Contracts are an indispensable part of business life. A successful commercial contract allows two or more parties to align their interests and create long-term value for all involved.
Commercial contracts are necessary for every company if it wants to work with suppliers, acquire new customers or hire new employees. In this article, we explain to you what exactly is the commercial contract and the most important things about it.
What Are Commercial Contracts?
A commercial contract is a legally tied agreement between two parties or more. Commercial contracts are most often in the form of written documents, but in some situations, they can also be agreed upon orally.
Commercial contracts detail what all parties must do to ensure that the contract remains valid, as well as the consequences if one of the parties fails to comply with the agreed terms.
Types of Commercial Contracts
These are the most common types of commercial contracts:
Vendor and customer agreements
A vendor and customer agreement is used whenever an entrepreneur or individual engages a person or company to provide services or deliver products. Supplier agreements are used in a wide variety of industries, such as professional services, technology, marketing, event management and more.
A quality service agreement clearly defines the product or service that the supplier will provide and the expectations of the agreement from the outset. This also reduces the risk of disputes or ambiguities for all parties involved.
An employment contract is a binding document between an employer and an employee, self-employed, independent contractor or subcontractor. The contract must contain the terms and conditions of employment and ensure that the parties understand what is expected of them.
Intellectual property and licensing contracts
A licence agreement is a contract between two parties, i.e. the licensor and the licensee. Under such an agreement, the licensor grants the licensee the right to manufacture and sell goods, register a trademark or trade name or use patented technology owned by the licensor.
Nondisclosure and confidentiality agreements
A non-disclosure agreement (NDA) is usually entered into to bind employees, suppliers, service providers, consultants and independent contractors not to disclose confidential business-related information, including trade secrets, customer data, business plans, etc. of a company.
A confidentiality agreement can be unilateral or reciprocal, depending on the requirements of the transaction between the parties.
Partnership and shareholder agreements
The partnership and shareholder agreements establish the relationship, objectives, powers and duties of the partners, the capital contributed to the partnership by each partner, the procedure for dissolution of the partnership, admission or withdrawal of a partner.
Real estate agreements
A real estate contract is a legally binding agreement that regulates a real estate transaction. In real estate, special contracts are used between two or more parties to facilitate the purchase or exchange of real estate.
Commercial Contract format
The following are some provisions that are often found in commercial contracts:
Parties and Contract Purposes
The commercial contract should identify the contracting parties, and the full legal names of all parties should be used in the signature line and elsewhere in the contract.
A commercial contract must clearly state that the buyer for example will buy (and pay) and the seller will sell the goods/services. This clause sets out the essential terms of the rest of the contract and usually includes a detailed description of the goods/services involved in the sale/purchase transaction or relation to a specific project.
In particular, the contractual commitment must clearly express the scope of the obligations of the party, i.e. design, delivery, installation, commissioning, warranty, training, services.
The contract should clearly state the details of the total payment agreed between buyer and seller, service provider and receiver, or employee and employer.
Terms of Payment
Payment terms are the provisions of a commercial contract that define the payment obligations of the party contracting for the purchase of goods or services.
Delivery Schedule and Terms of Delivery
The Delivery Schedule and Terms of Delivery is a very important part of the contract between the buyer and the seller. The delivery of a good or service is the main objective of most contracts, and ensuring timely delivery can be crucial to the success or failure of the business relationship.
Penalties and Liquidated Damages
The penalty clause defines the possible financial obligations of the exporter and, in some cases, the buyer, in the event of the exporter’s failure to fulfil certain obligations under the contract.
The performance clause sets out the parameters at which the contract comes into force. The contract sometimes distinguishes between the date of signing the contract and the date on which the contract comes into force. The effective date of the contract usually starts the “clock” for all deadlines: delivery, payment, issuance of enforcement documents, etc.
Cancellation, Suspension, Termination
During the performance of a contract, a party may find itself in an unpleasant situation when it discovers that its contractual partner has not fulfilled its obligations under the contract. A possible case: A buyer of a product discovers that the product is defective. Or the supplier does not receive payment from his customer on time.
A possible response to a breach of contract by the other party may be to suspend performance by the affected party or, even more radically, to terminate the contract. All these conditions should be included in the contract.
A commercial contract must be carefully drafted and analyzed before it is signed. The parties must clearly state what they want to include or exclude from the contract. Any vaguely worded terms, rights or obligations will only create ambiguity between the parties.
It is therefore important that the contract is drafted clearly and with the appropriate professional assistance to avoid conflicts or lawsuits in the future.
If you need GM Tax Consultancy assistance in drafting your commercial contract, please contact our tax advisors in Barcelona by email or phone.