6 Key Commercial Clauses in a Contract
Drafting a contract is not similar to following a uniform rule-book. No two contracts are the same. Each contract is customized and drafted in accordance with the client’s needs. However, there are certain clauses that are must-haves in every contract. It is not sufficient to merely have these clauses present in a contract; it is also important to understand the rationale behind their presence so as to be able to negotiate them effectively. We bring to you the six key commercial clauses you should mandatorily have in every contract and the practical aspects associated with each of these clauses.
Six Key Commercial Clauses You Should Have in Every Contract
Payment
A Payment clause is a critical component of all agreements. Whenever you are drafting a payment clause, you should keep in mind the following things:
- Is the payment being made in arrears or in advance? If you are the customer, insist on the payment being made in arrears.
- What is the mode of payment? The mode (cash/check/demand draft) of payment should be clearly outlined in the agreement.
- A clear timeline of payment and whether the payment is one-time or in tranches should be reflected in the contract.
- Many parties impose a penalty if the payment is delayed. However, penalty clauses may not always be enforceable. Always check if the penalty clauses are enforceable in your jurisdiction before including them.
Indemnity
An indemnity clause makes good the losses suffered by the other party on account of the party which breaches the contract. Parties to a contract often use an indemnity clause in addition to the contractual damages they would otherwise be entitled to. Some of the things you should keep in mind before you draft an indemnity clause are:
- Try to keep it mutual rather than one-sided.
- Risks covered under an indemnity clause should cover third-party claims as well as inter-party claims.
- Depending upon whether the indemnity is mutual or one-sided, negotiate whether the liability with respect to indemnity would be capped or not.
Confidentiality
A confidentiality clause is drafted to protect confidential data, like the trade secrets of a business, from being disclosed. Typically, keep the definition of `confidential information’ as wide as possible. Do not restrict confidential information to those documents or materials which are marked `confidential.’ Include all information shared, irrespective of the mode of sharing (written/electronic/oral), as confidential information. The clause may also cover certain exceptions under which information could be shared with a third party.
Jurisdiction
A jurisdiction clause in a contract will specify the appropriate jurisdiction that shall be applicable to both parties in case a dispute over the contract arises. It can also specify the particular state whose law would govern the contract. Parties should specifically choose their local jurisdiction for the purposes of initiation of a lawsuit and the law governing the contract. Parties are also free to choose a jurisdiction that would be favorable to them or a common jurisdiction depending on the negotiation rounds. Clauses that provide for an ‘exclusive jurisdiction’ is beneficial as it limits the jurisdiction to one specific location by excluding other possible locations. An absence of a jurisdiction clause in a contract often leads to ambiguity.
Dispute Resolution
Dispute Resolution clauses refer to the mode in which disputes may be resolved. This mode of dispute resolution can either be litigation or arbitration. Arbitration is an ‘out-of-court’ mechanism or an alternate dispute resolution mechanism (ADR). ADR is preferred prior to litigation because it is considered to be a faster and cheaper method to resolve a dispute. Arbitration gives the flexibility to the parties to choose the jurisdiction and the institution under whose rules Arbitration shall be conducted. The Arbitrator, too, is typically chosen upon mutual consent of the parties.
Limitation of Liability
A ‘limitation of liability’ clause specifies a fixed sum or calculated sum that a party will be obligated to pay in case of a breach, failure to perform, delay, or any other condition. It is included to limit the liability of the party (in terms of damages).
There is a three-fold benefit that a party would receive by including this clause in their contract:
- This clause shall provide certainty concerning the damages in case any breach occurs;
- This clause helps avoid intentional breaches by making the parties aware of the consequence of such breach.
- This clause helps a party to assess potential liabilities and take adequate insurance to cover such risk.
Conclusion
Every contract must clearly specify the relevant terms and conditions to avoid ambiguity. A poorly drafted contract often increases the risk of misunderstanding, which leads to disputes that shall cause unnecessary litigation, refusal to pay or perform obligations. A contract must be drafted with precision to ensure that business operations flow smoothly and efficiently.
