade secrets and proprietary information.
  • Intellectual Property: Address intellectual property ownership issues and clearly define who owns any intellectual property created as part of the contract. This includes copyrights, patents, trademarks, trade secrets, etc. Ownership should be spelled out for any pre-existing IP brought into the contract by each party, as well as any new IP developed during the course of the contract.
  • Term/Termination: State the time period during which the contract will be in effect and under what conditions it can be terminated earlier or renewed. Specify under what conditions each party can terminate the contract. Common reasons include material breach of the terms, failure to make payments, bankruptcy/insolvency, change in control, etc. Include the procedures for proper notification of termination, usually done in writing via registered mail or email. Verbal notification may not be enough.
  • Governing Law: Specify which state’s or country’s laws will be applied in interpreting the contract. This is especially important for international agreements.
  • Dispute Resolutions: Parties to contracts are often in ongoing relationships. Immediate court proceedings in the event of a dispute may not be in the best interests of either party. The parties may wish to consider an alternate dispute resolution process that will be managed and escalated by the parties themselves, such as arbitration.
  • Force Majeure: Force majeure events are such which are beyond the control of the parties and prevents the performance of the contract temporarily or permanently. These clauses excuse performance if events outside a party’s control make performance impracticable or impossible. This may include natural disasters, strikes, war, acts of terrorism or government restrictions.
  • Boilerplate Provisions: The term “boilerplate” refers to standardized language in a contract that usually appears at the end of the agreement (often in a section titled “miscellaneous” or “general terms”). While boilerplate provisions are common clauses in a contract, they should always be checked carefully and tailored to the particulars of the situation as they will address important issues that will be determinative of the parties’ rights with respect to the business contract. Standard legal provisions like severability, amendments, assignment, notices, and signatures should be included at the end. Severability allows remaining provisions to stay valid if a part is deemed invalid.
  • Survival Clause: This clause stipulates that certain provisions of the contract remain in effect even after the contract has ended. For instance, if a defect in the goods is discovered a month after the sale, the seller remains responsible for rectifying the issue. In a business contract between two parties, a dispute arises and one party seeks legal action, while the other party invokes an arbitration clause, rendering court intervention impossible. In such scenarios, the clauses that endure beyond the contract’s termination are paramount.
  • Exhibits/Attachments – Any documents attached to and made part of the contract should be referenced and clearly labelled as exhibits. This may include detailed specifications, plans, schedules, supplementary terms, etc.
  • Tax and Duties: It will specify who has to bear the taxes and duties. In international contracts, a method has been devised. The taxes and duties in the parties’ countries will be borne by them. But there are situations of taxes on consignments during transit. A question will natural arise as to the liability of such tax. One of the better ways of addressing such a situation is to have a clause detailing the relevant terms.

 

Careful consideration should be given to what to include in each clause. The goal is to document a detailed, balanced agreement and working relationship that provides protection and clarity for all involved. Following established best practices for commercial contracts makes it much more likely the contract will stand up in court if disputes arise.

Please note that this article does not constitute express or implied legal advice, whether in whole or in part. For more information, email us at  info@silvesterlegal.com.

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