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Accept Cookies Manage Preferences Announcing the Formation of SpotDraft’s Advisory Board Find out more Contract ManagementNot only does a commercial contract build healthy relationships, but it also streamlines business operations, limits liability, and manages expectations. Here, dive deep into ten special commercial contract types.
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Handling commercial contracts can be complex and time-consuming. Each type of contract comes with its own set of requirements and potential pitfalls. Knowing the key types of commercial contracts and their specific clauses can help you navigate these challenges effectively, ensuring smooth business operations and minimizing risks.
In this post, we will take you through the different types of commercial contracts and their common clauses. You'll also learn about the challenges legal teams face in managing these contracts and how Contract Lifecycle Management (CLM) software can help.
A commercial contract is a legally binding agreement between two or more parties that outlines the terms and conditions for the exchange of goods, services, or other business activities.
These agreements are the backbone of business operations, providing a clear framework for transactions and partnerships. Whether you're selling products, hiring services, entering a partnership, leasing property, or hiring employees, commercial contracts ensure that everyone knows their rights and responsibilities.
Also read: What Are Commercial Contracts (Clauses, Examples, and Benefits)?
Commercial contracts ensure clear terms, protect your interests, and manage risks. Businesses with solid contracts face fewer legal disputes and can boost revenue through improved vendor relationships.
Commercial contracts specify exact terms and conditions unique to business transactions, preventing misunderstandings that can lead to operational disruptions, strained partnerships, and financial losses. Without clear terms, misinterpretations can occur, potentially resulting in significant setbacks and damaged relationships.
Legally binding commercial contracts provide essential protection for businesses. They ensure that all parties adhere to agreed terms, and offer recourse in case of breaches. Without these protections, businesses face prolonged legal disputes that can drain resources and affect operations.
Commercial contracts address risks unique to business activities, such as supply chain interruptions, service failures, and liability issues. They include clauses that help manage these risks, ensuring smoother operations and protecting business interests from unforeseen events.
Also read: Effective Contract Risk Management: Top Tips & Strategies
Commercial contracts often include dispute resolution mechanisms like mediation or arbitration, which are faster and less costly than litigation. This helps maintain business continuity and preserves relationships by resolving conflicts efficiently.
Clear, well-drafted commercial contracts build trust between business partners by showing a commitment to fulfill agreed-upon terms. This trust is crucial for long-term partnerships and can enhance your business reputation, leading to more opportunities and growth.
Commercial contracts set specific performance standards and deadlines, ensuring that all parties meet their obligations on time. This is vital for maintaining high-quality standards and preventing delays, which can otherwise lead to client dissatisfaction and revenue loss.
Some common-day commercial contracts examples include - loan and finance agreements, settlement agreements, co-founders agreements, corporate lease agreements, advisor agreements, share subscription agreements, letters of intent (LOI), service level agreements, user agreements, contracts for the supply of goods and services, escrow agreements, non-compete agreements, and agency agreements.
Choosing and enforcing the most appropriate commercial contract type for the situation is vital to the long-term success of your business.
Joint Venture (JV) contracts are agreements between two or more parties for a particular business project or opportunity. JV contracts specify the conditions, terms, and duties to be met by each party during the project. In a joint venture, parties operate in a partnership and not as independent legal entities.
Critical elements of a JV agreement include:
Put JV agreements to effect when:
Shareholder agreements define the duties and responsibilities of shareholders, share issuance, corporate operations, and decision-making processes. Also known as the stockholders' agreement, it protects both the entity and the shareholders' investment in that entity.
A Business Purchase Agreement (BPA), also known as a business transfer agreement, transfers the ownership from the seller to the buyer of the business entity. Usually, this type of contract contains terms that govern the sale. BPAs can either be stock purchase agreements or asset transfer agreements.
BPAs are essential for anyone buying or selling a business.
Supply contracts are those in which the seller promises to provide the specified goods or services at a fixed price and for a set period. Here, as part of the agreement, the buyer also agrees to buy those products exclusively from the seller during that time.
These agreements are often used by procurement departments when working to procure goods and services for their organization.
A distribution agreement, also known as a wholesale distribution agreement, is a contract between a distributor and a manufacturer. It allows distributors to market, sell, and profit from the bulk sales of products from manufacturers or wholesalers. These agreements typically include terms and conditions addressing territories, exclusivity rights, and reporting requirements.
A distribution agreement is essential for anyone who wishes to distribute the products or services of another company. Typically, the following business types may need distribution agreements: wholesalers, manufacturers, retailers, software companies, beauty products, clothing and accessories, electronics, and brands.
A franchise agreement is a contract that legally binds franchisors and franchisees. These contracts outline what the franchisor expects from the franchisee, how the firm must be run, and other specifics. It is a contract whereby the franchisor (firm) agrees to provide the franchisee the consent to use the brand name or company system (individual or entity).
Anyone planning to license a business for use as a franchise must have a franchise agreement to operate legally. Traditionally, the following businesses use franchise agreements: retailers, travel agencies, convenience stores, fast food & chain restaurants, financial advisors, healthcare providers, health clubs, and real estate companies.
Non-disclosure agreements, or NDAs, are binding contracts that establish a trusting relationship between the owner of sensitive information and the person who will have access to it. If a relationship is confidential, neither party—nor both parties—should divulge that information.
-> Here’s a post that will guide you through the pivotal steps to follow while dealing with NDAs.
The following five situations necessitate the signing of an NDA:
A partnership agreement is an official contract containing the rules and circumstances governing the connection between company partners. It typically specifies the duties or activities that each partner is expected to do in the business as well as their relative ownership interests.
It is possible to form a business partnership agreement between two or more corporations or between two or more people. For instance, an LLC and an individual or an LLC and a corporation may enter into a partnership agreement.
The purpose of a partnership agreement could be to increase brand awareness, gain access to a new market, or gain a competitive advantage. Another example includes an instance wherein you use a product or a product feature that resulted from a partnership between two brands.
A vendor contract, often referred to as a vendor agreement, is an agreement between two businesses about the exchange of goods or services in exchange for payment. Vendor agreements lay forth the terms of the commercial partnership and specify what each party is expected to perform. Some common types include fixed-price contracts, cash-reimbursable contracts, time and materials contracts, indefinite-delivery contracts, and letter subcontracts.
Events like weddings, art festivals, and food markets may use vendor agreements. Additionally, your company depends on several vendor contracts for anything from office supplies to equipment repair and maintenance, internet and phone services, and even the raw materials for your products.
An agreement that specifies intellectual property ownership is known as an IP assignment agreement. IP assignment agreements are frequently used by businesses to both secure their innovations and developments and to transfer ownership of intellectual property when needed.
These assignment contracts are used to transfer intangible assets like copyrights, trademarks, and trade secrets of businesses. The IP assignment agreement, which is also sometimes referred to as an IP transfer agreement, makes sure that the firm may keep the rights to an intangible work that an employee develops on the company's behalf.
A smooth transfer of IP ownership rights can be made possible through an intellectual property assignment, regardless of whether you are beginning a new business, purchasing product rights, or buying a firm.
Knowing when a commercial agreement is legally binding is essential because it ensures all parties understand their rights and obligations. This clarity prevents disputes, protects your interests, and ensures that everyone follows the agreed terms in business transactions.
To determine if a commercial agreement is legally binding, consider the following criteria:
A commercial agreement begins with an offer by one party and acceptance by another. Both the offer and the acceptance must be clear and unequivocal.
Example: A vendor offers to supply goods at a specified price, and the buyer accepts this offer by agreeing to the terms.
Consideration refers to the value exchanged between the parties involved in the agreement. It can be in the form of money, goods, services, or a promise to perform (or not perform) a specific action.
Example: A company agrees to pay a consultant for their services, and the consultant agrees to provide the services in return for payment.
Both parties must intend for the agreement to be legally binding. This intention is usually inferred from the nature of the agreement and the circumstances surrounding it.
Example: A signed contract between two businesses to deliver products within a specific timeframe typically demonstrates the intention to create legal relations.
The parties entering into the agreement must have the legal capacity to do so. This means they must be of legal age, sound mind, and not disqualified from contracting by law.
Example: A company entering into an agreement with another company assumes both entities have the legal capacity to form the contract.
The purpose of the agreement must be legal. Contracts involving illegal activities or purposes are not enforceable.
Example: An agreement to supply goods that are legally permissible to trade will be enforceable, whereas an agreement to sell prohibited substances would not be.
The terms of the agreement must be clear and complete enough to be enforceable. Vague or incomplete terms can render a contract unenforceable.
Example: A detailed service contract specifying the scope of services, timelines, and payment terms ensures clarity and completeness.
While commercial agreements are essential tools for business operations, they are not without limitations. Being aware of these limitations can help your legal team mitigate risks and ensure better contract management.
Ambiguous or vague terms can lead to misunderstandings and disputes. If the language of the agreement is not clear, parties may interpret terms differently.
Commercial agreements may lack the flexibility needed to adapt to significant business changes, such as market shifts, technological advancements, or organizational restructuring.
Changes in laws and regulations can affect the enforceability or terms of commercial agreements. Contracts that are valid under current law may become problematic if laws change.
Including the right clauses in your commercial agreements is crucial for protecting your business interests and ensuring clear terms for all parties involved. Here are some key clauses that should be considered in any commercial agreement:
This clause defines the key terms used throughout the agreement, ensuring that all parties have a common understanding of important concepts.
The confidentiality clause ensures that any sensitive information shared between the parties remains private and is not disclosed to third parties without consent.
This clause details how and when payments should be made, including the payment schedule, method of payment, and consequences for late payments.
The term and termination clause outlines the duration of the agreement and the conditions under which it can be terminated by either party.
This clause addresses the extent of each party’s liability in case of damages or losses and outlines the indemnification obligations.
The force majeure clause covers unforeseen events that could prevent either party from fulfilling their contractual obligations, such as natural disasters or political upheavals.
This clause outlines the methods for resolving disputes that may arise during the term of the agreement, such as mediation, arbitration, or litigation.
The governing law clause specifies which jurisdiction’s laws will apply to the interpretation and enforcement of the agreement.
Organizations rely on commercial contracts for everything from simple deals to complex partnerships. These agreements share certain elements but are as diverse as the companies using them. They mitigate risk and build strong, mutually beneficial affinities. The above contracts each have a distinct purpose and objective.
Further, commercial contracts can offer new revenue opportunities, setting your company up for success and paving the way for growth. You can connect the people, processes, and data involved in commercial contracts to execute better agreements and advance your organization.
“The search result, contract repository, standardized template creation, and workflow are a few features that have brought down the efforts tremendously. SpotDraft has read our minds while setting up the platform for our use and hit the bull's eye. The introduction of SpotDraft as a CLM solution in our company helped us get our contracting ducks in a row. The easy-to-use functionalities added with superb customer support and implementation have made this transition a smooth process.”
SpotDraft helps create commercial agreement templates, eliminating mundane contracting work and giving businesses thousands of dollars back through efficient processes. It removes friction and makes commercial contracts accessible by offering a data-rich repository.
