While all of us are familiar with the requirements of a commercial contract, yet at times, I feel that we as Corporate Counsel need to sharpen our skills and re-visit the requirements that outline the basic tenets whilst negotiating and drafting a business agreement. It is with this thought that I have tried to mention, amongst others, few of the major constituents of a commercial agreement, which I believe you may find relevant while dealing with complex commercial contracts.
In my opinion, simple language reflects the clarity of mind. A sound thought if not couched in easy language would not have the desired effect. Therefore, effective language is the foundation of a good contract. A contract executed between the parties should have utmost clarity with regard to the intent with which the same has been entered upon and should clearly spell out each party’s rights and obligations and in case of confusion or disagreement or breach the remedies that the affected party may rely upon. In my humble opinion you do not need a lot of legalese to make a contract enforceable. Instead, have clear definitions, create short and clear sentences, numbered paragraph, headings, that articulates the thought with umpteen clarity.
In our complex organizational structure, we often tend to forget the importance of dealing with the right individual – one who is authorised and has the power to take decisions. Negotiations on a business agreement should be crisp and short, wherein one needs to identify the areas to be discussed beforehand to have a fruitful discussion. Time shouldn’t be wasted negotiating multiple times on the same issue on the understanding that the same is subjected to the approval of the authority/ies not present during such deliberations. Rather, polite, but a firm request, at times, may be necessary to end such negotiations.
The description of the parties entering the contract should be correctly spelt out and defined, which makes it easier in the latter part of the contract to bind such parties to their respective obligations and responsibilities.
It is most important that the contract should clearly define the individual description of the Parties and the reason and the purpose for which the parties intend to enter into the contract. A reading of the initial clauses should help in indicating the objectives of the contract and the roles that the parties would play – which may be broadly detailed out in the latter part of the contract.
We often miss out on the most important element of the contract i.e, the date when such understanding becomes effective, the tenure till which such contract binds the parties and such other elements which are co-related with a specific term, tenure and/or a specific calendar date. Such critical elements of a contract should be flagged with a proper defined description as the same at times acts as a catalyst to the broader commercial understanding between the parties.
Specify the commercials with utmost clarity – including the trigger points for the same and the effects in the event of non-performance. The conditions for such commercials should and always must be the critical element of a commercial negotiation and should be well articulated in the document to avoid future ambiguity and complications. Whether we like it or not money is more often than not becomes a contentious issue, so this part should be very detailed. In my opinion, I would always look for the consent from my business team prior to formalizing the commercials in a contract.
It would always be prudent to indicate the situations and/or the circumstances, upon happening of which, the parties can terminate the contract. In a business environment, time is always a critical factor that determines and controls the mode and manner of an Organisation’s success and failure. Thus, in a contractual relationship, it is important to check the balance in the event either of the party, or the one who is obliged to perform a specific role fails and/or delays, the other party should have the right to terminate the contract and seek for the remedies as agreed upon in such contract in accordance with the law of the land.
All goes well with regard to a contract till the time either of the party commits a breach – which may ideally never be the intent. In such a scenario, it becomes important to identify while drafting a contract the key elements that would constitute breach by the parties to the contract, the effects of such breach and the remedies that may be available to the party affected by such breach. The clear interpretation of the above would in some manner minimize the risk potentials that an affected party may be exposed to and may identify the route to be taken upon happening of any such adversity.
One of the critical element of contract is identifying the tune to which parties to the contract should indemnify and the extent of the same. While the former aims to spell out the protections that a party may enjoy in the event of happening / non-happening of certain events arising out of the contractual relationship, the latter aims to limit the financial and/or risk exposure of the defaulting party. Both the feature are required to be elaborated with utmost clarity such that the interpretation of the same be construed in the matter as it was ideally meant – at the time of construction of the contract. It is also quite important to curve out the instances which would lead to such indemnification, while being cautious of phrases which directs towards consequential and indirect losses and damages.
In a competitive environment, it is critical that the parties to the contract be bound by a sense of confidentiality with regard to the contractual terms and conditions that is enshrined in the contract. The parties to a contract should be bound by a non-disclosure clause such that the commercials alongwith the roles and responsibilities of the parties, any kind of proprietary information, trade secrets, business modalities and objectives are not spelt out in the open environment. However, mutually if the parties prefer, they may add on a specific period after which neither of the parties be bound under such doctrine.
One of the important element in a commercial contract should be the protection of the intellectual property rights. The parties to the contract should protect their respective intellectual properties for many reasons, which would include amongst others, protection of its business valuation, protecting its brand value and goodwill, to protect its competitive edge whilst using the intellectual property as a marketing edge, protecting the IP Rights which at times may be a potential revenue stream through licensing.
The parties to the contract may decide on the approach and the route to be taken for attending to a dispute which may crop up during the tenure of the contract or otherwise. In today’s commercial world a lot of breakthrough has been achieved, wherein the parties has taken a positive stride to attend to such dispute by way of a dispute resolution mechanism and/or by way of mediation and/or conciliatory proceedings. In addition, you may want to specify where you will mediate, arbitrate, or institute legal actions under the contract. This will simplify your life if a dispute does crop up.
At the end, as I said, the intention of the parties should come out clear, in a transparent manner to avoid any future complexities.
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