A commercial contract is an agreement between two or more parties – typically businesses, but potentially other types of organizations, such as government agencies – to exchange something of value, or to work together to create something of value. This can entail goods, services, or even intellectual property, and generally includes terms regarding payment or distribution of profits.
Individual clause types can appear across multiple types of contracts, while some other provisions may be particular to a certain type of agreement. Here are some common provisions in commercial contracts that ensure clarity, legality, and enforceability:
Parties to the Contract
Every contract must identify the role of each party to the agreement: e.g., supplier, buyer, service provider, client, employer, employee.
Scope of Work or Services
A commercial contract should include a detailed description of the goods or services being provided, and the specific duties and responsibilities of each party regarding delivery, fulfillment, and payment. The more precisely the contract outlines these terms, the less room there is for later misunderstandings and disputes stemming from noncompliance.
Payment Terms
These terms specify required payment amounts, acceptable currency, schedules (e.g., up front, milestone-based, or upon completion), accepted payment methods, and late payment penalties.
Delivery Terms
A contract for goods or services should cover delivery timelines and locations, criteria for acceptance by the buyer, and provisions governing the transfer of ownership and risk between the parties.
Duration and Termination
Every contract must specify start and end dates, renewal terms (if applicable), conditions for early termination, and any notice period requirements for termination or renewal.
Confidentiality and Non-Disclosure
If either party is sharing confidential information with the other, the contract must define what the parties consider confidential, what obligations each party has to protect that sensitive information, and the duration of the confidentiality obligations.
Intellectual Property Rights
If the parties plan to create any new IP under the contract, the agreement must define what is considered IP, establish restrictions on its use beyond the scope of the agreement, and set out any applicable licensing provisions.
Liability and Indemnification
Liability clauses set limitations on liability for damages incurred while fulfilling the terms of the business agreement. Indemnity clauses entail one party’s financial obligation to protect the other from claims or losses stemming from the agreement.
Warranties and Representations
Performance warranties protect buyers in case there is something wrong with delivered goods or services. A contract will also include remedies for breaches of those warranties. Other representations commonly include assurance that all parties have the authority to enter the contract.
Regulatory Compliance
Compliance clauses define each party’s obligation to adhere to applicable regulations, such as data privacy statutes or environmental standards.
Dispute Resolution, Governing Law, and Jurisdiction
Contracts typically set out in advance how the parties will handle disputes: e.g., negotiation, mediation, arbitration, or litigation. These provisions generally include governing law and jurisdiction, preempting the need to fight over the venue for potential lawsuits or other disputes.
Force Majeure
These clauses address events that are beyond either party’s control but may interrupt the business transaction, such as natural disasters and pandemics, and establish each party’s rights and obligations during those events.
Amendments and Modifications
These terms lay out a process for making changes to the contract after it’s been signed, including requirements for obtaining consensus and incorporating amendments into the agreement.
Notices and Communications
These clauses establish accepted communication methods between the parties (e.g., email, registered mail), including designated addresses and recipients for serving notices.
Assignment and Subcontracting
If it’s possible for either party to transfer its rights or duties under the contract to another party, this clause establishes the process for doing so.
Unclear or Imprecise Language
Poorly drafted clause language can lead to misunderstandings and disputes, as parties may interpret terms differently. Using clear language helps prevent later conflicts and makes the contract easier to enforce.
Lack of Definition
Vague or undefined terms can create loopholes or disagreements regarding the parties’ obligations. Defining key terms, responsibilities, and deadlines explicitly is crucial to promote contract performance.
Missing Key Clauses
Omitting essential elements, such as payment terms, deliverables, or timelines, can lead to confusion and contract breaches. A well-drafted contract addresses all core aspects of the transaction.
Missing Regulatory and Business-Specific Terms
Failure to include relevant regulatory and industry-specific provisions can result in regulatory noncompliance or misalignment with industry best practices.
Lack of Dispute Resolution Mechanisms
Without a clear process for resolving disputes, conflicts may escalate to costly, time-consuming litigation. Including provisions that specify the jurisdiction, venue, and governing law for disputes helps resolve issues more efficiently.
Missing Confidentiality Provisions
Failing to protect sensitive information can lead to unauthorized disclosure and ensuing business losses. Confidentiality clauses safeguard proprietary information and foster trust between parties.
Overlooking Renewal or Termination Terms
Contracts without defined renewal or termination clauses can create uncertainty and disputes about their continuation. Clearly specifying the conditions ensures smoother contract management and seamless renewal or termination at the end of the contract’s term.
A contract is at the heart of every business relationship. It lays out expectations about what each party will provide for the business arrangement, and it governs their interactions over time.
As such, it’s important for commercial contracts to be clear and thorough. An effective business agreement ensures that all parties know their responsibilities, how to satisfy them, and when they must do so.
A well-drafted contract has the added benefit of preventing and mitigating conflicts by keeping the parties on the same page about important terms, potentially helping businesses avoid costly litigation or other disputes.
To make that happen, though, legal teams must ensure the inclusion of dozens of key terms, verify that important concepts and deadlines are clearly defined, and craft custom clauses to cater to the precise needs of individual stakeholders, counterparties, and industries.
That can take a lot of work, but that’s where BoostDraft comes in. We provide tools to securely speed up the process of checking defined terms, reformatting documents, comparing versions to review edits, and more.
The less time you spend doing that rote work, the more time you have to focus on the real meat of the agreement.
Ready to see how you can boost contract creation with BoostDraft? Schedule a demo today