Key Takeaways

  • A commercial agreement is a legally binding contract between businesses that outlines mutual obligations.
  • Common types include supply contracts, distribution agreements, and service contracts.
  • Key clauses include payment terms, termination rights, dispute resolution, and confidentiality provisions.
  • Drafting and negotiation processes are essential to aligning business goals and avoiding costly disputes.
  • Enforcement depends on valid formation, performance obligations, and applicable contract law principles.
  • Legal assistance ensures clarity, compliance, and enforceability.

A commercial agreement is a legally binding contract between parties where both are required to do particular activities or refrain from doing something. They can be found in a variety of business types, including industrial, corporate, and retail.

What Are Commercial Agreements?

Commercial agreements can be verbal, in writing, or even implied in a formal or informal matter. They can cover all aspects of business, including wages, leases, loans, hiring, and employee safety. To breach a commercial agreement, one of the contracting parties fails to live up to their part of the agreement.

Commercial agreements utilize plain language, but they also include warranties and boilerplate language that has typically been reviewed by a lawyer beforehand. They are often standard forms that can be used on an ongoing basis with other providers or suppliers.

Business-to-business contracts are different from business-to-consumer sales. Business-to-business contracts have fewer default legal clauses to protect uneducated or uninformed parties or to give these parties an out to escape from a properly executed agreement. The terms of a commercial agreement are important, and the principles of contract law apply, but only in regard to the written terms of the agreement in order to clarify the parties' intentions. Courts will not consider outside influences unless a fraud claim is presented.

It is expected that businesses know how to protect their own interests, and an integral part of that is understanding what constitutes a legally valid and enforceable commercial agreement. Because these types of agreements are between business parties only, they use plain language rather than legal jargon when preparing the agreement.

Types of Commercial Agreements

Commercial agreements come in many forms, tailored to specific business relationships and transactions. Common types include:

  • Sales Agreements: Outline the sale of goods or services, including price, delivery terms, and warranties.
  • Service Contracts: Define the scope and terms of professional or operational services between parties.
  • Distribution Agreements: Govern relationships between manufacturers and distributors.
  • Franchise Agreements: Detail the terms under which a franchisee operates under the franchisor’s brand.
  • Licensing Agreements: Provide permission to use intellectual property under agreed conditions.
  • Partnership and Joint Venture Agreements: Clarify roles, profit sharing, and responsibilities in joint operations.
  • Nondisclosure Agreements (NDAs): Protect sensitive information exchanged between businesses.
  • Procurement Contracts: Manage purchases of goods and services by one party from another.

These agreements are often customized to reflect the nature of the industry and relationship involved.

Parts of a Commercial Agreement

The initial part of the contract typically requires the most work, as it will identify the parties, define any obscure terms, and discuss the details of the contract, including specifics like the product or service being sold, dates and times, delivery options, and the agreed-upon price. Because contract law requires involved parties to understand the terms of any agreement they are entering, using easy-to-understand language for an ordinary business purpose will help fulfill this requirement.

The next part of the contract should address specifics of non-performance. This is where you might find the use of boilerplate legal wording in each contract that covers specifics like the following:

You need a spot for signatures at the bottom where a representative of each business will sign. It's crucial to verify that the representatives are truly authorized to sign on behalf of the contracting company; otherwise, an unauthorized signature can invalidate the agreement and result in an unrecoverable loss.

Examples of commercial contracts and agreements include the following:

  • Licensing and franchise agreements
  • Loan and finance agreements
  • Supply of goods and services
  • Shareholders and joint venture agreements
  • Contracts for employment

Key Clauses to Include in a Commercial Agreement

To minimize risks and ensure clear expectations, commercial agreements often include the following critical clauses:

  • Payment Terms: Outline invoicing procedures, deadlines, and penalties for late payments.
  • Termination Clause: Establish conditions under which the agreement can be ended early.
  • Confidentiality Clause: Restrict the disclosure of sensitive business information.
  • Force Majeure: Define events that release parties from obligations due to uncontrollable circumstances (e.g., natural disasters).
  • Dispute Resolution: Specify whether disputes will be resolved through arbitration, mediation, or litigation.
  • Jurisdiction/Governing Law: Determine which state or country's laws will govern the contract.
  • Amendment Procedures: Clarify how modifications must be made to remain valid.

These clauses provide structure and predictability to the agreement, safeguarding each party’s interests.

Commercial Agreement Disputes

Disputes and disagreements surrounding commercial agreements typically center around how the contract is interpreted. Seek legal advice prior to signing any contracts for further explanation about what you're agreeing to and what the consequences are if you breach the contract.

Drafting and Negotiating Commercial Agreements

Effective commercial agreements require careful drafting and negotiation. Best practices include:

  • Clarity of Terms: Use plain language and avoid ambiguous terms that may lead to interpretation disputes.
  • Risk Allocation: Clearly assign risks related to performance failures, liability, and indemnification.
  • Due Diligence: Understand the other party’s legal and financial standing before signing.
  • Customization: Avoid relying solely on templates—tailor terms to your specific transaction and industry.
  • Legal Review: Have the agreement reviewed by qualified legal counsel to ensure compliance with applicable laws and regulations.

A well-negotiated contract fosters strong partnerships and helps avoid future legal complications.

Requirements in a Valid and Enforceable Contract

There are some basic details that must be present for any contract to be legal and enforceable:

  • Agreement: There must be an agreement that includes an offer and acceptance, and the parties must be on the same page when it comes to the elements of the agreement.
  • Consideration: Each party has to give something in the exchange. This is known as consideration and is what makes something a contract rather than a gift.
  • Legal Capacity: All parties must have the legal capacity to enter into a contract. There are certain circumstances, such as when one party is under the age of majority or was intoxicated at the time, that can render the contract void.
  • Willingness: A party must be willing to enter the contract. If you sign it against your will or were misled, etc., you may be able to void the agreement.
  • Legal: The contract's subject matter has to be legal under state and federal law. You cannot enforce a contract if it's for the performance of an illegal act.

Executing a valid and legal contract essentially has three phases:

  • Phase One: Contemplate the deal and evaluate pros and cons (risks) and future repercussions.
  • Phase Two: Reach the agreement through negotiations; complete a formal agreement that outlines the terms of the agreement.
  • Phase Three: Performance and enforcement of the contract; seek legal advice for breach and pursuit of damages.

Enforcing a Commercial Agreement

Once executed, a commercial agreement becomes enforceable under contract law. Enforcement typically involves:

  • Performance Monitoring: Ensuring all parties fulfill their obligations as agreed.
  • Breach of Contract: Occurs when a party fails to meet their responsibilities without legal justification.
  • Legal Remedies: May include damages (compensatory or liquidated), specific performance (court-mandated action), or termination of the agreement.
  • Mitigation Duty: The non-breaching party must make reasonable efforts to minimize losses.

Courts will evaluate the contract terms and available evidence to determine appropriate remedies. Proper documentation and communication are critical in these cases.

Frequently Asked Questions

  1. What is the purpose of a commercial agreement?
    A commercial agreement formalizes business arrangements between parties and outlines their rights, duties, and expectations to reduce the risk of misunderstandings or disputes.
  2. Can a commercial agreement be verbal?
    While some commercial agreements can be verbal, written contracts are generally preferred and more enforceable, especially for complex or high-value transactions.
  3. What should I include in a commercial agreement?
    Essential elements include party details, payment terms, performance obligations, termination rights, dispute resolution methods, and applicable law.
  4. What happens if one party breaches a commercial agreement?
    The non-breaching party may seek remedies such as damages, specific performance, or termination, depending on the contract terms and severity of the breach.
  5. Do I need a lawyer to draft a commercial agreement?
    While it's possible to draft one independently, legal advice helps ensure the agreement complies with laws, clearly expresses intentions, and minimizes risk.

If you need help with a commercial agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.