Your company’s contracts – with vendors, suppliers, customers, landlords and employees – are like the bones in a skeleton. Everything your company does relies on the support and protection of the terms in its contract. Just as you want strong bones, you need to make sure that your contracts are strong and appropriate for your business. Weak or nonexistent contracts can undermine a companyunexpectedly, creating risk or liability. A well-written commercial agreement not only protects a company from risk and liability, but also allows the court to better assess the intent of the parties in the event of a dispute.
What is a Commercial Agreement?
A commercial agreement is any contract that relates to the provision of goods or services bought, sold, licensed or used in the course of a business’ operations. For example, they can include:
- real estate leases;
- agreements for the sale, lease, maintenance or repair of equipment;
- Work For Hire agreements;
- professional services agreements;
- IT and data agreements; and agreements for the purchase of goods.
Commercial agreements make the parties’ rights and obligations more predictable in connection with a transaction or service delivery and clarify how to resolve disputes. On the other hand, the biggest disadvantage is that commercial agreements may create obligations that one or both parties may outgrow over the course of the relationship.
Common Types of Commercial Agreements
Work for Hire Agreements
Work for Hire Agreements (WFH agreements) are used for the development and transfer of creative aspects of products and services. When you hire someone who is not your employee, such as a freelancer, and the commissioned work falls outside one of the nine categories listed in the copyright statute, all rights to the work remain with the creator. To transfer the rights both parties must sign a written WFH agreement. WFH agreements usually state that all rights, title, ownership, intellectual property rights, are owned by the purchaser, not the creator.
Commercial and Industrial Leases
Leases are special commercial contracts for the right to use specific space in limited ways for a period of time. In many places, there is often a widely-used template commercial lease. Smaller leases may hew entirely to the template. Larger leases are usually negotiated extensively and are highly customized. Industrial leases follow a different process, because each industrial space is unique, and thus there is no generally-accepted template that is the starting point for negotiations for industrial spaces. Permitted uses of the space must be negotiated, because different uses can carry significant risks to the landlord.
Leases: Risks and Obligations
An industrial lease can be the largest obligation that a business owner will incur in his/her early years. Many landlords will require a personal guarantee from the business owner as a lease term, which is an enormous risk for many people. It is important to make sure that the rights and uses permitted in the lease match what the business requires immediately, and also for the life of the lease (if not beyond). Real estate insurance coverage is important, but it is paramount that the tenant understands the exceptions to coverage and real costs of the policy before signing. Be certain that the policy covers that location and that activity. Make sure that the lease site isn’t in a flood zone or a Superfund site.
Professional Services Agreements
These agreements are most commonly used by accountants, lawyers and professional advisors, and their language is governed by state bars, professional associations or other similar bodies. These professionals are bound by their own professional and ethical rules relating to how they may provide services, and under what circumstances they may terminate the relationship. Because these relationships often expand with time, the description of the provided service is more flexible than a WFH or other services agreement.
IT Agreements
What is included in an IT agreement has broadened over time, and they now include hardware, software, data licenses or cloud-based services. Nearly every company, not just IT companies, have IT agreements for crucial services and inputs. The standard language related to liability (including warranties and indemnifications) in an IT agreement is somewhat different from other types of commercial agreements for goods or services. IT agreements have also evolved as more and more products and services are delivered over the Internet. Some agreement terms can be negotiated, but most cannot, or cannot be negotiated easily, because the trend is for the standard agreement terms to be provided and agreed on in a template available online. Internet delivery of IT services is much more efficient and reliable than the former ways of doing it, but it also means that in developing a reasonable process for internet delivery, the agreement terms are not negotiable – they are agreed to by clicking “I Accept” (hence the term “Click Wrap Agreement”). Nonetheless, these agreements are generally enforceable under US law, but in some European countries, they are not.
Know Your Contracts
The best protection for your business is to know and understand your contracts. A good business attorney with an understanding of your business (and an interest in understanding your business) can make all the difference in having contracts that work well for you. Not all risks can be negotiated away, but recognizing where the unavoidable risks are can reduce the number and effect of nasty surprises, freeing you up to focus on developing and expanding your business.
This post is part of Priori’s blog series “From Our Attorneys,” where we feature lawyers in our network discussing important issues small businesses face. In today’s post, transactional attorney Anne Wolfson explains the importance of commercial agreements and different types to consider.
Priori makes it easy for businesses to find trusted, vetted attorneys at below-market, and often fixed rates. By eradicating structural barriers, Priori Legal makes the process of working with legal counsel simple, trasparent, and efficient.
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