The commercial sector is booming, and over 500,000 businesses are incorporated each and every year. With this huge influx of new companies, and the inexperienced directors in control over a portion of them, it has never been more important to know the ins and outs of a well-drafted, well-structured, well-executed commercial contract.
In all business arrangements there are a series of vitally important, key contract terms put in place to guarantee an even playing field for both parties. Find out more about commercial contracts, as well as the terms to place in them in the latest blog from Ruthberg.
What is a Commercial Contract?
A commercial contract is a formal agreement formed to regulate the relationship between two parties — usually between two businesses, or individuals involved in commercial dealings. The purpose of a commercial contract is to set out terms of their dealings clearly and concisely.
The contents of a commercial contract constitute a set amount of clauses and terms which dictate the agreement and exchange of goods/services therein.
Commercial contracts are traditionally done in writing. Written contracts are easier to enforce should either party ever stray from the agreement. However, no matter where you are in the world, it may be possible for contracts to be done verbally or even implied.
For example, the law of the United Arab Emirates states that verbal contracts are ‘’prima facie’ meaning that they will be enforceable unless proven otherwise. Although verbal contracts can be valid in the UAE and beyond, it is always recommended to formalise terms of an arrangement in writing to avoid potential conflict over the terms (or even existence) of the contract.
Contracts of this type are tied to common law and legislation, meaning that neither party can break the law or any terms stated in the contract without facing repercussions.
What are Terms in Contract Law?
In contract law, a term is a provision stated within a contract. These terms are the basis to any obligation within a contract. Breaches of these terms will likely cause the end of the contract, as well as potentially litigation. Terms can be written, communicated orally; or even implied by law, conduct, or custom.
In contract law there are three different, distinct types of terms:
- Conditions: Conditions are terms that give an aggrieved party the legal right to terminate the contract with immediate effect should they ever be breached. It is also possible in the event of a condition being broken for damages to be sought.
- Warranties: Warranties are terms that, if breached, do not give the automatic right to terminate the contract. Breaching a warranty does however allow the aggrieved party to claim damages.
- Innominate terms: An innominate term is an intermediate term which is defined as neither a condition or a warranty. The seriousness of the breach of an innominate term will depend on the severity of its impact on the aggrieved.
The Key Commercial Contract Terms to Watch Out For
If you’re in the process of forming a contract of your own or have been sent terms to look over, you will want to be sure you know some of the most important potential terms to look out for, including confidentiality, force majeure, and more.
Everything must come to an end. Widely seen as the most important term in any commercial contract. Termination is often located right at the end of a contract, and covers the inevitable time where the agreement must come to an end.
Often, a contract will come with terms of termination linked to either the passage of time, or the completion of a project/service. However, some contracts may allow a termination for ‘cause’. Cause refers to a certain situation or event that leads to one or both parties wishing for the cancellation of the contract early.
In the UAE for example, there are three main ways stated in the Civil Code to legally terminate a contract. These are:
- By mutual consent
- Via litigation
- In accordance with the law
Other common justifications for the termination of a contract include poor performance, refusal to perform agreed service, breach of contract, change in situation, goods/services no longer needed, one party can no longer fulfil the contract, or insolvency on either side.
It is not uncommon for commercial agreements to contain a clause or clauses with consideration to keeping any sensitive information between the parties concerned, without fear of it being shared.
A confidentiality agreement is binding. This means that should either party divulge any private information that the other wishes to remain secret, then they may be liable to legal recourse.
In principle, a confidentiality clause inserted into a commercial contract is there so that both parties police themselves. Ensuring company and trade secrets should be in the best interests of both parties, and this term acts to guarantee it.
Force majeure or ‘greater force’ is a contractual term that focuses on what happens in the event one party is unable to meet their obligations due to something beyond their control/unprecedented/unexpected.
Examples of things covered under force majeure include:
- Extreme weather
- Natural disasters
- Civil unrest
- New laws passed that impact operation
The purpose of inserting a force majeure term into a contract is to relieve any party of obligation in the event that any of the above happens and they are unable to meet all the terms of the contract.
There is no legal definition to the term force majeure. As a result, it is advised that examples of what could be accepted under the agreement be included within the contract.
Often in business disputes can be unavoidable. For a savvy operator aware of this inevitability, a dispute resolution term can be vital to ensure the smooth functioning of the contract, regardless of any future falling outs.
The term will cover exactly what should be done in the event of a dispute, to mitigate the effect of a disagreement. This can be methods of mediation, negotiation, and more.
A dispute resolution term should be agreed upon and drafted up prior to a contract ever being signed. The terms of such an agreement will be catered to the specific situation and contract the two parties are entering into.
Around the world, most deals are agreed on the principle of good faith. However, there are some areas where it is more than a principle, it is required. In regions of the Middle East such as the UAE, all contracts are subject to duty of good faith by both parties.
This duty refers to both parties acting honestly and fairly at all times during the term of the contract. In the UAE, good faith is an automatically implied obligation to any contract under Article 246 of the Civil Code and is deeply rooted in UAE law.
Good Faith terms mean that in any dispute or negotiation, the conduct of both sides should always be under question. If either party was seen to be acting dishonestly or fraudulently, then the clause may be cancelled as a result of this failure to act in good faith.
Jurisdiction terms grew in commonality as a result of the huge internet boom. Traditionally, businesses, particular smaller ones, would likely only deal with local companies. This allowed for more convenient access for meetings.
However, due to the accessibility the internet provides, a business can exchange goods and services with another party virtually anywhere on the planet. As a result, which party’s country or region’s laws will take precedence.
Commercial contracts should, as a rule of thumb, always contain a term of jurisdiction to ensure that the law is always followed to the letter, regardless of where your dealings are based.
How Ruthberg Can Help with Commercial Contract Terms
It can be tough to get started in business, particularly in an unfamiliar territory such as Dubai and the UAE — with all manner of potential stumbling blocks and complications on the horizon that can trip you up, it is important to understand as much as you can about ways to minimise risks.
For any business owner looking to enter into an agreement with an untested business, it is important to draw up a fool-proof commercial contract with equally fool-proof terms to ensure an even foothold for all.
Ruthberg can provide a personal, knowledgeable service for any business. We have offices around the globe so we can be ready to help review your contracts and make recommendations based on experience and expertise at a moment’s notice, no matter the time of day.
Contact us via Whatsapp, over the phone at +971 50 508 0586, or email us at email@example.com.