5 Things To Know About Commercial Contracts

You’ll undoubtedly enter into various commercial activities and related operations with other individuals and entities as a business owner.

Yet before these activities take into effect, all the parties involved should draft and sign commercial contracts to define their rights, duties, and obligations to avoid the risk of conflict and misunderstanding later on.

However, navigating commercial contracts can be challenging if you have no idea how they work. Because of this, it’s crucial to have a clear picture of everything you should learn about these contracts.

How are you going to do that? Continue reading to familiarize yourself with the five things about commercial contracts.

1. Purpose Of Commercial Contracts

Generally, a commercial contract refers to a legally binding business document that obligates one party to perform a particular activity. It’s required by businesses to ensure all the arrangements agreed upon by both parties are followed throughout the contract.

Meanwhile, when a commercial contract isn’t drafted correctly, it may result in a conflict of interest between the parties involved and other related problems.

That said, it’s essential to ensure the contract is written correctly to avoid potential loopholes affecting the parties’ relationship.

2. Key Commercial Contract Clauses

Although different industries require different clauses, there are critical commercial contract clauses that you should get familiar with to protect yourself along the line. These can include:

Confidentiality: This is a critical clause in commercial contracts as it ensures that unauthorized persons have no access to confidential information, such as intellectual property and other vital business dealings.
Indemnification: This is another crucial commercial contract clause intended to transfer risk from one party to another. It also ensures that one party will get compensation from the other party whose actions caused damage or loss. An indemnifying clause is typical in commercial contracts like employment agreements. Hence, if you think your employment contracts need this type of clause, it’s best to work with professionals to ensure you get this section right.
Dispute Resolution: This is also an essential contract clause as it helps address conflicts or misunderstandings between the parties. It includes certain agreements on the different methods to settle disputes and avoid the possibility of litigation.
Termination: This type of clause specifies the terms and conditions for terminating a commercial contract and releasing the parties from the obligations in the said document. Some common reasons for termination include completion of the sale and payment, breach of contract, and some term limits.

3. Different Types Of Commercial Contracts

It’s also essential to know that various types of commercial contracts exist. These are as follows:

Non-Disclosure Agreement: This safeguards a specific business’s trade secrets and other confidential information. It ensures that the parties to the contract will not disclose any information that may harm the company at some point.
Purchase and Sale Agreement: This involves selling specified goods or services at a specified price. It can be helpful in situations when there are repeated purchases from the same party involved.
Service Level Agreement: This establishes expectations for the quality of work of one of the parties. It specifies specific terms and conditions, including quality guidelines.

4. Key Elements To Make A Commercial Contract Enforceable And Valid

In most cases, the commercial contracts signed by the parties aren’t automatically valid and enforceable. There are significant elements you must comply with for a commercial agreement to be enforceable and valid, including:

Offer: It refers to one party’s expression to be willingly bound to another by the terms and conditions outlined in the contract.
Acceptance: It refers to a situation wherein one party accepts the terms of the offer by the other party. This should be communicated to the contracting party providing the offer is valid.
Capacity: It entails that the contracting parties should have the ability to give their consent to the terms and obligations of the commercial contract.
Consideration: It means that the parties should exchange some value that should be sufficient to be binding and enforceable.
Intention To Create Legal Relations: It refers to a presumption that the parties have real intention to enter into a commercial contract.

5. Consequences Involved For Breaching Commercial Contracts

A breach of contract or failure to fulfill the terms and conditions under the agreement happens for several reasons.

These can include poor communication, reliance on third parties, and other related situations. Regardless of the cause, breach of contract has several consequences you should be wary of for your protection.

Depending on the situation, a breach of a commercial contract may lead to the following consequences:

Legal remedies, including filing a case in court to hold the other liable;
Monetary damages or the amount of money the court awards to cover the losses they’ve suffered;
Rescission or the process of making the contract void;
Reformation or the process of rewriting the contract to fix the inequalities in it; and
The specific performance or a remedy requiring the breaching party to fulfill duties and obligations in the agreement.