The Comprehensive Guide to Commercial Agreements

Commercial Agreement Definition

Commercial agreements are contracts that are formed between businesses, commercial entities and private traders engaged in industrial, commercial or professional activity. The term encompasses both arrangements that have been created (and in some cases legally enforceable) and those that are agreements and pacts for future use.
Such an agreement could be oral but is most frequently a written document, though in the case of verbal agreements disputes can be contentious as to what points were actually agreed. More than a mere handshake, a firm handclasp alone is not enough to create a legal agreement. In many cases, there are written agreements that are not legally binding as a matter of law, which makes use of a legal advisor common when drafting commercial agreements. Of the broad range of activities that can be central to any legal agreement, the most integral are agreement to do something in return for something else, as well as consideration, which is the agreement by which one party has to give up something else in return for what they are receiving but without which the agreement would never have been made . Without consideration the other party would have no reason to enter into the agreement.
When used well, commercial agreements can be efficient ways for businesses to manage their internal priorities as well as external relationships with the world around them, be they with customers, clients, vendors, suppliers or buyers. They’re typically useful tools that provide the extent to which a relationship agrees upon things and the ways in which both parties can use them, though their absence doesn’t prevent the deal being reached.
Of course they can be complex and involved, perhaps being large and many pages in length, and can cover a range of stipulations and legal topics in depth. But they can be improved to be more readable by using legal jargon only to promote precision in what each party originally agreed to in the first place.
It is crucial to remember that the precise content of commercial agreements can be made very relevant in a case. Understanding whether a specific deal is wholly enforceable, however, will depend on factors such as the capacity of those parties who are party to the agreement, as well as the form and content of the agreement itself.

Different Types of Commercial Agreements

Supply Agreement
Typically, a supply agreement is considered a contract in which one party is obliged to provide another with products, and the other party is required to purchase those products on agreed terms and conditions. An example of this type of agreement is a truck supply agreement which stipulates the conditions for the regular supply of transport trailers for a transportation company. A common agreement is a raw materials or parts supply agreement, for example, the supplier of electrical wires with an electronics manufacturer as purchaser.
Distribution Agreement
The general purpose of a distribution agreement is to stipulate the relationship between a manufacturer or a supplier of goods with its distributors. An example of a distribution agreement is a supplier supplying agricultural products to a producer of mixers for the food industry who in turn distributes the mixers to other businesses.
Service Agreement
While not limited to providing a single service, a service agreement is generally an agreement in writing stipulating one of the parties provides services to another party and is typically entered into for a specified duration, such as one year or five years. For example, a facility management company providing regular cleaning services to an office building who enters into a service contract with the owner of the building is an example of a service agreement.

Components of a Commercial Agreement

There are various essential components which are often included within a commercial agreement, including the:
Parties: the details of the parties involved. If it is a corporation, then this will include the name and principal place of the business and the relevant jurisdiction. The section will also set out the legal status of the parties – are they business partnerships, limited liability companies, sole proprietorships or any other business entities.
Subject Matter: this section will state what the contract pertains to, such as the sale and purchase of goods, employment, joint ventures, licensing agreements or service or software development agreements.
Terms and Conditions: this section outlines how the agreement will be enacted and puts the parties’ expectations of the agreement into writing.
Rights and Obligations: the contract must state what rights and obligations each party has and will be responsible for. The parties must have legal capacity to perform the duties that they are obligated to do by the contract.
Clauses:

• Effective Date
• Definitions
• Contract Bodies
• Scope
• Deliverables
• Payment Terms
• Intellectual Property Rights
• Confidentiality
• Representations and Warranties
• Limitation of Liability
• Indemnifications
• Termination
• Changes to Contract
• Force Majeure
• Dispute Resolution
• Governing Law
• Miscellaneous Provisions

Legal Laws Related to Commercial Agreement

Commercial agreements and contracts are governed by a body of laws, enforcement mechanisms, and judicial guidance. The legal framework varies from jurisdiction to jurisdiction but invariably, it is influenced by the legal traditions of the jurisdiction, generally common law or civil law, which have developed over time in different parts of the world and have had an impact in courts governed by those legal systems everywhere.
As a whole, the laws governing commercial agreements should support the premise that agreements are entered into voluntarily and are enforceable unless they violate public policy or the fundamental laws of the jurisdiction. While commercial agreements are routinely enforced, there are recognized exceptions and limitations to their enforceability, including applicable governmental legislation preventing enforcement of certain provisions of agreements.
In the United States, the body of law governing commercial civil transactions is based largely on common law principles and legislation. At times, these two sources of law may overlap or appear to contradict. In a United States court, the common law is followed unless there is a legislative act or authority to the contrary. In such cases, or where a statute plainly conflicts with an established common law rule, the statute has the binding effect of law and is the rule of decision.
One of the few uniform and comprehensively applicable laws regulating commercial agreements is the Uniform Commercial Code, adopted in the United States to facilitate the orderly conduct of commercial transactions by creating a body of principles and rules governing the relationships between parties to the transactions. The Uniform Commercial Code may not be uniformly applied in every state, but the vast majority of states have adopted it, albeit with some differences. Among other things, the Uniform Commercial Code governs the sales of goods with a value greater than $500. An agreement that does not meet this value threshold may still fall under the Uniform Commercial Code if the provision of services is incidental to the sale of goods.
Contract law varies as well throughout the European Community. Instead of following the substantive rules of the country with the closest connection to the contract, the jurisdiction where the contract is concluded is recognized by some commercial jurisdictions. Some countries accept arbitration clauses. The Uniform Rules of ICC (International Chamber of Commerce) are also applicable in the European Community.
In the United Kingdom, contract negotiations and subsequent contractual relationships are regulated by a combination of English common law, court decisions, and legislation set forth by the UK Parliament and the European Communities Act of 1972.
Contract law throughout the African continent has been influenced by common law and civil law traditions, as well as local and religious laws. For example, in Botswana, the law of contract is couched essentially in English common law terms with some modification by local legislation, custom, and practice. Thus, while the common law as interpreted by the Courts of Botswana has remained a consistent principal source of law, it is subject to the influence of local customary and traditional law and the provisions of legislation which are aimed at the establishment of institutions and development of local law.
Enforceability of a commercial agreement in one jurisdiction may be subject to a conflicts analysis due to the close relationship between separate legal systems. For example, should a dispute arise between parties in different jurisdictions as to the existence or meaning of an agreement, the question of whether the agreement is enforceable by or against them is likely to be considered in accordance with the law of the country of the place where the contract was signed. Clearly the choice of law to be applied will depend on the circumstances of the matter under consideration, and such factors as the location of the transaction, the identity of the parties, the nature of the agreement, and the object of the agreement. The parties to any agreement should consider the location that has the most substantial relationship to the parties in determining the appropriate choice of law.

Advantages of Filing a Well Written Commercial Agreement

The primary benefit of a commercial agreement is that it helps all parties understand their rights and obligations in relation to the contract. This is preferable to having to rely on statutes and case law to resolve any issues that may arise. An agreement gives everyone an opportunity to think about the provisions as accepted by the negotiations and include desired protections and obligations up front rather than relying on the uncertainty of what a court might say if the matter ended up in the courts.
An agreement will also save considerable time and cost in the future if something unexpected happens. For example if it sets out what has to happen if one party sells its business or if there is a major business disruption. It allows people to spend more time concentrating on their core business.
For obvious reasons, the best way to achieve this is a detailed written agreement that will protect each party’s interests. In particular, it will cover items such as:
• the description of goods or services
• price
• confidentiality
• liability
• warranty and guarantees
• termination
• alternative dispute resolution
• ownership or use of IP
• force majeure
Having all these items clearly addressed in a well-drafted agreement saves substantially on future costs.
Of course, if any of the parties want to be able to avail themselves of ‘boiler plate’ provisions to cover specific aspects of the agreement – for example disclaimers, indemnities, non-solicitation, insurance and liability limitations – then it is even more important to end up with a clear written version.

Common Issues in Commercial Agreement

Even with the best of intentions, challenges may arise when it comes to offering or accepting commercial agreements. Negotiation difficulties can be one of the more common problems; many companies and individuals aren’t able to get a straight answer when trying to learn more about a business opportunity. Then, they must decide whether or not to move forward with a deal or walk away from it entirely. It’s not an unusual problem to have a potential deal, only to eventually find out that it’s not at all what you were promised.
Enforcement issues can also be difficult to deal with when it comes to business agreements . Violations of agreements can be an issue as well, and as the laws involved are often relatively vague, it often leads to firms becoming involved in a long and drawn out process.
Change of circumstances can include anything from a company being unable to change its product or service according to the agreement, to having a supplier declare bankruptcy. Sometimes these issues can lead to unspecified penalties, and at other times some may just be unable to honour the deal they made – a problem that can be especially troubling in a situation where the other party has already addressed their end of the deal, but the company in question has done nothing.

How to Negotiate a Commercial Agreement

When it comes to negotiating commercial agreements, preparation is key. An experienced business lawyer can save time and money by identifying potential issues and providing guidance specific to your particular situation. A lawyer can help prepare a client for a negotiation, make recommendations, and serve as a liaison between parties involved in a business deal. Negotiating terms of an agreement with a professional can help you avoid potential pitfalls and unwanted legal consequences.
One of the most important elements of negotiation is listening — not only to what you hear, but to what you don’t. A good corporate lawyer can help clients negotiate by using effective listening skills and asking good questions. Clients are capable of communicating their needs, so listening to them can help ensure the scope of their best interests will be represented in the negotiation. Clients should always provide their lawyer with a list of goals and objectives before meetings, as this can help the lawyer listen to the client’s needs. This can also assist the lawyer give helpful advice about what is negotiable and what isn’t.
Clients should also be encouraged to listen to the other party’s concerns through effective communication and listening. This can be done through questioning and tasking the lawyer with finding out information that may help strengthen the client’s case or bargaining position. Understanding the other party’s needs can provide valuable information that may give clients leverage and insight during negotiations. It can also provide a better idea of the other side’s negotiating strategy and expectations.
Effective negotiators should also be aware of their own non-verbal communication. Familiarize yourself with body language and understand the importance of verbal communication. Good listening skills and communication can help ensure negotiations go smoothly, and the end result is clear and satisfactory for both parties.
Persistence can be the key to a successful negotiation. Fortunately, the average person is not capable of being constantly on their toes or alert for long periods of time without several breaks. The repetition doesn’t work. Good negotiators and business lawyers are persistent on behalf of their clients due to their significant motivation to get the job done. Good negotiators should be able to analyze the whole picture, see the big prize and the big end goal, and find a way to get them there.

Importance of Legal Professional in Commercial Agreement

The vast majority of commercial agreements are drafted by legal counsel. It is often ill-advised to execute an agreement presented by the other party without first having it reviewed by your own legal counsel. Even when using a standard form agreement, it is a good idea have the agreement reviewed and tailored by your legal counsel before entering into the agreement.
Law firm representation involves drafting and renewing commercial agreements, negotiating terms within agreements, aiding in the execution of the agreement as well as terminating and unwinding agreements when the relationship between the parties falters. As is likely clear, the drafting and review of commercial agreements is an essential function of a business lawyer.
Regardless of whether you are drafting the agreement or simply reviewing a form presented by the counter party, an opportunity exists for you to remove provisions that provide a significant advantage to the other party. Identifying these opportunities requires an experienced business lawyer who can anticipate the risk to your business and manage those risks through the drafting process.
The majority of agreement terms are standard business practices. For example, it is standard in a purchase and sale transaction, other than certain consumer sale situations, to exclude representations and warranties with respect to the quality or characteristics of the goods being sold. In the majority of agreement disputes, a term that was missed or reviewed but not revised is where a party to the agreement has been put at a disadvantage. An experienced business lawyer knows the important terms of the agreement to negotiate and discuss so as to avoid adverse results for your business if a dispute arises.

Practical Case Studies

To illustrate the lessons and guidelines outlined in this article, we’ve provided a few case studies involving successful and unsuccessful commercial agreements. The following examples have been selected for their educational value. Names and other identifying details about the parties involved have been changed to protect confidentiality.
Case Study 1: Successful Commercial Agreement
Company E is a pre-commercial stage biotechnology company that entered into a commercialization agreement with Company F, a mid-sized specialty pharmaceutical company that focuses on acute care products. Company E sought a co-development and commercialization partner for its drug candidate to accelerate clinical trials, reduce the cost of development and distribute the drug in North America. Company F wanted to expand its portfolio of approved products, and acquire commercial rights to a promising new therapy. Despite Company E’s lack of commercial stage assets, the drug candidate was seen to fit into Company F’s pipeline and their growing acute product portfolio. Company F had the capabilities to finance, develop and commercialize the product from pre-clinical through to commercialization. The two companies were of similar size and comparable market caps, which allowed them to negotiate on a level playing field.
An effective commercialization agreement was put in place, spelling out the purpose, scope, rights and responsibilities of the two parties. A scientific advisory board was assembled to guide drug development, review clinical protocols and ensure strategic alignment between the two parties. Importantly, adequate systems were put in place to facilitate the collaboration, connect people and limit the potential for misunderstandings. Company E and Company F communicated effectively, learning from one another. Company F showed Company E how to manage investor relationships more strategically; Company E helped Company F obtain a better price for raw materials. The two parties were flexible, adaptive and collaborative, and managed to determine the root cause of misunderstandings without resentment or hostility. Lastly, both parties understood that Company F’s efforts to commercialize the drug would be more profitable if a more attractive formulation was developed. After a few years, the two companies decided to invest in a new GEL formulation. While this delayed the time to market, it ultimately resulted in a superior product and a higher return on investment.
Case Study 2: Unsuccessful Agreement
Company G is a small private technology company whose goal is to disrupt the industrial logistics market through technology. Company H is a large multinational logistics company. The two companies decided to join forces to establish a new technology-enabled supply chain company that is focused on reducing costs and increasing supply chain visibility, efficiency and safety. This was an align-and-assign type of deal whereby Company H agreed to provide equity financing for the start-up of the new entity. Also , once established, Company H promised to provide up-front technology and digital platforms, operations expertise, market share, customer relationships, more than 100 years of logistics expertise and direct access to market. Deferring to the deal "sweeteners" from Company H’s offer, Company G surrendered all control and governance rights as well as a large portion of the equity in the joint venture. The deal was structured as an LLC.
Within months, it was evident that the two parties struggled to work together. Company H was seen as controlling and even bullying Company G. Key members of Company G’s team left – some said due to frustration with Company H’s dominant role. Once the joint venture was up and running, Company G quickly realized that Company H was not prompt in performing its obligations. A few years later, a dispute arose between the parties. Company H did not do a good job managing the entity and was out of touch with market changes and trends. It wanted the company to aggressively go to market. It tried to take over the joint venture through a series of coercive and unfair tactics. In response, Company G tried to minimize its losses by limiting its own investments in the joint venture. The joint venture ended with litigation over who was, in fact, in charge of the joint venture. While the lawsuit settled averting the need for arbitration, the joint venture failed to achieve its intended objectives.
Case Study 3: Unsuccessful Agreement
Company I is a private technology company that focuses on developing miniaturized technology solutions for the retail market. Company J is a large multinational technology company. The two parties entered into a co-development agreement whereby Company J agreed to provide equity financing if Company I achieved certain targets. The two parties had worked closely together in the past, but this agreement was the first joint venture. Little consideration was given to how this agreement would differ from previous agreements. Both parties expected that the agreement would resemble work-for-hire and license agreements executed by the parties in the past. Company I assumed that Company J’s past relationship with Company I was indicative of a strong partnership. Accordingly, the agreement lacked many of the elements necessary for a successful joint venture. The agreement was vague and not drafted in light of local laws and regulations. Company I and Company J did not clearly define and delimit their roles in the joint venture. In order to be able to push back, Company J proposed a number of deal parameters that were unacceptable to Company I. However, due to the long history of cooperation, Company J convinced Company I that its proposals were reasonable. It was only after signing the agreement that Company I recognized the consequences of the agreement. Consequently, the agreement became a source of cost overruns and delays. Company J terminated the agreement in the end over disagreements on what constitutes acceptable costs.