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 agreements and their specific clauses can help you navigate these challenges effectively, ensuring smooth business operations and minimizing risks. Contract Collaboration Software can significantly reduce the complexity of managing these contracts.

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 Collaboration Software and Contract Lifecycle Management (CLM) tools 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 agreements ensure that everyone knows their rights and responsibilities. Contract Collaboration Software helps maintain transparency throughout this process.

Also read: What Are Commercial Contracts (Clauses, Examples, and Benefits)?

What are the types of commercial contracts?

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. Contract Collaboration Software streamlines the drafting of each of these.

Choosing and enforcing the most appropriate commercial agreement type for the situation is vital to the long-term success of your business. Contract Collaboration Software supports this decision-making with data-driven insights.

1. Joint Venture Agreement

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. Contract Collaboration Software improves coordination in JV scenarios.

Critical elements of a JV agreement include:

• Purpose of establishing the contract
• Each party's role in the partnership, including technical contributions or commercial commitments
• Meeting schedules and how parties will discuss the project's progress
• Tenure of the partnership
• Note on how to terminate the agreement if need be

Contract Collaboration Software helps teams draft and review JV contracts with ease.

Popular use cases

Put JV agreements to effect when: 

• Your business would require or benefit from resources that another company supplies
• The partnership aids in reducing the R&D cost of the project
• Expanding your business by creating a more extensive network
• Your business needs assistance developing a novel product, technology, or service.
• Increasing sales or targeting new clients by doubling down on another company's brand or reputation

2. Shareholders’ Agreement

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. Contract Collaboration Software simplifies version control and document tracking in such agreement

Benefits

• Ensures that all shareholders are treated fairly, and their interests are protected
• Gives existing shareholders the right to choose outside members as potential or future shareholders

Popular use cases

• While starting a company.
• Issuing the first shares of a company.
• Facilitating collaboration using Contract Collaboration Software.

3. Business Purchase Agreement

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. Contract Collaboration Software ensures accuracy and auditability during the sale.

Benefits

• All assets and liabilities can be valued at fair market value
• The transfer agreement outlines the terms that protect the interests of involved parties

Popular use cases

BPAs are essential for anyone buying or selling a business. Contract Collaboration Software can help facilitate due diligence.

4. Supply Agreement

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. Contract Collaboration Software helps track renewal timelines and pricing obligations.

Benefits

• Helps lock in the discounted price and other advantages the supplier agrees to provide in any specific period.

Popular use cases

- These agreements are often used by procurement departments when working to procure goods and services for their organization.

- Ensures clarity and compliance through Contract Collaboration Software

5. Sale and Distribution Agreement

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. Contract Collaboration Software simplifies document negotiations and clause management here.

Benefits

• These agreements help move products/services along the supply chain - from manufacturers to retailers to end-users. A third party can sell suppliers' goods to an unexploited region or new clients, meaning suppliers need not make a presence in a new territory themselves.
• A sale & distribution agreement in place gives the victim party a much simpler time in case of potential breaches or violations.

Popular use cases

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. Distribution agreements are drafted and executed efficiently using Contract Collaboration Software

6. Franchise Agreement

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). Contract Collaboration Software makes tracking compliance across franchisees easier.

Benefits

• Defines the relationship between franchisee and franchisor
• Offers better control to the franchisor
• Helps in brand management

Popular use cases

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. Franchise agreements are easily managed across multiple territories using Contract Collaboration Software.

7. Non-disclosure Agreement

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. Contract Collaboration Software helps generate and store NDA templates securely.

-> Here’s a post that will guide you through the pivotal steps to follow while dealing with NDAs.

Benefits

• Distinguishes confidential and non-confidential information
• Protects patent rights
• Guards sensitive information

Popular use cases

The following five situations necessitate the signing of an NDA:

• When a company agrees to the sale or licensing of a technology or product.
• When teams are negotiating with a new partner or investor.
• When an employee joins or quits an organization.
• When a new client is being onboarded.
• When a company is planning an acquisition or merger.
• Easily monitored through a centralized system like Contract Collaboration Software

8. Partnership Agreement

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. 

This contract outlines roles, ownership, and profit-sharing between partners. Contract Collaboration Software reduces the risk of miscommunication here.

Benefits

• Serving as a reference for dispute resolution
• Stipulate the rights and obligations between the parties
• Define the business relationship
• Enables collaborative editing using Contract Collaboration Software

Popular use cases

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. Partnership agreements are managed easily with Contract Collaboration Software.

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

Contract Collaboration Software helps ensure that agreements meet legal requirements. Here’s what must be included:

• Legal capacity of parties
• Lawful purpose
• Clearly defined terms
• Defined obligations and timelines

Using Contract Collaboration Software ensures no critical element is missed.

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, they have limitations. Contract Collaboration Software helps mitigate these:

• Ambiguity or misinterpretation of terms
• Inflexibility in adapting to change
• Regulatory or legal changes

Drafting with Contract Collaboration Software enables dynamic updates and collaboration between legal and business teams.

#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

Contract Collaboration Software helps ensure consistency across these critical clauses:

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.

Each clause can be templated and automated using Contract Collaboration Software.

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. Using Contract Collaboration Software like SpotDraft ensures these are executed quickly and effectively.

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.”

G2 Reviewer

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. Contract Collaboration Software is the future of agile legal operations.

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FAQs around Commercial Contracts

1. What legal protections can be gained from using a well-structured commercial contract?

‍A well-structured commercial contract protects parties by clearly defining rights, obligations, and remedies in case of disputes.

2. What should a lawyer consider when drafting a commercial contract for a partnership?‍

Lawyers should ensure clarity on roles, profit-sharing, dispute resolution, and exit terms to avoid future conflicts.

3. When should a lawyer recommend using a commercial contract?

‍A lawyer should recommend using a commercial contract whenever two or more parties engage in a transaction involving rights or obligations.