What Are the Key Drivers of Commercial Contracts?
Commercial contracts define and regulate business relationships, guiding and enforcing virtually every aspect of a business enterprise. Well drafted commercial contracts are crucial to a business’s success because they outline business expectations, protect business interests and minimize disagreements that can lead to litigation.
The commercial contract attorneys at Kendall PC have extensive experience drafting, reviewing, and negotiating commercial contracts for companies of all sizes across the United States. We help businesses identify potential pitfalls, items that fall outside of industry standards, and critical areas for further discussion.
The key drivers of commercial contracts include:
Indemnification Rights and Obligations
Indemnification provisions are commercial contracting tools that allow parties to allocate risk for specific events amongst the parties.
One of an indemnification provision’s key benefits is that it protects indemnified parties against losses from third-party claims related to the agreed-upon events. For example, an agreement that involves licensing intellectual property rights often includes indemnification by the licensor to protect the licensee against the potentially substantial liability associated with infringement lawsuits claiming that the licensed intellectual property infringes a third party’s intellectual property rights. Another common example is where wholesale distributors or shipping providers require manufacturers to indemnify them from claims alleging that the manufacturer’s products caused injury to the end customer
Indemnification provisions are highly negotiated and given the often substantial liability associated with triggering events, commercial contracting parties must understand the nuances and complexity of how the identified risks will be allocated. This makes the inclusion of an experienced commercial contracting attorney crucial to the process.
Limitations of Liability
Limitation of liability clauses are contractual provisions that seek to limit the amount of downstream financial risk to a specific party. Limitations of liability can limit future exposure by (1) prohibiting certain types of damages (e.g. indirect, consequential, or punitive damages); and/or (2) cap the amount of damages to which a company is potentially exposed in the event of a lawsuit or other claim being made against it. The limit may only apply to specific types of causes of action or to all claims that arise during the course of the contract. Importantly, parties may even extend limitations of liability to indemnification obligations.
Generally, limitation of liability clauses limit liability to one of the following:
- Fees and compensation paid under the contract (or some multiple thereof)
- Agreed-upon amounts of money
- Available insurance coverage
- A combination of two or more of the above
Warranty clauses are contractual provisions that typically provide a promise that (1) something will happen; or (2) some fact is, was, and will remain true. In general, a breach of a warranty will entitle the non-breaching party to some form of contractual remedy (if provided under this agreement) or a claim for breach of contract. Typical warranty provisions include:
- Identity and structure of the parties
- Enforceability of the contract
- Quality of Goods or Services to be Provided
- Valid ownership and transfer of any sold property or goods
- Commitments to conduct all activities in accordance with certain laws
Commercial contracts may limit the available recourse for breach of warranty claims to certain agreed amounts or types of consideration. For example, a manufacturer may provide a warranty that its products will meet an agreed-upon specification, but in the event that a particular product does not meet the standard, the manufacturer may limit the purchaser to only receiving a replacement product or a refund of the purchase price.
Parties to commercial contracts should also be aware that unless disclaimed, certain warranties may be implied by law. The scope of implied warranties depends on the nature of the contract and the specific state law applied. For example, the Uniform Commercial Code may impose an implied Warranty of Merchantability on the sale of some goods – this warranty implies that the goods sold are not defective and are fit for the purpose for which they are customarily used.
Term and Termination
A term and termination clause sets the length of time a commercial agreement lasts and the rights of one or more parties to terminate the agreement early. This type of clause addresses post-termination obligations, contract renewal, and survival. In commercial contracts, businesses are typically free to contract for termination rights and mechanisms that fit their business needs and expectations.
In practice, termination provisions become important when one party becomes dissatisfied with the relationship or otherwise wants to end the business relationship. With that in mind, parties should consider worst-case scenarios when drafting Term and Termination provisions to ensure they are adequately protected. For example, if services are priced based on an assumption that the entire term will be completed, service providers need to account for this in the termination provisions to ensure they are adequately compensated in the event of earlier termination. Customers, on the other hand, will want to provide themselves with great flexibility to terminate services without penalty should they become unhappy.
An exclusivity provision, or non-compete clause, prevents one party from negotiating or soliciting offers from a third party within a specified period. It may restrict the signer from buying, selling, or promoting products or services from or to a specific company or person. Essentially, it means that the individual or company will work exclusively with the contract’s issuer.
This type of clause can be used for a variety of purposes, such as:
- Preventing a service provider from providing the same services to competitors
- Obtaining exclusivity to produce a specific product
- Limiting third-party relationships for business partners
Purchasing Requirements and Forecasting
Purchasing and forecasting clauses allow suppliers to plan their staffing and production schedules beyond the time periods covered in a customer’s purchase order. Commercial contracts can include significant penalties for failing to order forecasted products and/or may provide that a supplier has no obligation to supply products in excess of a forecasted amount.
Intellectual Property Rights and Responsibilities
Intellectual property rights involve rights related to intangible assets (non-physical property created by human intellect) owned by a person or business and protected against use without consent.
Intellectual property includes:
- Patents: The U.S. Patent and Trademark Office grants rights to original inventions, protecting them from use by others and giving exclusive rights to inventors. The three primary types of patents include utility patents (protecting products that serve a practical purpose), design patents (protecting a device or invention’s aesthetics), and plant patents (protecting new plant variants).
- Trademarks: Trademarks protect assets that distinguish a company’s products or services, such as logos, colors, words, phrases, sounds, or symbols. While trademarks apply to goods; “service marks” apply to services. Trademarks do not grant ownership to particular words or phrases. Rather, protections are given to how words or phrases are used with respect to specific products or services.
- Copyrights: Copyright law protects the rights of original creators of original works of intellectual property. Copyrights protect original works of authorship, such as books, plays, movies, sound recordings, musical compositions, paintings, photographs, architectural works, blog posts, and computer programs.
- Trade secrets: Although the exact definition for what constitutes a trade secret can vary from state to state, it is essentially any information a company would not want its competitors to know. They are usually things that are not known to the general public, where reasonable efforts have been made to ensure confidentiality.
A confidentiality clause, or non-disclosure agreement, prevents signing parties from sharing trade secrets, personally identifiable information (PII), and other confidential information. Confidentiality clauses protect both written and verbal communications.
Depending on the specific provision, a confidentiality clause may:
- Prevent service providers from divulging strategies
- Stop business partners from sharing IP rights
- Limit the disclosure of on-site business practices
- Protect a company when working with contractors
- Prevent employees from talking to the press
If your business needs assistance with any aspect of commercial contracting, the commercial contract attorneys at Kendall PC can help. Contact us today online or at (484) 414-4093. Our firm has decades of experience serving small, emerging, and mid-size businesses throughout the United States and across the globe.