Commercial contracts are legally enforceable agreements between two parties or entities engaged in a business transaction. They look like regular contracts at first glance. After all, commercial contracts, like other forms of contracts, are written commitments in which one party provides something of value to another in exchange for monetary compensation.
However, there are a few pitfalls such as liability, copyright infringement, project scope creep to avoid when writing commercial contracts. Signing off poorly written business contracts that don’t account for these problems only to claim for damages in court later, might damage your reputation, and inevitably your rapport with potential partners and investors. Read on to learn about six key clauses for a commercial contract in order to circumvent costly litigation.
1. Jurisdiction
With the global spread of the internet, cross-border deals, whether domestic or international, have become commonplace. This goes without saying that it is not always obvious which state, province, or region’s laws apply to an agreement when the parties to it are located in different states or even other countries. Being a business owner, if you ever need to go to court to enforce your rights under a contract, this could pose a serious problem. This is why commercial contracts should always make it clear which state’s laws will apply by designating that state as the forum for the agreement.
2. Confidentiality
When two or more businesses enter into a contract, there will inevitably be a substantial amount of information sharing to ensure that all parties are able to fulfill their responsibilities. Trade secrets, customer information, sales methods, and anything else you don’t want known to the general public should be protected by a confidentiality clause. However, this provision need not be unduly specific. Be sure to document your compliance and the measures you’ve made to safeguard the privacy of your customers and staff. If you already have a privacy policy, you may merely link to it in your confidentiality clause.
3. Liquidated Damages
A liquidated damages clause specifies the predetermined sum of money that the party in breach of the agreement is obligated to pay to the opposing party. There are two advantages to including a damages clause in a commercial contract. Firstly, it helps both parties know what to expect in the event of a breach. Secondly, they deter breaches by making the consequences of breaking the contract crystal clear. In addition to this amount, the court may order different sorts of damages, based on the seriousness and nature of the breach.
4. Force Majeure
French for “superior force”, the “force majeure” clause exonerates a party from obligation for uncontrollable events such as:
- Disasters caused by “acts of God” such as cyclones, tornadoes, tsunamis, typhoons, explosions, pandemics, and earthquakes
- Prolonged energy or raw material shortages due to war, terrorism, conflagrations, labor strikes, lockdowns, or lockups
- The inability of any party to meet its contractual duties as a result of governmental action
In the absence of a force majeure provision, the parties would be left to rely on less promising common law doctrines such as “impracticability” and “frustration of purpose” to absolve themselves from obligation. Therefore, the contracting parties must incorporate a force majeure clause in case landslides or civil upheaval causes shipping delays or rerouting.
5. Indemnification
One common contractual provision that permits one party to seek redress for harms caused by another party’s acts or lack thereof is an indemnification or indemnity clause. Because it states that one party will pay another’s legal fees if they win a certain lawsuit, this clause is also sometimes referred to as a “hold harmless” provision.
By maintaining a comprehensive audit trail and limiting access to authorized personnel, contract management software can reduce contractual breaches, non-compliance, and copyright infringement, but there should always be an indemnity clause in a commercial contract to cover unforeseen risks.
6. Severability
A severability clause allows an agreement to stand even if some parts are unenforceable or illegal. If a severability clause is not included, the entire contract could be rendered invalid if even a single provision is not upheld by the local court. However, if an invalid provision is material to the agreement’s purpose, the severability clause will not protect it.
In most cases, a severability provision will consist of two sections. The savings language guarantees that other parts of the contract remain unchanged, whereas the reformatory language lays out the way to correct the problematic parts, which can involve rewriting or removing them entirely, as agreed upon by both parties.
Conclusion
A solid commercial contract is essential to the longevity of any business partnership. In order to protect your company’s interests, you should include these six provisions in any deal you sign. Not doing so could allow the other party to behave carelessly or maliciously without worrying about consequences.
Author Bio:
Qurat-ul-Ain Ghazali, aka Annie, is the growth manager at Contractbook and looks after all the organic channels. She has been with tech startups and scaleups for a couple of years with a B2B focus. You can find her socializing, traveling, indulging in extreme sports, and enjoying the local desserts when she is not working.
