What Are Commercial Contracts?
Commercial contracts define and regulate business relationships, whether a standard employment agreement or more complex agreements like merger and acquisition contracts. Today’s increasingly litigious environment has made it critical to understand and master the principles guiding commercial contracts, how to protect your interests, and minimize commercial litigation.
Using contract lifecycle management (CLM) software to manage your commercial contracts is no longer just “nice to have.” You need it to keep pace with today’s regulatory and general business uncertainty. Read on to understand commercial contracts and how you can streamline your contracting process with CLM software.
What are commercial contracts?
Commercial contracts are agreements regulating business relationships between individuals or businesses where they agree to perform some actions or refrain from doing others.
Commercial contracts are usually in writing, but they can also be verbal. A written commercial contract is easier to enforce and provides parties with guidance on how to perform their obligation under the transaction.
Examples of commercial contracts
Commercial contracts are critical for your business’s success. No business can operate alone without the support of other businesses or individuals providing key services for business operations. For example, your business entered a software license agreement with the vendors of all the software you use in your organization. Other examples of commercial contracts include:
- Joint venture agreement
- Shareholders agreement
- Business purchase agreement
- Purchase and supply agreement
- Sale and distribution agreement
- Franchise agreement
- Non-disclosure agreement
- Employment contracts
- Intellectual property license and assignment
- Partnership agreement
- Loan and finance agreements
Purpose of commercial contracts
No matter the size of your business, its success largely depends on your ability to ensure your commercial contracts accurately capture your business arrangements, adequately protect your interest, and limit your liability.
Commercial contracts play various roles in business operations:
Define rights and obligations
Your commercial contracts define the rights and obligations of each party in the business arrangement. Your contract details the terms agreed upon so parties know their responsibilities.
Provide a reference for dispute resolution
Business disputes are common. Whether parties try to resolve the dispute themselves or via arbitration or litigation, the commercial contract will be used to determine where the fault lies.
Protect business interest
Whether it’s through a confidentiality clause, an indemnity clause, or any other means, commercial contracts allow you to protect your interest and minimize risk from dealing with other parties.
Parts of a commercial contract
Your commercial contracts should identify the parties in the transaction. Ensure you write their correct legal names. The transaction details, date, the goods or services sold, price, payment details, and how the agreement can be terminated should be written in clear terms. Otherwise, the contract might be unenforceable.
Commercial contracts should also contain standard clauses like:
- Confidentiality clause to prevent unauthorized disclosure of confidential information.
- Dispute resolution clause stating how disputes arising from the transaction will be handled.
- Details on the court that will have jurisdiction over matters arising from the transaction and the governing law, especially for domestic and international cross-border transactions.
- Termination clause detailing how any party can opt-out of the arrangement and conditions that will end the contract.
- Indemnity clause to protect parties from liabilities caused by a breach of contract or negligent acts of third parties.
- Liquidated damages clause to specify damages upon breach of contract.
- Force majeure to remove liability for failure to perform contractual obligation caused by unforeseen and unavoidable circumstances.
Indemnity clauses in commercial contracts
The indemnity clause is a common provision in commercial contracts, and it is one of the most contentious clauses to negotiate or litigate. Also called an indemnification clause, it is a promise by a contracting party (the indemnifier) to protect the other party (the indemnitee) from liabilities caused by the indemnifier’s negligent actions, breach of contract, or third party actions. Essentially, an indemnity clause transfers liability from one party to the other.
The indemnity clause allows you to:
- Restrict the amount of risk you are willing to expose yourself to in every transaction
- Transfer liabilities to the party that is most suited to bear them, usually the party that has more control in the transaction
In drafting an indemnity clause, ensure it reflects the parties’ intention to avoid conveying wider or narrower protection than what you both intended. Parties can also use an indemnity cap to restrict the indemnifier’s liability to a specific amount.
Limitations of commercial contracts
If the subject matter of a commercial contract is illegal, it will be unenforceable. Parties also cannot agree to transfer their liability for an illegal act or restrain another person from performing a statutory obligation.
Managing commercial contracts
Depending on the size of your organization, your commercial contracts can number hundreds or even thousands a year. Without a solid system of creating, negotiating, executing, storing, and retrieving your commercial contracts fast, they will be a source of frustration and delay in your business operation.
Automating workflows for commercial contracts
If your organization routinely deals with high commercial contract volume, automation is the way forward.
Contract management is beyond creating, signing, and storing contracts. You also have to track, report, and monitor them. Instead of relying on Legal to move your commercial contracts manually from one stage to the next, you can use CLM software to automate them from start to finish.
Why commercial contracts are difficult to manage
For enterprise companies with various departments churning out contracts—HR has lots of employment contracts, and Procurement has purchase agreements—managing these contracts manually can become a hassle.
If your organization does not have efficient contract management software in place to handle your contracts, managing commercial contracts will be challenging because:
Contracts are stored in separate systems
Some organizations still store contracts in file cabinets, while some have moved to cloud storage. However, they still present similar challenges. Contracts are stored in separate systems, and accessing contract data takes lots of time. There is also no efficient way of tracking contracts to ensure that parties comply with their contractual obligations and avoid missing critical contract deadlines, like renewal date.
When contracts are in silos, there is no means of gathering intelligence from different contracts that will aid future contracting. Although every contract is distinct, there may be a recurring trend that slows down contracts. For instance, a purchase agreement is a Procurement department contract, but Legal and Finance may need to approve the contract before it can be sent out.
Lack of transparency
Although some commercial contracts are within the domain of specific departments, other departments may also need to be involved. For instance, a purchase agreement is a Procurement department contract, but Legal and Finance departments may need to approve the contract before it can be sent out. When departments in your organization don’t have access to contracts that affect them, it slows down your contracting process.
How contract lifecycle management software solves challenges
Innovative businesses are pivoting to CLM software like Ironclad to tackle contracting challenges. CLM software will improve your contracting process in the following ways:
We said earlier that contract management is beyond creating, executing, signing, and storing contracts. CLM software offers a level of collaboration and visibility that stakeholders need to contract efficiently throughout all contract lifecycle stages.
One source of truth
CLM software stores your contracts in a searchable, secure repository, making finding contract information as simple as a few clicks. All stakeholders involved in a contract can see any updates in real-time, eliminating the danger of having different contract versions in circulation.
Transparency into the entire process
CLM software streamlines all your contracts in one place. Your Legal departments can see all your organization’s commercial contracts at any stage. Other departments can access relevant contract data without Legal sacrificing privacy concerns. You can also analyze your process data to get more insight into your contacting process.
Manage your commercial contracts efficiently with Ironclad’s CLM
Ironclad’s CLM has all the functionality you need to automate all your commercial contracts, from the simplest to the most complex.
Our Workflow Designer helps you to build workflows for your organization’s routine commercial contracts. When creating contracts is as easy as “drag and drop,” you can easily create commercial contracts and ensure they meet regulatory and organization standards.
Everybody talks about the need for both internal and external stakeholders to collaborate efficiently in contracting. Ironclad’s Editor makes it a reality and then takes it to the next level. Ironclad’s Editor provides a single platform for revising, negotiating, redlining, and approvals. All stakeholders can see every action taken on your commercial contract in real-time, ensuring that everyone is involved.
Your commercial contracts are vital drivers of business success and should not be managed with obsolete and inefficient systems. Ready to explore how Ironclad’s CLM software can help automate your commercial contracts and increase your contracting efficiency? Request a demo.
Table of contents
- What are commercial contracts?
- Examples of commercial contracts
- Purpose of commercial contracts
- Parts of a commercial contract
- Indemnity clauses in commercial contracts
- Limitations of commercial contracts
- Managing commercial contracts
- Automating workflows for commercial contracts
- Why commercial contracts are difficult to manage
- How contract lifecycle management software solves challenges
- Manage your commercial contracts efficiently with Ironclad’s CLM