What are Commercial Contracts
The term "commercial contract" is used to describe many different types of written agreements between businesses. In general terms, it is a legally enforceable agreement between a seller and purchaser (or "buyer") for the supply of goods and/or services at an agreed price and time. From a legal point of view, it must demonstrate the "essentials of a contract", which are:
A clear offer. This can be in the form of a product and its price, but it can also be in the form of a service with a rate of payment. The key is that the offer must be unambiguous.
Clear acceptance of the offer.
Consideration. This is somewhat of a legal jargon word that means an agreed form of payment for the product or service that is unambiguous and clearly demonstrated. It can be a monetary payment, but it doesn’t always have to be.
Legal intent of both parties. Since the resulting contract will be a legally binding agreement, both parties must demonstrate a clear intention to agree to the arrangement.
Both parties must have the capacity to enter into the contract. Essentially this means that neither party is legally or mentally incapacitated and therefore able to understand and adhere to the terms and obligations of the contract . For example, someone who is underage, unable to give consent, or deemed incompetent would not be permitted to enter into the agreement.
Something of value must be exchanged. One party pays the price for the products or services, and the other party provides the product or service.
An agreement regarding the performance of a service or the transfer or sale of goods.
Types of Commercial Contracts
Commercial contracts are the backbone of commerce and business. Any type of free trade usually requires some type of agreement that will result in an enforceable contract. The written agreement can take many forms, including:
Frequent Examples of Commercial Contracts
Common examples of commercial contracts include the following:
Importance of Commercial Contracts
Commercial contracts provide a clear and concise method of defining the details of a proposed agreement. They not only allow the parties an opportunity to clarify the details of the terms and conditions, but they also explicitly detail each party’s obligations and responsibilities to one another. If at any time a party fails to perform the duties or obligations stated in the contract, or if there is a dispute regarding the contract, the contract itself can be presented as evidence in a court of law.
Elements of a Commercial Contract
In its most basic form, a commercial contract is a legally enforceable agreement between two or more parties that sets forth the terms and conditions between them. Contracts generally contain an offer, an acceptance, consideration, and mutual consent. A commercial contract can be with any party, including an individual (known as a natural party) or a legally authorized entity (such as a corporation or limited liability company, termed a "legal person").
The offer is a proposal by one party to do something or provide something of value in exchange for something of value from another party. Once the initial offer is made, the parties then negotiate to arrive at a mutually acceptable agreement, which forms the basis of the contract. Consideration refers to the value that each party provides to the other. Contractual mutual consent occurs when each party has agreed to and signed the contract.
The elements of the contract must be sufficiently clear to allow the parties to understand their respective roles and obligations. There also must be consideration—if no value is exchanged between the parties, there is no contract.
Contracts can be written, oral, or even implied. Verbal agreements may be valid, but create risk because the terms of the contract are open to dispute. Written contracts are easier to interpret and provide a more solid legal basis for enforcing the parties’ obligations. Oral and partially enforced contracts may be proven through the presentation of witness testimony, other parties’ communications, and/or documentary evidence. Written contracts may be modified by mutual consent of the parties, although any such modification is subject to any limitations established by law. Verbal agreements may be more difficult to enforce because the terms of the agreement can be disputed and therefore difficult to prove.
Categories of Commercial Contracts
Commercial contracts are a ubiquitous part of business transactions in the modern economy. While some deals can be done on a handshake, even in those cases it is more common than not for businesspeople to execute a written agreement. Unwritten contracts can still be legally binding, but the absence of a written document can lead to expensive litigation in the event of a dispute.
Sales contracts are of course among the most common types of commercial contracts. This agreement is between a seller of goods and the buyer of those same goods, and may be for one or more separate transactions or an ongoing relationship. A classic example of a sales contract is a sale of goods from a retailer or wholesaler to a customer, although the parties may also be a consumer and a producer of a component part.
Other types of common commercial contracts include those concerning services, which define the parameters of the transaction and the payment arrangements, as well as lease agreements, which define terms between a lessor and lessee for the use of real property (typically land and/or a building or other structure) in exchange for rent.
Legal Creation and Requirements
A commercial contract requires a mutual agreement to perform some lawful purpose in exchange for valuable consideration. Consideration is what each party receives in return for the promise or performance of the other. Some of the most common types of contracts in commerce are for the sale and purchase of goods. Goods have been defined as "all things that are movable." UCC § 2-102.
Not all commercial contracts need to be in writing to be enforceable. Agreements to be performed within one year need to be in writing to comply with the Statute of Frauds. Contracts for the sale of goods over $500 also need to be in writing. UCC § 2-201. Other types of agreements may need to be in writing to be enforceable, but not under the UCC. Sales of goods over $5000 must be in writing under Maryland law.
In Maryland, for a contract to be enforceable the parties must have "legal capacity." Unless otherwise legally incapacitated, this usually means the parties are of legal age at the time of contracting and are competent. Minors and those of unsound mind may not enter into an enforceable agreement. Additionally, the object of the contract must be lawful at the time of contracting and throughout the performance of the contract.
Many contracts can be formed "orally," meaning a mutual exchange of promises without being in writing. The problem that often arises from oral contracts is proving the terms of the agreement between the parties. Often disputes arise over the terms agreed upon, with each party having a unique interpretation of those terms. Oral contracts are difficult to prove, especially when one party fails to uphold some portion of the agreement. A written document signed by both parties can eliminate most of the potential disagreements that arise from oral contracts.
Parties may also change or add terms after the occurrence of certain events, such as the opening of an event-based escrow account (without withdrawing any funds) or obtaining a mortgage. A written document can outline these changes, preventing disputes over the agreed terms.
Typical Terms and Provisions
Certain terms and clauses are found in most commercial contracts, and it is important for the parties to be aware of them to prevent unpleasant surprises at a later date. Even if you have had previous dealings with the other party, you should satisfy yourself that you clearly understand what is being agreed and why.
The following are terms and clauses commonly seen in commercial contracts:
Confidentiality agreements
Also called "confidentiality clauses", "non-disclosure agreements" or "NDAs", confidentiality agreements are a common means of protecting confidential information disclosed by one party to another. They impose a legal duty of confidence upon the recipient of the information which carries the threat of damages for breach of that duty.
Indemnity clauses
An indemnity clause is a promise by one party to compensate the other party for loss that might occur.
Termination conditions
These are conditions which must be satisfied for the contract to continue. For example , a financier may require the business to have certain key appointments in place and to be performing to certain financial targets. If certain key people leave, or financial performance falls below specified levels triggers may be invoked which permit the financier to terminate the facility.
Representations and Warranties
Representations and warranties are generally statements of fact made by one party to the other, or of a party’s belief as to the truth of a statement which if incorrect allow the other party to claim damages for the misrepresentation or warranty.
After Sale / Completion Terms
Where a warranty was given at the time of sale – usually requiring the seller to honour a warranty for certain services provided – there may be terms relating to after sale / completion.
Deliverables / Milestones
A requirement for completion usually depends on the successful delivery of certain milestones. Milestones in connection with certain contractual obligations may need to be met with specific deadlines.
Significance of Legal Review
A critical component of contract negotiation is having experienced legal counsel review a contract before it is finalized. This enables the parties to understand the important terms and obligations in the contract. While you may think you have an understanding of the issues that are relevant or important in a contract, a legal review may reveal hidden problems or issues in the arrangement that otherwise would not be apparent.
One of the major concerns when entering into a contract without legal counsel is that you may not fully understand the rights, duties or obligations that are created. Your legal counsel will know the issues to focus on in determining whether the contract terms are favorable to your interests. Further, your legal counsel will be able to advise you on how to best achieve your goals based on the contract terms. Some of the foresight is based on experience, which provides an invaluable resource in working through the contract process. Finally, your legal counsel will catch errors or omissions in the contract that are not in your favor. Even if you fully understand the effect of a provision, the fact that the provision is legally unenforceable does not mean that the particular clause should remain in the contract. Your legal counsel will remove the ambiguity from the clause and advise you on whether the provision is enforceable or not legal and unenforceable.
It is at the very early stages of negotiating a deal that the most important issues must be addressed, and having experienced legal counsel guiding you through the process will avoid future headaches as the relationship progresses.
Enforcement Issues in Commercial Contracts
Even with well drafted, precise commercial contracts, disputes can occur. Likewise, even when parties to a commercial contract spend time drafting and negotiating clear terms, they can find additional terms and issues to argue about. In either event, it is advantageous for parties to have clear procedures for resolving those disputes. The basic ways to resolve most disputes are the same for commercial contract disputes as well as other types of business disputes: negotiation, mediation, arbitration, and litigation. The specifics of those dispute resolution procedures vary widely. Some procedures are initiated by one party seeking another party’s compliance with the contract terms (litigation, arbitration) while others require both parties to participate in the dispute resolution (mediation). Some of the most common dispute resolution procedures for commercial contracts are: Negotiation is the simplest and most direct way to resolve commercial contract disputes. Negotiation saves all the time and expense of formal dispute resolution methods. Unfortunately, negotiating a solution that will satisfy everyone usually takes a significant amount of time and effort and requires a third party who is knowledgeable about the business relationship and the specific dispute. Mediation is a structured negotiation that relies on a third party, usually a retired judge or other neutral person with knowledge about the particular industry and dispute, to facilitate a resolution. The mediator does not issue decisions or write opinions for the parties like a judge in a court-based arbitration. Instead, the mediator helps the parties understand each other’s position, clarify how the dispute developed, and clarify what each party wants from the dispute resolution process. A mediator can be particularly valuable in resolving a dispute that involves a continuing business relationship between the parties. The continuing business relationship may cause the parties to want to preserve the relationship because of a potential future value that is greater than any money currently being disputed . Mediators often have techniques they use to aid in preserving the business relationship, such as requesting that parties keep the dispute confidential, instead of filing lawsuits, in order to protect the value of the business relationship. Arbitration is a judicially recognized alternative dispute resolution process. Arbitration typically involves the consent of both parties to forego judicial resolution of their dispute and submit the dispute to a third party, at least one of who is acting in a judicial capacity. The advantage of arbitration is the private nature of the process which limits public disclosure of the parties’ dispute or business practices. Also, the parties may agree to limit the jurisdiction of the arbitrator(s) selected to resolve the dispute. These features make arbitration an attractive option when the parties do not want to disclose their dispute or business practices to the public or to other parties doing business in their industry. In a typical arbitration, the parties are allowed to present their cases through oral arguments and witness testimony, including cross-examination. The arbitrator can select procedures to be followed on a case by case basis, but the most common practices include: A typical arbitration has a written award with no opinions or reasons for the award. More sophisticated and experienced arbitrators can include detailed opinions and citations to applicable legal authority in their awards, but that level of detail is frequently unnecessary. One of the major appeals of arbitration is its flexibility and the ability of the parties to design their own dispute resolution procedures. The one drawback to arbitration is that it does not typically allow broader resolution beyond the dispute between the parties. Mediators can more commonly avoid "zero-sum" arguments by emphasizing the benefits of compromise as a value-adding feature of the business relationship. An arbitration will not typically provide that value to the parties. Instead, an arbitration will often result in only one party being satisfied and one party being disappointed.