Modern problems require modern solutions. Contract management is modernizing to continue to be a solution for all enterprise operations. In this new decade, as the dynamics of how we evolve in business drastically changes, it is essential that contract management software changes too. Businesses need to equip themselves with a viable contract management software solution to adapt to the ever-changing world.
Each company has many contracts being executed simultaneously, as even more contracts are being added for future business. Common contract stress comes from multiple parties, multiple procurement processes, multiple customers, multiple supply chain vendors, etc. The dynamics of business have changed. Contracts need to be drafted while keeping in mind the modern requirements.
Clauses added to the contractual agreement can help to address modern requirements. But which clauses should be added to a contract? You cannot just add all of them, can you? In this blog we identify the 22 significant clauses that we think should be included in a modern commercial contract draft. We discussed in one of our previous blogs why commercial contract management is important. Now let us see which clauses make a modern commercial contractual agreement.
When forming a contract one of the first steps is to identify all parties involved in the contract. As far as the contract is concerned, a party can be an individual, or a company, or LLP, or any entity. Each party is identified with a description (legal name, address, etc.). Whatever party description is used, identification is mandatory. For companies and LLP, you need to identify them by the following parameters:
- Complete legal name
- Registered Office Address
- Registration number
- Country of incorporation
In the case of individuals or sole traders, identify the party with the following parameters:
- Party’s trading name
- Full legal name of the individual
- Current address of the individual
- Government provided ID number (optional)
Accurate identification clarifies in the contract who is legally bound to the contract. One wrong information here could result in rendering the contract void.
2. Agreement Title
Every contractual agreement should have an appropriate title. One important point to remember in naming the contract is to be clear and abstract. Contract names should not be overly specific. They should enable the users of a contract management system to easily retrieve it when searching or sorting among many contract names.
3. Recitals and Definitions
Recital clause otherwise known as preamble or whereas, is usually found before the main body of the contract. It contains information about the business background of the party, why they are entering into the agreement, etc. It is basically an introduction to the agreement itself.
Definition clauses should contain the description of technical terms used in the contract. The purpose is to make it easy for all parties to interpret the contract.
4. Representation and Warranty
The representation clause provides an underlying statement of facts by the parties. It is an assertion. The warranty is a promise for indemnity if any party breaches a contract. A breach is a break of a promise.
The covenants clause is an unconditional promise found in a contract. For example, a promise to make a payment from one party to another on or before a fixed date. In simple words it is an agreement to do or not do something. Failure to abide to these terms can be considered breach of contract.
The term clause defines the duration of the agreement, often represented as years or months. This clause will stay relevant unless the contract is terminated by a party or by mutual consent of all parties.
7. Terms of Payment
The terms of payment clause defines the duration of payment, method of payment, and the mode of payment.
Consideration clause defines a promise made by one party to the other in exchange for a promise or an action by the other party. It is an essential element for the contract to be considered valid.
9. Invoices and Notices
This clause includes the details of invoicing, how it is to be done and the date or number of days before the amount should be paid.
The notices clause should include all the contact details of the parties involved, like physical address, shipping address, billing address, email address. This serves as a valid mechanism for giving and serving notices.
10. Exclusivity and Severability
The exclusivity clause requires the signee of the agreement to only engage in business activities with the issuing party associated to the contract. For instance, if party A gives exclusivity to distribute product X to party B, party A promises to not allow any other parties to distribute product X for the duration of the contract.
The severability clause ensures that the legal clauses in a contract are still enforceable by law if a portion of a contract (one or more clauses) is/are deemed to be illegal.
The amendment clause sets forth the modus operandi if a condition of a contract needs to be changed.
12. Governing Law and Jurisdiction
Specify which law (state or other) can govern the contract in this clause. In the event of a litigation, the court will respect this clause and use that law in the verdict. Given that there are considerable differences in the state laws across the US, it would be wise to specify this clause.
The jurisdiction clause will specify a choice of court to be used in the event of any future disputes.
13. Dispute Resolution
If the contractual parties have a dispute, this clause defines how the parties should resolve that dispute. There are several methods to resolve contract conflicts, like mediation, arbitration, and conciliation. It is common for most organizations to add an arbitration clause for cases of dispute.
Contracts need to be signed by the contractual parties and initialed beside any hand-written changes made to a contract. Parties who sign the agreement have the authority to bind the party to the agreement.
15. Entire Contract
This clause specifies that all rights and obligations of the parties involved in the contract are covered by the agreement and it supersedes any other agreements (written or oral) between the parties.
16. Confidentiality Clause
The confidentiality clause binds the parties to an agreement that ensures the non-disclosure of sensitive information. It is important for commercial contracts to have this clause since the process may involve sensitive or secretive data from other parties.
The non-compete clause restricts one party from entering into a competition with the other party by starting a similar business or colluding with a rival company.
The non-solicitation clause restricts one party from soliciting other party’s employees, customers, or other commercial relationships for their own benefit.
The indemnification clause protects a party from liability due to harm occurred to a third non-contractual party or entity due to the missteps by the other party. For instance, in a contract between party A and party B, party A agrees not to hold party B liable if party B partners with party C for some aspect of completing the contract's promise to party A.
This clause ensures that either party entering into a contract is not breaking contractual agreements with other parties (in other contracts).
The merger clause, or integration clause, commonly found in a commercial contract dictates that the drafted contract is the complete agreement between the parties as to a specific transaction. This means that all the other agreements between the parties written or oral is superseded by this drafted contract.
22. Force Majeure
The French phrase force majeure means a superior force. The force majeure clause states that parties are released from contractual obligation when a contract breach results from a circumstance that is beyond human control. For instance, a natural catastrophe, war, or a pandemic such as Covid.
A completed contract has a natural termination at the end of the term. A contract that ends before the natural termination date is done so based on the termination clause. This clause states the parameters by a party in the contract to end, or terminate, the contract prior to natural termination.
Remember, modern problems require modern solutions. While contract clauses remain important, contract management software solutions can protect your organization from missing the pertinent details of each contract clause. Use contract templates. Protect your organization. Analyze and discuss each and every clause written in the contract with all contract parties before signing and closing the deal. Use your contract management system to communicate with all other parties. Allow all parties to edit, amend, redline. And then sign and execute the contract.
In the case of commercial contracts, it is essential that you give priority to analyze the clauses in your contract agreement. When dealing with many contracts on a daily basis, it might get pretty hard for you to closely analyze each and every section of each contract. Even with a dedicated legal team, human error occurs more often without a contract management system than with one. This is why successful enterprise organizations depend upon an automated contract management system to manage their contracts. With the features like clause library in the contract management system, you can make sure that you have added all the required clauses to the contractual documents. There are several other exciting features in a contract management system that help to streamline the entire process. Plan and strategize your contract management process with certified contract management professionals empowered by an efficient contracting software.
Written by Adarsh Dorai
Adarsh is a SharePoint expert with hands-on experience developing various SharePoint and Office 365 solutions.