Streamlining Commercial Contracts
Streamlining commercial contracts refers to the process of making business contracts more efficient, straightforward, and less complex. This involves simplifying the language, terms, and conditions in contracts to make them more understandable and accessible to all parties involved. The aim is to reduce unnecessary legal jargon and lengthy clauses that may hinder the comprehension of the contract’s obligations and rights.
By streamlining commercial contracts, businesses can expedite the negotiation and signing process, minimize potential misunderstandings, and facilitate smoother interactions between different parties. This approach can also help in mitigating potential legal disputes or ambiguities that may arise due to convoluted or confusing contract language.
In day-to-day operations you will be concluding a wealth of agreements and so it is important to understand what types of contracts you need in your business to get started, but also to grow and scale fast & efficiently.
When you are expanding internationally or even at European level, beyond just the territory of one country, and when you are scaling your offer, the question is suddenly not about whether you need a signed written contract or not, but rather, it becomes about how you can optimize your contract management, so that you can:
- Accelerate time-to-market
- Streamline customer on-boarding
- Simplify cash flow
- Increase sales
- Have financial control
Types of contracts
Contracts are the law of the parties; meaning, a contract is what you and your partner agree on -> your gentlemen’s agreement in writing becomes a CONTRACT, and its contents, the terms and conditions, will govern the business relationship with your partner – co-contracting party.
Main categories of contracts include:
- Corporate: co-founding, shareholder agreements, subscription agreements, options, warrants
- Investment: investment agreements, loans, credit notes
- Employment: labor contracts, job descriptions, company staffing policies
- Real estate: lease agreements, sale-purchase agreements
- Credit documentation: credit facilities & security
Not all contracts are created equal: some have different formation requirements (e.g. labor contracts, credit, mortgage), other are generating revenue (commercial agreements), while others create debt and encumbrances on your part.
In this section, we want to introduce you to several common forms of commercial agreements you’re likely to encounter as a founder and business owner.
For clarity, “commercial agreements” include your team agreements, given the fact that more and more businesses do not employ staff under a typical labor contract, on a permanent basis anymore, but rather, they prefer to work lean and flexible, by hiring freelancers and building a network of partners and collaborators instead.
Types of commercial agreements
Your standard terms of business or click wrap agreements
These are the ones that require your customers or clients to check a box (or several) to acquire something from you:
- A membership
- A subscription
- A download/freebie
- A product or a service
- A digital product: course, materials, templates, etc.
What is important to keep in mind about them is that since they are standard or general, they have to include the general or standard terms, and nothing further, derogating from what the law typically provides.
This is because in the European legal systems freedom of contract is a governing principle, and for someone to sign and agree on something with you in writing, they would have to be informed in advance and be given the opportunity to negotiate certain clauses.
A lot of businesses push the boundaries, which trigger frequent conflicts and liabilities.
These are the most frequently used type of contract if you are a service-based business. Fee structures differ greatly depending on whether they are recurrent services, on a retainer-basis, hourly, fixed, project based, all sorts of arrangements are possible, the key element here is that there is clarity and the clauses are worded in such a way as to properly reflect the understanding of the parties.
While their subject matter may vary greatly (from web development to software development, to coaching or training services), it is recommended that you standardize your terms and create your own template that you can provide to business partners, so that you simplify this process as much as possible and have more transparency and control over your obligations in the overall contract lifecycle.
It is also very common that you have a set of main/standard business terms covered under a Master Services Agreement, with the specifics of the service delivery provided for in a scheduled Statement of Work (e.g. for software development services, marketing agency services, etc.).
Software as a Service or Platform as a Service is an incredibly common form of agreement and revenue model. Fundamentally, it is a services agreement with many of the above-mentioned considerations, but it will include also very specialized terms regarding technical integrations, specifications, updates & upgrades, maintenance & uptime, customer service / service levels, representations (or disclaimers) about the ability of the software to interface with existing systems, usage rights (intellectual property rights), revenue sharing or fee arrangements, audits, etc.
Intellectual Property Licenses
IP Licensing is a good revenue model and commercial strategy: instead of purchasing or investing in R&D to develop your own IP, companies will license what they need to develop their product.
Key elements to take into account are:
- Geographical limitations
- Time restrictions
- Right to sub-license
- Right to terminate.
Confidentiality and Non-Disclosure Agreements are an important instrument to protect trade secrets and know how in commercial relationships where you are still exploring the terms and conditions of your agreement, and do not have as of yet clarity over the deliverables, milestones, key terms of the agreement. An NDA helps protect not only the confidentiality of the relationship with your potential future business partner, but also the mutual disclosures that are made between you in the process.
They are frequently used by startups when preparing for funding, and they are in more advanced or closed talks with investors, in the due diligence phase, but also when two business partners are assessing the technical and operational integrations which are required in order for a solution to work, up to and including an actual agreement date on the project scope.
The importance of signing contracts
It’s not that oral agreements are not binding, but in the absence of a record (in principle, written and which includes also in electronic form), of exactly what was said and agreed upon, disputes arise and what was once a good friendship turns into a war. We strongly advise clients to get everything signed in writing, not only to avoid any misunderstandings and potential disputes, but also in order to simplify any exchange of communication of “I said/you said”.
When signing a contract, ensure that you have all the relevant business details you need in order to identify your contracting partner, as well as that you have verified the validity of the information provided against public records and the mandate of the authorized signatory.
Other issues that can arise from lack of or poor contracting practices:
- miss-alignment with your finance department (e.g. you have payment terms or your agree to pay deposits, guarantees, give collateral, make long-term payment commitments) that are not aligned with your budget, forecasts, cash flow, and your finance team cannot honour.
- spending too much time with the actual drafting and negotiation of the contract, because you don’t have your own standard in place.
- passing responsibility from one department or team member to another, regarding who should oversee the negotiation or no one taking responsibility for it.having unclear business terms, that your sales or product team is not aligned with, hasn’t been consulted or trained on.
- over-contracting without a clear business development strategy, without knowing if in the short, medium and long term, making a contract with a certain number of suppliers is supporting or serving you in your business expansion
- being locked in in a contract, and not being able to get out of it, except if you pay a certain amount of money.
If you are the supplier and haven’t done so already, we strongly recommend that you:
- have a complete set of general terms & conditions of (supply) business – standardized.
- save all your contracts in digital format & group them by categories.
- set appropriate viewing, editing rights to each category or contract, according to your own internal access policy.
- use contract lifecycle management to streamline on-boarding, negotiation and post-closing monitoring of your contracts.
Contact us to find the right legal solutions for you, tailored to your specific needs.