Introduction
Commercial contracts are at the core of all business relationships. They are needed to streamline business operations, reduce risks, and foster strong business relationships. However, managing commercial contracts can be challenging, especially as businesses mature.
This guide explores what commercial contracts are, their importance, the different types of them, and how to manage them efficiently.
What are commercial contracts?
Commercial contracts are legally binding agreements between two or more parties engaged in business transactions or commercial activities. They set out the expectations, rights, and obligations of everyone involved.
Key legal elements of a commercial contract
For a commercial contract to be legally binding, it must include the following elements.
Offer
An offer is a clearly defined proposal sent by the initiating party to the counterparty within the scope and terms and conditions of the agreement.
Acceptance
Acceptance is the willingness of the counterparty to be bound by the scope, terms, and conditions of the initiating party's offer.
Consideration
Consideration refers to the value each party receives from a contract, like payment in exchange for goods and services.
Capacity to contract
Capacity to contract refers to the legal ability of the parties involved to enter into an agreement, like age, mental capacity, and not being under duress.
Legality
The legality of a contract means that all the clauses, terms, and conditions in the agreement should be legally binding and enforceable in the respective jurisdiction.
Consent
Consent indicates that both parties involved in the contract voluntarily agree to the scope, terms, and conditions of the contract.
Certainty of terms
Certainty of terms in a contract means all the terms, obligations, rights, and other clauses mentioned in the agreement are clearly defined and enforceable.
Benefits of using commercial contracts
Commercial contracts serve as essential tools for businesses by safeguarding their interests and establishing a clear operational framework.
Clearly defines rights and obligations
Commercial contracts clearly define the roles, rights, and obligations of all stakeholders involved in the contract. Thus, it sets clear expectations for businesses and reduces potential conflicts.
Minimizes risks
Commercial contracts include clauses for liability, indemnification, and dispute resolution. This helps reduce legal, financial, and operational risks.
Ensures compliance
The clearly defined terms in commercial contracts ensure adherence to industry regulations such as the GDPR for data protection compliance and the ISO for organizational compliance. They also promote compliance with the contractual obligations.
Facilitates business relationships
By clearly defining the roles, expectations, and dispute resolution mechanisms, commercial contracts set up a framework to foster better business relationships.
Top 10 commercial contracts for your business
Commercial contracts cover all types of business activities, ranging from the sale and purchase of goods and services, employee management, partnerships and joint ventures, confidentiality and data protection, technology and intellectual property licensing, financial agreements, and vendor management.
Here is an overview of the essential types of commercial contracts.
Joint venture agreement
A joint venture agreement outlines the details of the strategic collaboration between two or more businesses. This agreement is typically signed by ventures requiring combined expertise or capital. These agreements typically include clauses on resource utilization, stakeholder roles, profit sharing, and dispute resolution.
Shareholders’ agreement
This agreement establishes a framework of governance for managing the company and protecting the interests of the shareholders. It covers aspects such as share issuance, transfer restrictions, dividend policies, conflict resolution, and decision-making processes.
Data processing agreement
A data processing agreement outlines how personal data is collected, used, stored, and shared between parties to ensure compliance with data protection laws. It covers aspects such as the purpose of collecting personal data, data security measures, the rights of data subjects, and data breach notification procedures.
Service agreement
A service agreement defines the terms under which services are provided by one party to another. It sets up clear expectations of the deliverables by specifying the scope of services, duration, confidentiality clauses, terms of payment, and termination conditions.
Outsourcing agreement
An outsourcing agreement outlines the services to be outsourced when a business delegates certain deliverables to external providers. This contract is vital to managing third-party relationships effectively.
Purchase agreement
A purchase agreement is used in transactions involving the sale of goods. It details the goods being sold, pricing, delivery terms, warranties, and payment conditions.
Partnership agreement
A partnership agreement is drafted when two or more entities decide to operate a business together. It outlines each partner's responsibilities, profit sharing, and procedures for dispute resolution and partnership dissolution.
Nondisclosure agreement (NDA)
An NDA stipulates what information must remain confidential and the consequences of unauthorized disclosure between the parties involved in the contract. NDAs are crucial when sensitive information is exchanged, ensuring that proprietary data remains secure.
Lease agreement
This contract governs the rental of property, whether real estate or equipment. It specifies the lease term, payment amounts, maintenance responsibilities, and conditions under which the lease can be terminated.
Employment agreement
An employment agreement sets the terms of employment between an employer and an employee. It includes job responsibilities, compensation, benefits, confidentiality clauses, and termination conditions. Such contracts are vital for establishing a clear employer-employee relationship.
Challenges managing commercial contracts and how a CLM solution helps overcome them
Managing commercial contracts comes with its own set of challenges like lengthy contract drafting times, managing multiple negotiation cycles, managing contractual obligations, and staying compliant. Modern contract lifecycle management (CLM) solutions help overcome these challenges by streamlining the contract lifecycle, mitigating risks, improving compliance, and fostering better business relationships.
| Contract stages | Challenges in commercial contracting | How a CLM solution helps overcome them |
|---|---|---|
| Contract drafting | 1. Legal teams are required to draft each contract manually, leading to delays and inconsistencies.2. Even in cases where templates are available, the inability to access the latest template from a central template library introduces risks of using outdated language. | Customizable contract templates in a central library speed up drafting and ensure consistency across contracts. |
| Approval process | Manual approvals via emails with contract documents as attachments slow down approval. | Automated workflows accelerate the approval process. |
| Negotiation & redlining | Multiple back-and-forth emails create a slow process. There is also an inability to compare changes between versions. | Real-time collaboration and redlining, version history, and the ability to compare changes reduce turnaround times. |
| Contract signing | Reliance on physical signatures causes delays, logistical challenges, and security risks. | Digital and secure e-signing speed up execution and provide audit trails. |
| Post execution | Managing the post-execution process manually can lead to errors, missed deadlines, and unintended financial or legal consequences. | Automated workflows to generate and approve contract letters for amendments, renewals, extensions, and terminations ease manual efforts and reduce human errors. |
Beyond the contract lifecycle, businesses must also address compliance, performance tracking, and risk management challenges. The table below highlights additional commercial contracting challenges and how CLM solutions help overcome them.
| Aspect | Challenges in commercial contracting | How a CLM solution helps overcome them |
|---|---|---|
| Risk & compliance | Inconsistent clause languages, outdated templates, a lack of approval workflows, and the inability to track activity at all levels introduce risks and make compliance a challenge. | CLM tools enforce compliance checkpoints at various stages of the contract lifecycle, such as clause standardization, template currency, approval workflow management, and detailed activity tracking, significantly reducing risks and compliance gaps. |
| Storage and retrieval | Contracts are stored in shared folders, emails, or physical files, making retrieval difficult. | Cloud-based central repositories with advanced search and filter options ensure easy and secure contract access. |
| Tracking obligations | No system to track contractual obligations such as performance clauses or key contract deadlines. | Milestone-based alerts help businesses stay ahead of obligations, ensuring compliance with contractual commitments. |
| Performance measurement | Lack of visibility into contract performance makes it difficult to assess effectiveness and measure deliverables. | Performance analysis and reporting provide insights into contract performance, ensuring compliance with agreed terms. |
| Audit trails | Difficulty in maintaining a structured audit process leads to gaps in tracking contract modifications and approvals. | Comprehensive audit logs ensure transparency, providing a verifiable history of contract activities and compliance tracking. |
5 Common mistakes to avoid in commercial contracts
Drafting and managing commercial contracts can be complex, and even minor oversights can lead to disputes, financial losses, or strained business relationships. Here are five common mistakes to watch out for and how to avoid them.
Vague or ambiguous terms
Using unclear language or failing to define key terms can lead to misunderstandings between parties.
How to avoid it: Use precise clause languages and include a section to define the key terms.
Ignoring potential risks
Not having a mandated approval workflow for critical contract types can increase exposure to business risks.
How to avoid it: Implementing structured approval workflows ensures critical contracts undergo proper review, reducing the likelihood of unforeseen risks.
Omitting termination clauses
Contracts without clear termination conditions can result in legal complications if one party needs to end the agreement prematurely.
How to avoid it: Clearly define the termination conditions, as well as the process to be followed.
Overlooking confidentiality and data protection
Failure to include clauses that safeguard sensitive information can lead to data breaches or a loss of a competitive advantage.
How to avoid it: Include robust confidentiality and data protection clauses and ensure compliance with applicable laws like GDPR or DPDPA.
By being mindful of these common mistakes, businesses can execute commercial contracts that are clear, effective, and legally sound, reducing the risk of disputes and fostering successful partnerships.
FAQs about commercial contracts
1. What is the difference between a contract and a commercial contract?
2. How can businesses ensure compliance with industry regulations in commercial contracts?
3. Can commercial contracts be modified after signing?
4. How can businesses resolve disputes arising from commercial contracts?
5. What is the importance of contract renewal tracking?
Enhance your commercial contract management with Zoho Contracts
Efficient contract management is essential for thriving business operations. Zoho Contracts allows you to streamline the contract lifecycle, mitigate business risks, improve governance, and promote cross-functional collaboration—all within a comprehensive contract lifecycle management (CLM) solution. Check out our free contract templates and draft your first commercial contract in Zoho Contracts!