Five important clauses that can be found in all commercial contracts
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This article is written by Mohammad Suboor, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.

Table of Contents

Introduction

The boom in the commercial sector has further scaled the need for well-drafted and structured commercial contracts without any loopholes. A well-drafted commercial contract facilitates a smooth and hassle-free execution of the contract, here the parties adhere to the mentioned clauses in a strict manner, thus leaving scope for little or no ambiguities. Every commercial contract has two sets of clauses:

  1. General clauses: These clauses are present almost in all the contracts as they form the basic pillars on which the whole contract rests. They are generic in nature and cover most of the important aspects of a contract. 
  2. Specific clauses: These are some tailor-made clauses that demand the specificity of the circumstances and the nature of the contract. They can vary from contract to contract to fit the best interest of the parties to facilitate the effective carrying on of the contract.

The general clauses share the widest applicability in all the contracts and therefore, shall be the limelight of the present article. The author shall discuss the top 5 generic clauses that are found in most commercial contracts. This would focus on what these 5 particular clauses are, along with reference to how these clauses can be well-structured and drafted. This would build a better understanding of these clauses and also provide a structure to adhere to while setting up the clauses next time. 

What are these clauses?

In the realm of commercial contracts there exist a number of important clauses to choose from, and it is hard to confine the top 5 clauses that are most commonly used. A snapshot of the key clauses that are most commonly found in a commercial contract can be Assignment, Boilerplate, Confidentiality, Dispute Resolution, Entire Agreement, Force Majeure, Indemnity, Jurisdiction, Retention of title, Termination, and Waiver Clause. Among these key clauses, the most commonly found can be restricted to the following:

1. Recitals/parties clause

Seldom given any acknowledgment or appreciation, this clause forms the backbone of the entire contract. Even before starting the actual parameters of what all is to be laid down in the contract, this clause helps to set the background to the whole contract. This clause expressly states in clear terms who all are the parties that are to be taken into consideration in the formation of the contract, and it also acknowledges and sets out the purpose or the intention of the parties behind setting up the contract. It truly enlightens the reader as to what purpose and between whom the contract is being formed. The parties mentioned in this clause are often referred to as signatories to the contract, and in case if any dispute arises pursuant to the contract, then it is the signatories that are bound to the contract and not any third party.

Whereas:

  1. The ABC is engaged in the business of providing online higher education catering to rigorous industry-relevant programs which are designed and delivered in collaboration with world-class faculty and industry (hereinafter “Business”). ABC’s business is specialised in providing courses in data science. The ABC has designed, developed, and owns the assets of the business.
  2. The ABC wishes to expand its business and reputation. XYZ wishes to set up and carry on at the XYZ’s own risk a franchised business in New Delhi, 110025, India. Accordingly, the ABC wishes to grant relevant rights to the XYZ to carry on the business of the ABC. The XYZ after having a complete understanding of the business wishes to enter into an agreement with the ABC herein.
  3. The parties are hereby interested in the execution of this agreement for the purpose of facilitating the business, as set forth herein, and are desirous of fixing and defining between themselves their respective responsibilities, interests, and liabilities in connection with the said agreement.

2. Confidentiality clause

The moment the parties enter into a contract there is an exchange of information between them, which is often of sensitive nature. To prevent the other party from divulging that information, a confidentiality clause is set forth in each contract. This clause has a binding nature on each of the parties to the effect that, if any of the parties divulges the information shared pursuant to the contract, then the other party can make the divulging party liable before the competent authority. This helps the parties to keep a check on each other so that no sensitive information is shared and the business or trade secrets are safe. The parties must keep in mind and make sure of the fact as to what information is of confidential nature and what is not. Furthermore, the ambit of the Confidentiality Clause can also be determined between the parties, this would make it clear that up to what extent the confidential information will be covered i.e., will it be everything that is shared during the duration and performance of the contract or will it be confined to only a few selected things that are labeled as confidential by the parties.

Sample of a confidentiality clause

  • The XYZ agrees that the ABC has a proprietary interest in any information provided to XYZ by ABC, whether in connection with this Agreement or otherwise, whether in written or oral form, which is: 

(i) a trade secret, confidential or proprietary information; 

(ii) not publicly known; 

(iii) annotated by a legend, stamp, or other written identification as confidential or proprietary information; and 

(iv) any Intellectual Property mentioned in the Agreement (hereinafter “Proprietary Information“). 

XYZ shall disclose the proprietary information to anyone else other than its agents and employees to whom it is necessary in order to carry out their duties as limited by the terms and conditions hereof. Both during and after the term of this agreement, all disclosures by XYZ to its agents and employees shall be held in strict confidence by such agents and employees. During and after the term of this agreement, XYZ, its agents, and employees shall not use the proprietary information for any purpose other than in connection with XYZ’s sale and distribution of the products in the territory pursuant to this Agreement.

3. Force majeure clause

Owing to the unprecedented circumstances that this COVID-19 pandemic has caused around the world right now, the importance of this clause has further escalated. The term ‘Force Majure’ translates to ‘greater force’. Now as the name suggests, this clause comes into play when there exists a situation that is unforeseeable and beyond anyone’s control. In cases where one of the parties is not able to perform its obligation under the contract due to some event that is unforeseeable and beyond anyone’s control, then pursuant to the Force Majeure, the party in default is exempted from its obligation to perform. This clearly highlights the importance of this clause and its applicability in such circumstances. However, it should be noted that there is no particular legal definition to the term Force Majeure, and therefore it is usually advisable to define in the contract itself what all situations and circumstances can be accounted for by the invocation of this clause. Examples of some force majeure events can be acts of God, acts of civil authorities, acts of military authorities, riots, embargoes, acts of nature and natural disasters, pandemics, etc.

Having a look at a Force majeure clause

Neither Party is liable for any failure to perform due to causes beyond its reasonable control including, but not limited to, acts of God, acts of civil authorities, acts of military authorities, riots, embargoes, acts of nature and natural disasters, pandemics, and other acts which may be due to unforeseen circumstances.

4. Termination clause

Often placed at the end of a contract, the termination clause of the most important clause in a contract. Every contract has to come to an end, may it be after the completion of the contract or somewhere in the middle during the term of the contract because of a default committed by a party. In either of the mentioned scenarios, a proper exit strategy should be laid down and then only an effective exit should be made. The same is the work of a termination clause in a contract, whereby it enables the parties to lay down certain conditions and circumstances beforehand so that the termination can be hassle-free. As soon as any of the predefined conditions set out in the termination clause is satisfied, the termination process is triggered, thereby resulting in an exit from the contract. The conditions defined in the termination clause should be vivid and no scope for any ambiguities should be left. Also, a prior notice period should be set pursuant to which the termination shall take place.

Sample draft for the Termination clause

This agreement may be terminated in the following events as follows:

  1. When both the parties to the agreement are of the opinion that the agreement can no longer be honored in harmony, then upon the mutual written consent of both the parties the agreement can be terminated by issuing a prior 1-month notice to each other.
  2. When either party wants to terminate the agreement, prior written notice shall be served to the other party at least 90 days in advance. Prior to the termination of the agreement, all the dues shall be cleared and no accounts shall be rendered unfulfilled.
  3. By the ABC by giving written notice to the XYZ having an immediate effect, if the XYZ breaches this agreement and fails to remedy that breach (if capable of remedy) within next 60 days of being given a written notice identifying the breach and requiring it to be remedied.
  4. This agreement shall terminate without notice in the event of the death of XYZ.
  5. Without prejudice to any remedy which ABC may have against the XYZ for any antecedent breach or non-performance of this agreement, the ABC may terminate this agreement with immediate effect on giving written notice to the XYZ if the XYZ:
  1. suffers or commits an act of bankruptcy;
  2. is convicted of an indictable criminal offence or one involving dishonesty;

iii. engages in conduct prejudicial to the rights or the business or otherwise behaves in any other manner that may damage the reputation of the ABC or the business;

  1. is insolvent or is prevented by infirmity or ill health from performing his functions  under this agreement;
  2. is in persistent breach of the franchisee’s obligations under this agreement;
  3. fails to carry on the business;

vii. challenges the franchisor’s Intellectual Property rights. 

5. Dispute resolution clause

Disputes are unavoidable and are bound to emerge in any contract, therefore to avoid them and promote the smooth functioning of any contract, this clause is important. As the name suggests, this clause is used to settle any dispute that arises between the parties during the course of the contract. A well-drafted dispute resolution clause is very essential as it could make or break the relations between the parties when it comes to a dispute. A swift and amicable handling of the dispute is often preferred in commercial contracts as the parties value the business ties, rather than ending them completely over a trivial dispute. The dispute resolution clause in itself is a mechanism that can be tailor-made by the parties suiting their own needs and requirements. A well-drafted clause should contain an escalated form of dispute resolution, i.e. the parties should first try to settle the dispute via multiple Alternate Dispute Resolution techniques, and then move to a stringent method of dispute resolution. Observing the recent trend, the parties usually prefer Multi-Tier Dispute Resolution Clauses, which have mediation or negotiation at the first step, followed by arbitration. This upward trend in the ADR mechanisms is because of their effective and efficient techniques which are less time-consuming and also save massive dispute resolution costs. While drafting this clause, one should particularly strategize as to what would be the perfect combination of multiple dispute resolution techniques to cater to the best interest of the parties. Pursuant to the discretion of the parties, the jurisdiction in which the dispute resolution shall take place should also be mentioned in this clause.

Example of a Dispute resolution clause

  1. Any and all disputes and differences between ABC and XYZ including and in relation to the interpretation of this agreement shall be referred for amicable negotiation and settlement between the parties to be resolved within 30 days of the written notification thereof.
  2. In the event that such amicable negotiation and settlement attempts fail, then either party may refer the dispute to arbitration in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (“SIAC Rules”) for the time being force. The tribunal shall consist of one arbitrator who shall be appointed in accordance with the SIAC Rules. The language of the arbitration shall be English. The seat of the arbitration shall be Singapore. The decision of the tribunal shall be final and binding upon the parties. The expenses of arbitration shall be borne in accordance with the determination of the arbitration.

Conclusion

The drafting style of a contract can vary from person to person and there is no fixed standard format for it. Apart from the basic structure of each contract, the clauses can be tailor-made by the parties to fit their best interest. A good draft should adhere to only the needs of the parties, any excess information or making a clause too stringent can put a party in a deadlock situation. A proper clause should be balanced and should have a mix of neither too stringent nor too flexible a draft. Due consideration and importance should be given to each clause and only precise and relevant information should be added to each clause to make it a perfect fit for the contract. The abovementioned 5 clauses form an integral part of the contract and can be seen in all commercial contracts. It is important to have an understanding that why a person needs these clauses in the contract and how can they be improved upon. A person should truly understand the purpose of these clauses before drafting them.

References


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