Commercial Contracts and Agreements

By definition, commercial contracts represent a combination of commercial and legal factors. For businesses and
organizations, the key requirement is to ensure that the legal arrangements allow the full commercial benefits to be
realized.

In the day-to-day course of business, regardless of the size of your operation, it is fundamental to regulate and
document your business relationships. To do this, your commercial contracts with suppliers, customers, distributors
and agents must be drafted in a way which properly protects your business interests.

Weak or non-existent commercial contracts make a business unstable. Sound legal advice is therefore essential
when drafting these documents to prevent your business from entering into one-sided agreements and avoid time-
consuming and financially dangerous repercussions in the event of breaches of contract, or if the matter needs to be
taken to court.

It is important to make sure that all of your business contracts are drawn up professionally and are legal watertight, as
it is essential that both parties understand the terms included and are aware of their rights and responsibilities
afforded by the contract. Poorly worded contract terms could have serious implications for both parties and their
stakeholders.

Usually, the following are included in commercial contracts:

Parties: The names and addresses of all the contracting parties should be clearly stated.
Definitions and Interpretations: Explanations of the specific meaning of any terms defined in the contract.
Payment Provisions: Outlines the exact price to be paid for the goods or services provided and the date or dates for
payment to be made should be clearly set out.
Description of Good or Services: A specific description of the goods or services that will be provided under the
contract, including the level of service if the contract is for services.
Term of contract: Specifies the length of the contract.
Timescale: The specific timescale for the project should be noted including any deadlines that have to be met.
Limitation of liability: For example, 'Neither party shall have any liability to the other party for a claim of loss of
profits.
Termination provisions: Sets out the circumstances under which the parties can terminate the contract.
Change of Control: The procedures for change of ownership/controlling interest etc. For example if the first party
transfers a controlling interest to a competitor of the other party.
Dispute Resolution: Sets out the procedures in the event of the parties having a dispute.
Confidentiality: There should be confidentiality clauses drafted in the contract which identify the information being
protected and the circumstances in which it can be used or disclosed.
Intellectual Property Rights: States who owns such rights to products provided under the contract.
Warranties: It is common for the party providing goods or services under a contract to provide certain warranties in
relation to the delivery of the goods or services.
Indemnity: Indemnity clauses are an express obligation to compensate the indemnified party by making a money
payment for some defined loss or damage.
Force Majeure: This clause should cover situations where performance of the contract is impossible through no fault
of either party. For example, if there is a natural disaster or civil unrest.
Applicable law: There should be a clause indicating which law governs the contract. For example, 'This Agreement
shall be governed by and construed in accordance with the laws of India'.
Running a business involves entering into many different relationships and dealing with many different people and
organizations. The terms of each different relationship and arrangement need to be documented so that each party is
aware of his/her rights and obligations and duties in respect of it. As well as ensuring that both parties understand the
agreement being made, they also ensure that there is a signed record of the agreement in case disputes srise. Each
type of agreement must satisfy certain legal requirements and these will differ according to the nature of the
relationship and the form of business.

For example, terms and conditions of sale are essential in setting out the legal agreement between the business and
the customer. The content of the terms and conditions must comply with the law and this is different depending on
whether the customer is a business or a consumer.
In all commercial contracts the agreement is designed to set out the terms by which all parties within the contract will
be legally bound. If any party breaks the contract they have signed, this is called a breach of contract. If you do
break the terms of a contract you have signed, there could be far-reaching consequences.

STRUCTURE OF COMMERCIAL CONTRACT

1. Name of the contract

2. Parties to the contract
3. Definition and interpretation
4. Recital
5. Operative part or action part
6. Validity and termination
7. Representation, warranties and covenants
8. Indemnity
9. Dispute resolution method

10. Boiler plate clauses

a. Entire agreement g. Equitable n. Confidentiality

b. Further Remedies o. Non-Compete
Assurances h. Liquidated p. Governing law
c. Cost and Damages q. Jurisdiction
Expenses i. Assignment r. Read and
d. Amendments j. Severability Understood
e. No Partnership k. Waivers s. Counter Parts
f. Time is the l. Force majeure
Essence m. Notices

11. Schedules
12. Execution sheet

More Details:

Indemnification

This is one clause which if not negotiated properly can pose to be of great risk for any organization. Indemnification can
be understood in laymans term as one party making good another for any losses (including costs). In contractual terms
it is important to make a party to a contract whole again should that contractually-specified event occur. An
indemnification provision should ideally be a mutual clause, and should be applied to the extent directly attributable to
the parties involved in the contract.
Indemnification should be avoided for i) breach of contract and ii) breach of representations and warranties as these
breaches should be handled through dispute resolution.

Common indemnification clauses are Intellectual Property infringement, injury to person and death, property damage,
breach of law and breach of confidentiality obligations.

As far as possible, indemnity should be limited to third party claims. Its best to specify indemnity process and remedy; for
example: i) to provide prompt written notice, ii) in case of a third party claim for Intellectual Property infringement, to allow
the party indemnifying to take sole control of defense/settlement, and the indemnified party to provide reasonable
assistance.

2. Limitation of Liability

This is another critical and often fiercely negotiated clause. It is frequently seen that limitation of liability is linked with the
indemnification clause because a limitation of liability clause limits the financial liability of a party where such party needs
to indemnify the other party. While negotiating the limits of liability an attorney must assess and balance the risks and
opportunity involved in the business project. Clauses like indirect, consequential, special damages, loss of profit and loss
of revenue should be categorically excluded. It is a standard industry practice in most business contracts, especially
software and service contracts, to seek unlimited liability on claims involving IP infringement, confidentiality breach,
grosses negligence, willful misconduct, personal injury or death.

An exclusion clause's purpose is to exclude or restrict liability and (where the contract is between businesses) will often
exclude or restrict the party from pursuing a right or remedy (for example the right to reject goods where they are not of
satisfactory quality). Such exclusion clauses are subject to a 'reasonableness test'. What can and cannot be excluded
will turn in the facts of each case but as a general rule it may be permissible to exclude the following if the clause
satisfies the reasonableness test:

negligence (save where the negligence causes death or personal injury);

breach of the implied conditions of fitness for purpose or correspondence with description or sample;
breach of contract; or
misrepresentation.

It is important to remember that if an exclusion clause is found to be unreasonable, it will be wholly unenforceable.

3. Warranty

In business and legal transactions, a warranty is an assurance by one party to the other party that specific facts or
conditions are true or will happen. The other party is permitted to rely on that assurance and seek some type of remedy if
it is not true or followed.
Broadly speaking there are two kinds of business contracts from billing perspective: i) Time and Material (T&M): these
are business contracts involving provision of services and ii) Fixed Price (FP): these are business contracts involving
delivery of either products or services. In T&M engagements warranties should be limited to providing services in a
professional and workman-like manner. In FP engagements there should be a definite warranty period, which is
determined by the price charged for the services delivered.

Warranty should commence immediately after acceptance or deemed acceptance as the case maybe. Warranty under
FP should be related to compliance with agreed specifications. Implied warranties should be specifically excluded in all
business contracts.

4. Non-solicitation of employees

A companys strength is in its employees; and in order to safeguard against losing the most important resource, there
should be a well drafted non solicitation of employee clause in a business contract. Every company has an eye for the
best talent and talent is best showcased whenever companies do business together. Therefore, it is imperative to draft a
good non-solicitation or non-hire clause.
An ideal non-solicitation clause should include standard non-hire, prohibiting direct and indirect hiring or solicitation.
Standard exclusions (like paper advertisement etc.) not specifically targeted at the employee is acceptable. There should
be a specific term for non-solicitation and preferably it should survive the term of the business contract. The term should
not be very long and it should be restricted to 12 24 months depending on the Human Resource Policy of the
companies involved.
5. Confidentiality

Another important clause in a contract, but sadly the most ignored one, is the confidentiality clause. Most of the time this
confidentiality clause is dissected mercilessly during a law suit between the parties of the contract. Therefore, in order to
avoid any confusion and confrontation based on confidential obligation, it is crucial to draft a strong confidentiality clause.
A well-drafted clause broadens scope of information termed as confidential; it not only includes the written information
exchanged, but also includes the oral information exchanged between the parties for the sake of efficacy of business.
The terms of this clause should be mutual. The standard exclusions should be specified without fail. An attorney must
specify a definite term for survival of obligations.

Contracts will typically include a clause requiring the parties to protect each other's confidential information. The inclusion
of such a confidentiality clause is imperative in the situations where the parties' confidential information will be exposed
to the other. The wording below is a simplified example of a confidentiality clause:

The parties shall keep confidential all Confidential Information and not, without the prior written consent of the other
party, disclose the Confidential Information to any other party save to the extent required by law.

The definition of 'Confidential Information' is often drafted widely to include all written, pictorial, machine readable or oral
information which relates to trade secrets, customers, suppliers, or business associations or information that is financial,
technical or commercial in nature. It is vital that the definition of 'Confidential Information' satisfactorily captures the
information particular to your business to ensure all such information remains confidential and protected from disclosure
to third parties who could be potential competitors.

6. Dispute Resolution

In the early stages of contract negotiation, dispute resolution provisions are rarely given much consideration. Focus
tends towards level of payment, defining the scope of the service or product(s) to be provided, negotiating warranty and
indemnity provisions and payment mechanisms. However, it is important to ensure that your contract contains suitable
and appropriate wording dealing with disputes which may arise under the contract to ensure clarity for all parties as to
the precise procedure to be followed in the event of a dispute.

Frequently the parties will agree to an escalation procedure, whereby clear steps and processes are stipulated prior to
the matter being referred to the courts. As a matter of principle, it is the duties of the parties to a contract to "help the
court further the overriding objective". This "overriding objective" is to ensure that all cases are dealt with justly and "to
encourage the parties to cooperate with each other in the conduct of proceedings". In the light of these duties it is
important that pre-court conduct also adheres to these principles which in short encourage communication and
cooperation between the parties.

Typically a notice setting out the dispute/ breach will be served on the breaching party, giving them a specified period of
time to rectify the breach. In the event that the notice is not complied with, there will be a number of steps to be taken
for example the managing directors meeting to attempt to resolve the dispute/ an arbitrator is appointed to settle the
dispute. Only after these steps have been followed will the non-breaching party be able to take the dispute to court. You
should always ensure that the escalation procedure and time frames given are feasible in the circumstances.

7. Force Majeure

The effect of a force majeure clause is to excuse the affected party from performance under the contract as long as the
force majeure event continues. It should be noted that there is no legal definition of 'force majeure' and accordingly the
precise definition as provided for under the contract is important. The clause will typically provide for a time limit whereby
if the force majeure event continues, the contract will terminate automatically with both parties being excused from their
liabilities under it. Examples of force majeure events are fire, explosion, strikes, riots, terrorist activity and acts of God.

Recently the clause has been extended to include 'acts of nature which prohibit travel' to capture the recent disruptions
caused by volcanic ash. This serves as a reminder that force majeure clauses are not set in stone so thought should
always be given to the potential risks the contract could be exposed to and drafted accordingly.

8. Liquidated Damages

A liquidated damages clause sets out the fixed sum (or calculation of that sum) agreed by the parties that will be payable
on breach by either party. If the figure is deemed by the courts to be punitive, the clause will be unenforceable so care
should always be taken to ensure the clause includes an appropriate figure which reflects the contractual context and
could not be deemed to be punitive.
9. No Partnership or Agency

Contracts frequently contain boilerplate provisions stating that the relationship between the parties is not to be construed
as a partnership or agency. This is because both of those legal forms may arise implicitly, without the parties realizing
that they have done so, and both have a range of legal and tax implications for the parties. If the parties do not intend for
them to arise, it may be safer to state expressly that the contract does not create either form of relationship, to ensure
that no unintended consequences flow from the contract.

10. Retention of title

Retention of title provisions are often hotly debated in contractual negotiations. Where a supplier sells a product to its
customer and is not paid immediately upon delivery, then the supplier will wish to provide that it retains title to (ie
ownership of) the products until payment is made. The supplier will also want to impose various related obligations on
the customer, covering issues such as how the products are stored, how they are identified as belonging to the supplier
and whether or not the customer may sell them on before title has passed.

11. Termination

It is common is most commercial contracts to see a termination clause which enables the parties to terminate the
contract prior to the expiry of the contract's stipulated term. The clause sets out automatic triggers which enable
immediate termination of the contract or termination on notice. The clause may provide that the position of both parties in
respect of termination is equal thought should be given as to whether this is appropriate or desirable in each individual
case.

12. Waiver

In the absence of a waiver clause, where a party fails to take action in respect of a breach or default under the
agreement, or delays in taking action, that party may lose its rights to take action in respect of that breach of default. A
waiver clause is designed to ensure that a party's rights, powers and remedies will not be lost as a result of any delay or
omission in exercising or enforcing them and to expressly provide that any partial exercise/ enforcement of a party's
rights or remedies shall not thereby extinguish or otherwise reduce those rights and remedies.

13. Assignment

The law states that, in the absence of express drafting to the contrary in a contract, either party to that contract may:
1. Assign their rights to a third party (subject to limited exceptions); but
2. May not transfer obligations arising under that contract to a third party.

This 'default' legal position exposes the parties to the undesirable reality that a contract they have entered into can be
freely assigned to a third party without their consent. Particularly in services contracts this is far from ideal as it could
expose the service provider to the situation where a third party of which they have no knowledge (including its ability to
pay) is utilising its services under a contract. It is therefore common to see the inclusion of the following clause, or some
variation on it:

Neither party may without the prior written consent of the other, such consent not to be unreasonably withheld, assign or
in any way dispose of its rights under this agreement to any third party.

Such drafting is neutral and protects both parties from the eventuality discussed above. However, it would not be
unusual to see a one way obligation to seek consent to assign, if the party seeking to impose that obligation on the other
party has concerns as to who might end up providing it with services or products.

14. Boilerplate

'Boilerplate' describes provisions which are common to most commercial contracts and which do not relate to the main
object of the contract but which are required for regulate its operation. Although such clauses are often considered
'standard', their ramifications are far from so, and careful thought should always be given to the impact of the clause in
the specific commercial context of the contract.

Conclusion
Last but not the least, a well drafted contracts assures repeat business, so a good attorney always weighs and balances
the interest of the delivery, finance, sales and legal teams of the parties to the contract.