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.
What is a commercial contract?
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)?
Why do we need commercial contracts?
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.
#1 To set clear and precise business terms
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.
#2 To protect business interests with robust legal coverage
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.
#3 To manage and mitigate specific business risks
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
#4 To ensure efficient dispute resolution for business conflicts
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.
#5 To establish trust and reliability in business dealings
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.
#6 To enforce high standards and deadlines in business operations
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.
What are the types of commercial contracts?
Different contracts address different needs, from sales to partnerships. Understanding these types ensures you are prepared for any scenario, minimizing risks and maximizing opportunities. Here are 10 essential commercial contracts you should know about.
1. Sales agreements
Sales agreements are used when buying or selling goods or services. They are essential in both business-to-business (B2B) and business-to-consumer (B2C) transactions.
A sales agreement includes specifications of the goods or services being sold, the price, payment terms, delivery dates, warranties, and any other conditions relevant to the transaction. It often includes clauses for breach of contract, which outline the remedies available if one party does not fulfill their obligations.
Also read: What is a Purchase and Sale Agreement? (+ Free Template)
Benefits of sales agreements
- Clearly define the terms of sale, including price, delivery, and payment terms
- Reduce disputes by setting expectations upfront
- Provide legal protection if one party fails to meet their obligations
Use case of sales agreements
A company purchasing office supplies from a vendor would use a sales agreement to outline the quantity, price, delivery date, and payment terms. This ensures that both the buyer and the seller understand their responsibilities, reducing the risk of misunderstandings or disputes.
Also read: Purchase and Sale Agreement Template
2. Employment agreements
Employment agreements are agreements between employers and employees. These agreements typically include the job title, description of duties, salary, benefits, working hours, confidentiality obligations, and conditions for termination. It may also include non-compete and non-solicitation clauses to protect the employer’s business interests.
Benefits of employment agreements
- Clarify job expectations and responsibilities
- Ensure both parties understand the terms of employment
- Provide a legal framework for resolving disputes
An employment agreement typically includes the job title, description of duties, salary, benefits, working hours, confidentiality obligations, and conditions for termination. It may also include non-compete and non-solicitation clauses to protect the employer’s business interests.
Use case of employment agreements
When hiring a new employee, a company would use an employment agreement to specify the employee’s role, salary, benefits, work hours, and other conditions. This helps protect both the employer and the employee by clearly outlining what is expected.
Also read: Rolling Out An Employment Agreement - Key Clauses
3. Non-disclosure agreements (NDAs)
NDAs are used to protect sensitive information shared between parties. They are common in business deals, partnerships, and employment relationships.
An NDA specifies what information is considered confidential, the obligations of the receiving party to protect the information, and the duration of the confidentiality obligation. It may also include exceptions for information that is publicly known or independently developed.
Benefits of NDAs
- Prevent parties from disclosing confidential information
- Protect business secrets and proprietary information
- Provide legal recourse if confidential information is disclosed without permission
Use case of NDAs
A tech company developing a new software product might ask employees and partners to sign an NDA to prevent them from sharing details about the product before its official release. This helps protect the company’s competitive advantage.
Also read: How to Review Non-Disclosure Agreements (NDAs)
4. Lease agreements
Lease agreements are used for renting property or equipment. They are common in both commercial and residential settings.
A lease agreement typically includes the rental amount, lease term, security deposit, maintenance responsibilities, and any restrictions on the use of the property. It may also include provisions for renewing the lease and handling disputes.
Benefits of lease agreements
- Specify rental terms, payment schedules, and maintenance responsibilities
- Provide clear expectations for both landlords and tenants
- Offer legal protection if either party fails to meet their obligations
Use case of lease agreements
A business leasing office space would use a lease agreement to detail the lease term, monthly rent, maintenance responsibilities, and other conditions. This ensures both the landlord and tenant understand their rights and responsibilities.
Also read: How to Review Leasing Contracts: A Comprehensive Guide
5. Partnership agreements
Partnership agreements define the relationship between business partners. They are essential for any business with two or more owners.
These agreements include the roles and responsibilities of each partner, the initial capital contributions, the profit and loss sharing ratio, and the decision-making process. It also outlines how disputes will be resolved and the process for adding or removing partners.
Benefits of partnership agreements
- Clarify roles, profit sharing, and dispute resolution processes
- Ensure all partners understand their responsibilities and contributions
- Provide a legal framework for resolving disputes
Use case of partnership agreements
Two entrepreneurs starting a new business together would use a partnership agreement to outline their roles, how profits and losses will be shared, and how decisions will be made. This helps prevent conflicts and ensures a smooth operation.
Also read: What is a Partnership Agreement (+ Free Template) - SpotDraft
6. Service agreements
Service agreements are used when hiring a service provider. They are common in industries like consulting, marketing, and IT services.
A service agreement specifies the services to be provided, the timelines for completion, the payment terms, and any warranties or guarantees. It also includes provisions for modifying the agreement and resolving disputes.
Benefits of service agreements
- Detail the scope of services, timelines, and payment terms
- Ensure both parties are aligned on expectations
- Provide a legal framework for resolving disputes
Use case of service agreements
A company hiring an IT consultant to upgrade its computer systems would use a service agreement to specify the work to be done, the timeline, and the payment terms. This helps ensure the consultant delivers the agreed-upon services and the company pays for the work completed.
Also read: Checklist to a Good Master Service Agreement [+MSA Template]
7. Franchise agreements
Franchise agreements govern the relationship between franchisors and franchisees. They are common in businesses that operate under a franchise model, like fast-food chains and retail stores.
A franchise agreement includes the rights and obligations of the franchisor and franchisee, the franchise fee, the terms of the franchise, and the operational guidelines that the franchisee must follow. It also outlines the training and support provided by the franchisor and the marketing and advertising obligations of the franchisee.
Benefits of franchise agreements
- Establish brand standards, fees, and operational guidelines
- Maintain consistency across franchise locations
- Provide legal protection for both franchisors and franchisees
Use case of franchise agreements
A restaurant chain allowing an individual to open a franchise location would use a franchise agreement to detail the brand standards, franchise fees, and operational guidelines. This ensures the franchisee maintains the quality and consistency of the brand.
Also read: How to Review Franchising Contracts: A Comprehensive Guide
8. Joint venture agreements
Joint venture agreements are used when two or more businesses collaborate on a project. They are common in industries like construction, technology, and research.
These agreements include the objectives of the joint venture, the contributions of each party, the management structure, the profit and loss sharing ratio, and the duration of the joint venture. It also outlines the process for resolving disputes and dissolving the joint venture.
Benefits of joint venture agreements
- Outline each party’s contributions, responsibilities, and profit sharing
- Ensure a fair partnership
- Provide a legal framework for resolving disputes
Use case of joint venture agreements
Two technology companies working together to develop a new product would use a joint venture agreement to specify their contributions, how profits will be shared, and how decisions will be made. This helps ensure a successful collaboration.
Also read: How to Review Joint Venture Collaboration Agreements - SpotDraft
9. Supply agreements
Supply agreements are for the supply of goods over a period of time. They are common in manufacturing and retail industries.
A supply agreement specifies the quantity and quality of the goods to be supplied, the delivery schedule, the price, and the payment terms. It also includes provisions for handling defective goods and resolving disputes.
Benefits of supply agreements
- Ensure consistent supply
- Define quality standards and set pricing terms
- Stabilize supply chains
Use case of supply agreements
A manufacturer needing a steady supply of raw materials would use a supply agreement with a supplier to ensure the materials are delivered on time and meet quality standards. This helps the manufacturer maintain production without interruptions.
Also read: How to Review Vendor/Supplier Contracts: A Comprehensive Guide
10. Consulting agreements
Consulting agreements are used when hiring a consultant. They are common in industries like business strategy, marketing, and finance.
These agreements include the scope of work, the deliverables, the timeline, the payment terms, and any warranties or guarantees. It also outlines the process for modifying the agreement and resolving disputes.
Benefits of consulting agreements
- Specify the consultant’s duties, deliverables, and payment terms
- Ensure clear expectations and accountability
- Provide legal protection for both parties
Use case of consulting agreements
A company hiring a marketing consultant to develop a new advertising campaign would use a consulting agreement to detail the scope of work, deliverables, and payment terms. This helps ensure the consultant delivers the agreed-upon services and the company pays for the work completed.
Also read: How to Review Consulting Agreements: A Comprehensive Guide
When is a commercial agreement legally binding?
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:
1. When both offer and acceptance are clear
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.
- Offer: A proposal by one party to enter into an agreement
- Acceptance: The agreement by the other party to the terms of the offer
Example: A vendor offers to supply goods at a specified price, and the buyer accepts this offer by agreeing to the terms.
2. When both parties receive consideration
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.
- Mutual benefit: Both parties must receive something of value
- Sufficiency: The consideration must be sufficient but does not have to be equal
Example: A company agrees to pay a consultant for their services, and the consultant agrees to provide the services in return for payment.
3. When there is an intention to create a legal bond
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.
- Business agreements: Generally presumed to have an intention to create legal relations
- Social agreements: Typically not intended to be legally binding unless clearly stated otherwise
Example: A signed contract between two businesses to deliver products within a specific timeframe typically demonstrates the intention to create legal relations.
4. When there is a legal capacity to enter a contract
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.
- Legal age: Generally, parties must be at least 18 years old
- Sound mind: Parties must have the mental capacity to understand the terms and implications of the agreement
Example: A company entering into an agreement with another company assumes both entities have the legal capacity to form the contract.
5. When the purpose is legal
The purpose of the agreement must be legal. Contracts involving illegal activities or purposes are not enforceable.
- Lawful activities: The contract must involve actions that are legal and not against public policy
- Compliance: The terms of the agreement must comply with existing laws and regulations
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.
6. When the terms are certain and clear
The terms of the agreement must be clear and complete enough to be enforceable. Vague or incomplete terms can render a contract unenforceable.
- Clear terms: All essential terms and conditions must be specified.
- Complete agreement: The agreement should cover all necessary aspects to be carried out effectively.
Example: A detailed service contract specifying the scope of services, timelines, and payment terms ensures clarity and completeness.
Limitations of commercial agreements
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.
#1 Ambiguity and the risk of misinterpretation leading to disputes
Ambiguous or vague terms can lead to misunderstandings and disputes. If the language of the agreement is not clear, parties may interpret terms differently.
- Risk: Misinterpretation of terms can result in disagreements and legal challenges
- Mitigation: Ensure that all terms and conditions are clearly defined and unambiguous
#2 Insufficient flexibility to adapt to business changes
Commercial agreements may lack the flexibility needed to adapt to significant business changes, such as market shifts, technological advancements, or organizational restructuring.
- Risk: Inflexible contracts can hinder a business's ability to respond to changing circumstances, potentially leading to missed opportunities and operational inefficiencies
- Mitigation: Draft contracts with clauses that allow for adjustments in response to major changes, ensuring the agreement remains relevant and effective over time
#3 Challenges arising from changes in legal and regulatory landscapes
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.
- Risk: Legal changes can invalidate certain terms or make the contract non-compliant
- Mitigation: Include clauses that address potential
Important clauses in commercial agreements
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:
1. Definitions and interpretations
This clause defines the key terms used throughout the agreement, ensuring that all parties have a common understanding of important concepts.
2. Confidentiality
The confidentiality clause ensures that any sensitive information shared between the parties remains private and is not disclosed to third parties without consent.
3. Payment terms
This clause details how and when payments should be made, including the payment schedule, method of payment, and consequences for late payments.
4. Term and termination
The term and termination clause outlines the duration of the agreement and the conditions under which it can be terminated by either party.
5. Liability and indemnification
This clause addresses the extent of each party’s liability in case of damages or losses and outlines the indemnification obligations.
6. Force majeure
The force majeure clause covers unforeseen events that could prevent either party from fulfilling their contractual obligations, such as natural disasters or political upheavals.
7. Dispute resolution
This clause outlines the methods for resolving disputes that may arise during the term of the agreement, such as mediation, arbitration, or litigation.
8. Governing law
The governing law clause specifies which jurisdiction’s laws will apply to the interpretation and enforcement of the agreement.
Create commercial contracts with SpotDraft
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.
