What Should an Entrepreneur Know: Common Terms in Commercial Contracts
I earlier wrote a blog article on some basic contract law concepts that would be useful for an entrepreneur to know. Although you should always consult a lawyer when drafting and interpreting your contracts, an understanding of these legal concepts can assist with facilitating discussions with your lawyer and identifying the need to seek legal advice in the first place. To follow up on that brief Contract 101 session, this article will explore some common contractual terms in commercial agreements.
The nature of contractual agreements required by a start-up varies with the life cycle of a business. In its infancy, among the first contracts a start-up enters into may be confidentiality agreements as the business navigates conversations among the founders and its early employees, and with third parties. When it comes time to raise institutionalised investment, a new company may perhaps be concerned a shareholder agreement. As the start-up grows and invites more people onboard, potential employment and consulting agreements may also require further scrutiny if the business had not earlier turned its mind toward these issues. Depending on the business plan and industry practice, a start-up may variously be entering into: a lease, a licensing agreement, a purchase and sale agreement, or a lending agreement, just to name a few. While different contracts necessitate a variety of considerations (I meant that in the general sense, not the legal consideration for those who have read my previous blog), there are some contractual terms that appear in almost all contracts.
Recitals / Preamble: Some contracts, usually those lengthier ones, include introductory paragraphs that describe the nature of the contract, the respective roles of the contracting parties and the context under which they have entered the contract. Recitals do not necessarily determine the parties’ rights and obligations under the contract, but they can provide a helpful interpretive tool in the event that interpretation is at issue.
Entire Agreement: An entire agreement clause seeks to provide greater certainty and clarity by stating that the contract represents the full and complete contractual arrangement between the contracting parties. Such clause may state that the contract supersedes all previous understandings and arrangements. Whether an entire agreement clause can fully protect against considering anything beyond the four corners of the contract remain dependent on the specific contract.
Governing Law: The governing law clause is critical when drafting a contract with connections to multiple places. For example, the contracting parties may be from different provinces or countries. Perhaps the contract is to be performed in a third province or country. Since these places may have significantly different laws governing contractual relationships or other subject matters relevant to the contract, it is important for contracting parties to determine at the onset which set of laws will govern the contract. This can avoid lengthy disagreements over the preliminary issue of governing law should the parties later have a contractual dispute.
Dispute Resolution: Having determined which set of laws will govern the contractual relationship, the parties may wish to next consider how to solve potential disputes. Some parties may choose to refer disputes to arbitration, which can often be a cost- and time-efficient manner of resolution. Others may choose to submit disputes to courts, in which case the parties may further consider whether a specific court ought to have “exclusive” or “non-exclusive” jurisdiction to hear the matter. As is the case with the governing law clause, the dispute resolution clause (whether in the form of jurisdiction or arbitration clause) is important in eliminating preliminary procedural issues.
Amendment / Termination: In anticipation of changing circumstances in the future, parties may provide for mechanisms of amending and terminating the contract. A common tool is to provide for amendment and termination by mutual consent (an additional qualifier may be that consent ought not be unreasonably withheld). Sometimes, a contract may provide for a party’s sole discretion to amend or terminate the contract. The contract may also provide for a specific list of events the occurrence of which may trigger termination.
Liquidated Damages: Parties may sometimes be able to anticipate the extent of loss in the event of a certain contractual breach and provide specifically for the amount recoverable as compensation for such breach. The enforceability of a liquidated damage clause can be a point of dispute; contracting parties should seek advice from their lawyers in understanding how this clause works.
For more information on the current jurisprudence on any of these contractual terms, please contact the Business Venture Clinic. Tiffany Bennett is a third year student that worked for the BLG Business Venture Clinic for the 2017/2018 academic year.
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Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.