Commercial Contracts

Commercial contracts play a significant role in the day-to-day operations of most businesses. The types of commercial contracts are as numerous as the businesses they are used in; supply contracts, product purchase agreements, service contracts, development agreements, marketing contracts, partnering agreements, independent contractor agreements, and on and on. The nature of the business arrangement dictates the specific issues relevant to a given contract. There are, however, certain fundamental issues that should be considered and addressed in any commercial contract. To the extent these issues are appropriately addressed in the written document, it reduces the possibility that the parties will have a dispute as to their respective rights and obligations during the performance of the agreement.

Some of these issues include:

· Clear Expression of Performance Obligations. One of the most common problems in contract drafting is one of the most basic. Parties often fail to include an adequately specific description of the parties’ respective performance obligations under the contract, be it services to be provided or goods to be delivered. Another important element is the timing of performance, whether a general time frame is sufficient or a very specific timetable must be met. A thorough and accurate description of performance obligations either in the body of the contract or on schedules thereto reduces the possibility for discrepancies in the parties’ expectations.

· Representations and Warranties. A well-crafted commercial contract will have representations and warranties appropriate to the subject matter of the contract. Representations should be carefully tailored based upon the specific performance obligations in the contract. For example, a contracting party receiving goods or services under a contract is entitled to a representation that the goods will be of a specified quality or that the party performing the services is qualified to do so. On the other hand, neither party should be expected to make representations that are irrelevant to the subject matter of the agreement. Drafting and negotiating the representations and warranties provides a forum for identifying any confusion in the expectations of the parties.

· Risk Allocation. An essential part of any contract is the allocation of risk among the parties. Should something go wrong during the performance of the contract, the contract should clearly delineate which party bears the burden of the problem. One way risk is allocated is through the representations and warranties which are discussed above. Another way is through the use of indemnification provisions. Indemnification provisions protect a party from liabilities that arise out of the actions or misrepresentations of the other party. Indemnification provisions should also be carefully tailored to the specific nature of the agreement thereby not exposing either party to greater liability than it should rightfully bear. Insurance requirements are another manner of allocating risk. Requiring one or both of the parties to carry insurance to cover the specific risks associated with the contract performance is an appropriate way to manage liability exposure.

· Dispute Resolution. In the unfortunate event a dispute arises a provision addressing where and how disputes will be resolved may provide for the more efficient resolution. If the parties simply desire to allow any disputes to be resolved in court, the contract should at least specify what state law will
control and the parties should submit to the jurisdiction of the courts in that state. More complex contracts involving high dollar values often include specific procedures for resolving disputes. These procedures may begin with requiring disputes be escalated with internal senior management at each company party to the contract. In the event internal procedures are unable to resolve a dispute there is a broad range of external dispute resolution alternatives. These alternatives range from voluntary mediation to mandated binding arbitration.

· The “Miscellaneous” Provisions. Anyone who regularly deals with commercial contracts is likely familiar with the often-called “Miscellaneous” provisions. Despite the label, these provisions address some very important issues. A provision restricting assignment of the contract by one or both of the parties is usually included among these provisions. Companies carefully choose with whom they want to enter in business relationships. These decisions could be quickly mooted if a party, without the consent of the other party, is free to assign its rights and obligations under a contract to third party. There is, of course, often specifically delineated exceptions to these no-assignment clauses to address the business succession of a party. Governing law and jurisdiction are often included among these provisions. As discussed above in “Dispute Resolution” these provisions clarify for the parties the forum for resolution of any disputes that may arise. After carefully crafting a written contract neither party should expect that its provisions may be changed unless expressly agreed upon. Thus, another important provision is that which requires any amendments be in writing and signed by the parties. These are just a few of key issues that are often covered as “Miscellaneous” provisions.

The issues addressed above, are by no means an exhaustive, but they provide a strong basis for most commercial contracts. Addressing these issues not only provides for a more thorough final contract, the process of negotiating them will provide a means to illicit and, hopefully, resolve any discrepancies in the parties’ understanding of the arrangement.

Every commercial contract has its own issues and the proper resolution of those issues requires an understanding of the legal implications of the contract language. The Business Group at Wiggin & Nourie, PA has extensive experience in drafting and negotiating a myriad of commercial contracts. Please call Erik Barstow at (603) 629-4543 for further information.

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