Today, commercial contracts are sought after as they bolster business relationships. They should be crafted with great care to avoid serious litigation. Further, commercial contracts save time, money, and headaches. They are a great way to record, communicate and contractually bind your exchanges.
Ever dealt with a commercial contract poorly drawn up, or that didn't capture the argument fully? If yes, then ask yourself if you would like to fix this with the touch of CLM. Perhaps leaving that aside to munch on a little later, let's indulge in a commercial contract's definition, benefits, structure, and much more.
Let's get started.
What are commercial contracts?
Commercial contracts are legally enforceable agreements between two or more parties. At companies, in-house lawyers draft contracts that inform stakeholders of the dos and don’ts and terms and obligations of upcoming engagement(s). Precisely, they help in achieving two things:
- Assist buyers in receiving the intended products and services on time and in the agreed quantity
- Aid sellers in getting appropriate and timely payments
Moreover, properly drafted commercial contracts can help you avoid costly litigation. In the rise of unexpected events, say a breach of contract, these contracts act as a guide. They usually include effective dispute resolution mechanisms. Typical examples of commercial contracts include acquiring a company, launching a joint enterprise, and outsourcing tasks to another company.
Pro tip: Commercial contracts are agreements used to govern commercial activity(s). They guarantee that parties follow their word and streamline transaction flow.
Benefits of commercial contracts
High-growth companies or massively-scaling companies generally win a large number of deals. Maintaining an obligation record for every deal soon becomes complex and myriad. By creating and executing commercial contracts, you can monitor, track, report, and eventually see essential obligations in effect.
Other advantages of using commercial contracts include:
Setting objectives and expectations
Commercial contracts lay out specific expectations for each party. They detail the terms that involved parties agreed upon earlier. Moreover, they ensure requirements are met and provide teams with a much-needed legal defense.
Minimizing contract risk
High-value transactions come with considerable risks. To combat potential losses, parties need a commercial contract in place. These contracts also formalize relationships, safeguard business interests, and help achieve contract compliance.
Conducting your business with professionalism
When you have a contract written, it creates massive impact. As a result, parties accept full responsibility for any violations of the agreement they commit. Commercial contracts establish a paper trail, help build trust, and make parties appear credible and proficient.
Pro tip: Commercial contracts are essential for multi-jurisdictional or cross-border deals. They help structure client relationships and help them navigate through the complexity while utilizing a solid framework for success.
Also, click here to learn the 10 best examples and types of commercial contracts.
Seven common clauses in commercial contracts
Commercial contracts identify involved parties and their deliverables. They outline transaction details, payment terms, goods or services exchanged, date, and price. However, it's important to note that each commercial contract is different and contains varied elements.
Some standard clauses you can find include:
Confidentiality: Parties promise to keep sensitive information out of reach of the public. The confidentiality clause impedes unauthorized disclosure of confidential information such as business dealings, intellectual property, or similar entities.
Dispute resolution: This clause mentions how parties will handle disputes in case of a conflict in the future. In light of similar events, it has helped organizations avoid litigation to a greater extent and instead submit for arbitration.
Damages: The liquidated damage clause will shed light on the damages if someone has breached the contract. Usually, a trespasser owes a predetermined amount as default in addition to other damages.
Termination: Whether during acquisitions or breach of contract, parties have the option to end the contract, freeing themselves from any obligations initially accepted. These clauses also mention the circumstances leading up to termination.
Indemnity clause: Indemnification defines the compensation one party pays to another in the event of loss faced. In short, this clause provides compensation for liabilities upheld by other party(s).
Jurisdiction: With prevalent cross-border transactions, it is good practice that a commercial contract explicitly states which jurisdiction law governs it. Since each country or state has its distinct governing rules, the jurisdiction clause brings clarity and offers legal protection.
Force Majeure: A Force Majeure clause outlines the line of action when any of the party(s) is not able to fulfill its obligations due to reasons not in human control. For instance, natural calamities or similar catastrophic events may hinder either party from performing obligations. In these situations, failing or not yielding promises is not considered a breach of contract.
Challenges in managing commercial contracts
When you have commercial contracts spread across systems, you face problems like losing sight of contract owners, chaotic status-tracking, and much more. There are umpteen chances of losing a contract, which may expose you to risks unknown before.
Sometimes, more than one department owns the commercial contract, meaning partnership becomes quintessential. The solution is to use a CLM software, such as SpotDraft, that can help you collaborate internally.
Lean legal teams and voluminous contracts
Your legal team might be spending more time on administrative activities like data entry, which results in less-than-ideal results. They have to switch between different platforms from the drafting stage to the execution stage. These activities may expose the contracting process to human biases.
Top-performing businesses have most likely cracked and streamlined their commercial contract strategy, which is less-error-prone. Additionally, without expanding the legal teams’ throughput, scaling commercial contracts becomes practically impossible.
Lack of automated workflows
Often, procurement teams create SPA contracts, but legal and finance teams must approve the same. Building and executing routine commercial contracts becomes more challenging without automated approval workflows.
Enterprises swirling out a large number of contracts on a regular basis can get baffled without a CLM. Also, when you consider the post-execution phase, tracking and reporting commercial contracts, finding insights for a competitive edge, and fine-tuning their renewals are odd and irregular.
SpotDraft’s approach to handling commercial contracts
For commercial contracts that surpass a given value or include a specific jurisdiction, approval processes might be set up. SpotDraft enables you to build these unique approval series while creating templates. The platform ensures the accuracy of each contract exchanged with the counterparty.
Also, custom approval workflows enable interdepartmental collaboration and provide confidence when executing the already negotiated terms. These workflows also help in reducing turnaround time on contracts and actively mitigate risk.
A single source of truth
Finding contract information is as easy as a few clicks, thanks to the way SpotDraft stores your contracts in a safe, searchable repository. The risk of having multiple contract versions in circulation is eliminated when all parties involved can monitor all revisions in real-time.
Furthermore, SpotDraft eliminates the need for manual contract reports hosted on Microsoft Excel or other such software. The platform helps you instantly create reports and visualize critical contract data. Additionally, it offers a chance to link those commercial contracts with supporting documentation.
Seamless review and collaboration
SpotDraft's 100% Word compatible contract editor automatically detects definitions and errors in commercial contracts. By simply uploading them to the platform, you may review them in just a few minutes.
Additionally, the platform encompasses a dashboard view of all contracts, and the ticketing system aids in triggering requests and allocating & prioritizing tasks.
Additional FAQs for commercial contracts
- What makes a commercial contract legally binding?
To make commercial contracts enforceable, there must be an offer, acceptance of the offer, consideration, and the intention to be legally bound. Also, the term 'consideration' means "something in return."
- What does the content of commercial contracts look like?
Commercial contracts specify the parties, the deliverables, a clear plan for what will happen if the parties don't fulfill their responsibilities, and the applicable law.
- Why are commercial contracts difficult to manage?
More shrunken legal teams, increased risk, and a ton of administrative work make it hard to manage commercial contracts.
- What are some outcomes of having a commercial contract?
Some well-known results of creating a commercial contract include achieving contract compliance, minimizing risk, offering legal protection, and setting clear expectations.
SpotDraft makes the entire contracting process transparent, allowing each department to securely access and track commercial contracts. Managing commercial contracts throughout the lifecycle couldn't be made simpler and more powerful. Get a free demo now.