What Is a Commercial Contract
In this commercial contract, two or more businesses or organizations decide to agree to legally bind one party to the performance or the non-performance of a specific activity in exchange for a fee.
A Brief Introduction About the Commercial Contract
A commercial agreement is usually entered into between two or more businesses so that a particular transaction is either executed or not executed, such as a non-compete agreement as per the terms and conditions laid down in the agreement. It is very important to hire a commercial contracts attorney to draw up the contract to ensure that there are no weaknesses in the agreement and the interests of both parties are protected. Such contracts are required for the sale of goods or services, rights to intellectual property use like patents, copyrights or trademarks, real estate transactions, or rights to disclosure of confidential information.
All these contracts are governed by the laws of the state in which the transaction is taking place and need to adhere to the Uniform Commercial Code. There has to be an offer and acceptance in such contracts, and an important element would be a consideration. Both parties need to be competent to contract, and there should be an exchange of money, tangible goods, or services.
Who Takes the Commercial Contract – People Involved
This contract is taken by businesses or organizations where consideration is paid for the sale of goods or services. There are certain parameters like quality and delivery deadline, which form part of this contract. One of the parties offers the other a certain amount for the goods or services, and the other party accepts the offer and agrees to supply them.
Purpose of the Commercial Contract – Why do You Need It
Every business is governed by a specific law, and it is important that the law is followed, or else the business may be forced to wind up its operations. With commercial contracts, you will follow the guidelines required by law and therefore protect your business. The party to the contract which supplies goods or services expects to be paid on time. If there is an official contract, then there will be no payment problems.
Resolution of disputes will be convenient with contracts as both parties know the procedure to be followed should there be a dispute. The possibilities of disputes are minimized with contracts, along with the costs associated with them.
Contracts help clarify the use of intellectual property. The client has the right to use the software, but cannot misuse it. A contract creates certainty, and both parties know what the expectations of the other are. The contract has all the information a client needs about the product and gives them assurance about the credibility of the supplier.
Your customers get an in-depth understanding of how your business operates when you have a contract. This is an excellent practice when it comes to client communication. If either party is not satisfied, then the contract can be terminated by providing sufficient notice.
Contents of the Commercial Contract – Inclusions
The commercial terms are an important component of all such contracts. The consideration payable by one party and the goods and services to be delivered should be mentioned. A standard contract should include the following information:
- The names of the parties to the agreement. The obligations of both the buyers and sellers need to be stated
- Details regarding the contracted price, which are negotiated by both the buyer and the seller, must be accurate. It should be mentioned if there is any variable component in the price. The basis of payment if it is based on the stage of completion of the task
- Terms of payment: The mode of payment and the due date. Approvals, if any, required from the buyer to be incorporated.
- Delivery details: The mode of delivery and the deadline for delivery needs to be mentioned
- Penalties: The penalties applicable if there is a delay in payment on behalf of the buyer and delay in supplies on the part of the seller. The amount of penalty and the method of calculation should also be included
- Force Majeure clause: The events under which delays in performance of the obligations of the buyer and seller are allowed
- Dispute resolution clause: The contract should clearly state if disputes will be resolved by arbitration or litigation and the jurisdiction where they will be settled
- Termination of contract: The notice period to be served by either party for termination of the contract prematurely
- Governing law: The laws of the state under whose jurisdiction the contract is drafted
- Contract effectiveness: The occurrence of specific events which lead to the execution of the contract
How to Draft the Commercial Contract
While drafting commercial contracts, here are some points which need to be considered:
- Eligibility of the parties to enter into the contract: You need to determine if the parties are competent to contract. They should be over 18 years of age, of sound mind and should not be coerced into entering the contract
- The consideration for the contract: There has to be a payment of consideration for the goods or services delivered
- Terms of the contract: The contract terms should ensure that the expectations of both parties are met. No deception should be involved
- Confidentiality clause: This should be included if trade secrets or similar information is involved and needs to be protected
- Dispute resolution clause: If there is a breach of contract, then the method in which the dispute will be settled should be part of the contract. This would state whether arbitration or litigation would be followed, the sharing of fees of the attorney and the jurisdiction of settlement
- Termination of contract: If either party wants to terminate the contract prematurely, then they need to serve a notice to the other party
- Applicable laws to be adhered to by the contract
- Signatures and dates: The last page of the contract should be set aside for the signatures by both parties and the relevant date.
Negotiation Strategy
Before signing a commercial contract, the buyer should prepare a draft contract and make an offer to the seller. The seller should study all the clauses of the agreement prepared by the buyer and make a counteroffer to the buyer. Both parties should negotiate the price based on the services being provided and finalize the agreement.
Benefits & Drawbacks of the Commercial Contract
The benefits of a commercial contract are:
- Protection of interest of both parties: The buyer and seller know that they will get what is mentioned in the contract. The buyer is assured of the goods or services which meet the quality standards and within the given deadline. The seller gets the payment on the due date
- Legal remedy: Both parties have recourse to legal action if the other party breaches the contract and can claim adequate compensation
- Termination of contract: If either party wants to exit the contract, they can send a notice to the other party
The drawbacks of a commercial contract are:
- Expectations not fulfilled: If there is no contract, the buyer has no guarantee that the seller will deliver the goods and services on time. The seller cannot be certain about payment from the buyer
- No claim for damages: Neither party can claim damages suffered due to non-performance of the contract by the other party
- Additional losses: The buyer will have to look for other sellers to fulfill the contract, which will be difficult at short notice. The other seller might charge higher rates. The seller will have to find other buyers, which will be equally difficult
What Happens in Case of Violation of Commercial Contract?
In case of violation of any clause by either party, the following are the remedies available:
- Money Damages: If there is non-performance of the contract by any party, then the other party can claim compensation to the extent of the amount they would normally have received if the obligation was fulfilled. This would include any lost profits. The amount of compensation would depend on whether there is a partial breach or a complete breach. In the case of a complete breach, the compensation would include lost profits. In the case of a partial breach, the compensation would be limited to the expense incurred to replace the other party
- Restitution: The injured party is restored to the position in which they were before the contract was signed. The party violating the contract would then have to return the money or property taken from the injured party.
- Rescission and reformation: Both these remedies are applicable when there is fraud involved in the contract. In the case of rescission, the contract is canceled, and neither party has any contractual obligation. In the case of reformation, the court draws a new contract that is fair to both parties.
- Specific performance: In this case, the party which has violated the contract needs to fulfill their contractual obligations.
When businesses and organizations want to transact with one party supplying the goods and services and the other party agreeing to pay a specific consideration for it, a commercial contract is essential. The agreement should incorporate all the clauses which protect the interests of both parties. Both parties should review all the clauses of the agreement before signing it.
The essential clauses which should be included in the agreement would be the force majeure clause, the dispute resolution clause, and the termination of the contract clause. The force majeure clause(1) mentions the circumstances under which delayed payment or delayed supply will be accepted. This will protect the buyer and seller in specific situations.
Even though the contract is drafted to ensure that the possibilities of disputes are minimal, but should there be a dispute between the parties, then there should be a precise dispute resolution mechanism(2). The termination of the contract clause enables the parties to end the agreement prematurely after providing notice to the other party. The laws of the state and the Uniform Commercial Code should be followed by all agreements.