Creating Contracts for Digital Transformation: Understanding Key Elements of Commercial Contracts
Contracts are ubiquitous tools that form the base of professional relationships among organizations, vendors, and business partners. Be it an agreement or closing a professional deal, contracts are used to fix terms of obligations, rights of involved parties, and their duties. Thus, legal and business teams across the globe emphasize the importance of understanding the main elements of commercial contracts in Contract Lifecycle Management.
– As per research conducted by Forrester and Aberdeen.
Creation and approval of a contract take around 3.4 weeks in a typical organization.
Consequently, organizations across the globe are looking to minimize this time by coming up with strategies to create contracts that require less time in creation or approval and have comprehensive terms with every necessary detail. Let us understand the main elements of commercial contracts used in Enterprize CLM.
1. Establishing Terms of Contractual Offer
All contracts start with a contractual offer. The contractual offer establishes the relationship of wants and fulfillment among the parties. The offer encompasses terms of what is needed by one party and the conditions under which the other party will fulfill the requirements. The offer clearly outlines the expectations of the involved parties.
The terms of the contractual offer demonstrate the values exchanged between the parties related to actions performed under the contract. An offer can be altered, terminated, accepted, or rejected by the other party. It also allows the extension of a counteroffer as a part of bargain on value exchange.
2. Terms of Acceptance
This term of contracts includes terms of acceptance of the offer made in the contracts. Acceptance of terms and conditions implies that both parties are fully aware of the duties, conditions, and responsibilities and are accepting it.
Acceptance of contracts can be made in several ways:
- Conditional Acceptance: This essentially means that the other party can agree to the terms of the contract but needs some conditions to be met before final acceptance.
- Acceptance by Action: This form of acceptance is done when the other party directly takes the actions mentioned in the contract. For example, if the commercial contract is between parties for supplying goods, and the other party directly ships the goods, then this is called Acceptance by Action.
- Option Contract: This type of contract gives the holder the right without obligations to sell assets or give services at the agreed prices in the future.
Signatory awareness is an important part of contract acceptance. This ensures that both parties are fully aware of the terms and conditions and agree in their full capacity without any external influence. Without establishing awareness of parties, the contract can stand void.
3. Legal Terms and Obligations of Commercial Contracts
All the legally binding terms and obligations must be stated clearly in the contract. All the terms, data, and agreed prices should be outlined clearly as part of a commercial contract. It must also be ensured that all the terms included are legally valid as per jurisdiction. It should also give a course of action in case of missing obligations.
A commercial contract should also include the following provisions,
- Provisions related to sales of goods, or vendor services.
- The terms related to the disclosure of confidential information and engaging in competition for both parties.
- Provisions related to the use of intellectual properties such as copyrights, trade secrets, patents. trademarks, etc.
- Specifics for non-performance like indemnification, termination, warranty details, damage cover, etc.
4. Terms of Legal Capacity and Willingness to Sign
Including terms of Qualification of signees essentially implies that all the people signing on the contract are legally qualified to do so. The signees must have the legal capacity to sign a contract. In general, people from the following categories are not considered to have the legal capacity to sign a contract:
- Minors
- Mentally unstable
- Intoxicated (Unders influence of alcohol or drugs)
- Someone under undue influence or has been misrepresented
- Someone with insufficient understanding of the contract or the related subject matter.
Essentially, the contract must establish that it has been signed with mutual assent and understanding of the involved parties or else it will stand void. It should indicate the general willingness of the involved parties to sign the contract.
Commercial contracts form the basis of professional relationships among organizations or included parties. If a contract doesn’t have unambiguous terms then it may fail or create loopholes. To decrease the time spent in the creation and management of commercial contracts, the business or legal teams should opt for an efficient CLM tool.
As per research, efficient CLM tools can reduce the time spent in Contract Management Cycle by up to 82%. Legal teams can completely automate the process of creating contracts having all the essential elements using the CLM tool. The automation will lead to the creation of comprehensive contracts with all essential elements in lesser time. Thus, the legal and business teams of any organization must have a clear understanding of the elements of commercial contracts and use efficient CLM tools for their contract management needs.
It’s important to consider the needs of your organization as thoroughly as you would examine the features and benefits of Contract Management tools. It helps you reduce operational costs, increase productivity, and exceed your client’s expectations, and that’s exactly what we help you with.
So, are you ready to take control of your contract processes?
