This article has been written by Priya Nandi, pursuing Diploma in International Business Law and has been edited by Oishika Banerji (Team Lawsikho).
It has been published by Rachit Garg.
Table of Contents
Introduction
A smooth and hassle-free drafted commercial contract is the basis to carry out a fruitful business in the corporate world. It should be as clear as water, so at a very fast pace before drafting any contract the person needs to understand the context of the contract so that he can have an overview on his mind and work with intellect on the contents of the commercial clauses. Therefore before entering into a contract, the parties should have a clear set of objectives regarding the decision he is about to promise to the other person. As the commercial contract is a legal document that is incorporated into governing the formation, interaction and enforcement of any business venture. Under Section 2(h) of the Indian Contract Act, 1872, the contract is an agreement that is enforceable by law. Therefore “it is a set of promises by two or more parties and is a legally binding agreement”. However, the commercial contract is governed by the Indian Contract Act of 1872 and the Specific Relief Act of 1963 as well. As commercial contact is an integral part of any business venture. clauses of commercial contracts can be intimidating and critical, which may be filled with legal jargon. As it can lead to the business’s downfall, it is crucial to understand the concept of commercial clauses in an easy common language. Therefore in this article, we will decode the standard clauses that are typically found in commercial contracts.
Standard essential clauses
Commercial contracts are drafted in many different shapes and sizes, but there are a few common clauses that are most likely to be included in all commercial contracts. Consequently in commercial contracts, there may exist six standard clauses:
1. Indemnification and liability clause:
Under Section 124 of the Indian Contract Act,1872, indemnity has been defined. But in simplified terms, it is a reimbursement for the loss caused. As there are two parties involved in a commercial contract, the participants are named as follows –
- Indemnifier.
- Indemnity holder/ Indemnified.
Indemnified is the person who promises to save from the damages and whose loss is to be made good. Therefore this clause is commonly found while drafting a commercial contract as it acts as a protective shield for the party who may have to bear expenses or losses due to the other party’s behaviour.
An indemnification clause is needed to be included in commercial contracts according to all the valid terms and conditions of the parties that may be the signatories of the contract. This clause is negotiable as it shifts the liability for the expenses and costs to another party, this may be a mutual or a one-sided clause. On the other hand, the liability clause sketches the amount of stake that each party may predetermine in the occurrence of any damages that may take place. It also outlines the limits of responsibility of any parties bearing the financial or any other damages.
2. Termination clause:
There are numerous unforeseen circumstances that may occur in a business organisation. It does not always proceed how it may have been organised. Contracts in such situations may come to the termination step. So, this termination clause is commonly included in what condition the termination of the contract should be executed, irrespective of the amount of time left according to the contract.
It basically outlines that:
- On what grounds may the contract come to an end?
- And how to deal with the contract period at the time of termination?
3. Confidentiality and non-disclosure clause:
Protection of financial information, trade secrets, customer lists and proprietary technology and any other list of information is the most crucial and considerable part of any business entity. Therefore it is very much important to dictate a strict confidentiality clause.
The clause must be drafted to prohibit all the involved parties in the contract from disclosing it to any unauthorised parties or individuals in any sense. This clause works as a protective shield for the sensitive information of all the parties involved where there are two or more parties to an agreement there can be an exchange of details in order to fulfil the contractual obligations. This clause has a binding nature on each party therefore this helps each to check on the other party so that all information is safe. Every business is different from the other so this clause also sets out the limit of how much a party can reveal any information or vice-versa.
4. The Force Majeure clause:
Force Majeure is a common clause that stands for “superior force”; it is a French term. The main purpose of this clause has been escalated due to the crises faced by business ventures during the novel Covid-19 pandemic. Henceforth Force Majeure is an unforeseeable event that cannot be included in a breach of contract and no parties can be held liable for any unfinished obligation that may be promised in the agreement signed.
It works as a hazard allocation tool. It benefits both parties in such a situation where the circumstance is uncontrollable or not in the hands of the party. In such a situation the party may inform the other party about the event that took place and it’s impractical to work in such a situation. This clause basically narrates the procedure of invoking the promises that are made in the agreement with prior notice of the event and with a valid reasonable cause.
5. Governance and jurisdiction:
In this world today, overseas expansion is fairly routine, as commercial contact is also a subject of Private International Law, it defines the governance of commercial contact i.e. When the contract took place in one country and has its effects in another country. For example, A contract may be signed with an offer and acceptance in one country, for instance, England. But the contract which is signed in England may be performed in India, on the other hand, the subject of the contract formed in England has situated in Germany and both parties in the contract are domiciled in Italy.
So, the question here arises is the breach of the demonstrated above commercial contract will be governed by which country law? Therefore this governance jurisdiction clause allows us to specify the country or state that will have jurisdiction over this contract so as to clarify which countries’ laws are applied.
6. Dispute Resolution clause:
The dispute Resolution clause acts as a resolving mechanism. The difference of opinion is a common trait, accordingly, the difference in opinion may lead to disagreement, and this is when this clause comes into action. As stated above the conflict resolution clause is a resolving mechanism it provides a solution to patch up the conflicts that arose between the parties. This clause is subjective in nature as different businesses have different terms and conditions, so this clause varies from business to business for example – negotiation, mediation, arbitration and many more maybe resolution steps.
Why is it important to know about the fine print of commercial contracts along with the clauses?
When a commercial contract is drafted it’s crucial to understand the fine print as well. This helps to understand the details of a contract if it is beneficial or if it is not. It’s important to invest time and effort to read and understand each and every clause. So, there can be no loopholes found in the later period while executing the obligation of the contract. We need to understand each and every line of the clauses that may be dictated in the contract irrespective of how least significant it may seem to be. The fine part contains information regarding the payment schedule, delivery date and other obligations as well. It may contain financial terms and conditions and other information about the disclaimer and exclusions etc, and may not be included in the clause part of the contract.
Conclusion
In conclusion, it can be said that the commercial contract is a legally binding agreement. Therefore, it should be crystal clear to the parties that the clause which may have been dictated in your contract page, before the offer and acceptance made by any parties in the agreement to ensure that the parties involved under the agreement are protected in the event of a dispute or Breach of the Contract. It is advisable to take professional legal help to understand the contract drafted with a fine-toothed comb if you are suspicious about any clauses that may be included in the context of the contract. Also, the contracts are negotiable so, if one encounters anything which you think can be beneficial for your business you can negotiate with the other party for the same to make the contract more favourable. Last but not least the record should be preserved of all the agreements that you have signed for future reference. As it always helps a business individual to stay organised and fulfil all the obligations on time and make others remind of their duties, adopting these key points a business owner can keep themselves safe and their business from any legal action and financial disputes down the line.
References
- https://www.upcounsel.com/important-clauses-in-a-contract.
- https://www.ahlawatassociates.com/blog/types-of-commercial-contracts-in-india/
- https://www.google.com/amp/s/blog.ipleaders.in/commercial-contract-important-clauses/%3famp=1
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