Commercial Agreement and its Importance

Posted On : June 17, 2021
Commercial Agreement and its Importance
commercial contract are the most important aspect of general corporate law. It starts from negotiation between the parties and ends when all parties to contract has discharged their duties. Types of contract clauses are unlimited in commercial contracts but it depends on understanding of parties to contract on which clause to use.

What is commercial agreement?

Commercial: Commercial transaction are some sorts dealing where payment for defined goods or services are involved. Different form of commercial transaction involves transactions between business to business or business to consumer or business to government are few examples of the same.


Agreement: As per section 2(E) of Indian Contract Act, 1872 "every promise and every set of promises, forming the consideration for each other is an agreement."

Commercial Agreement: The negotiations between parties with regards to the commercial transaction of goods or services which are listed in agreements in writing.

The agreements define the duties and responsibilities of all parties and what they will get in return from the agreement. A commercial agreement generally contain following clause:

  • Name of parties.
  • Terms, purpose and duration of agreement.
  • Commercial benefit of all parties.
  • Duties and Responsibilities of each parties to the agreement.
  • Termination of the agreement clause.
  • Signature of all parties to give consent to all clauses of the agreement.

Process of Making of Commercial Agreement

Each agreement is different from each other and it should meet all the requirements of parties involved in the transaction. All transaction start from negotiations between all parties in the transaction to enter into a contract after negotiations are completed then a document is drafted generally on a stamp paper and registered with a notary. Process of commercial agreement is:

Negotiation: Negotiations are starting point of any commercial relationship between parties and it is done so that parties in the agreement could do their research well on the subject matter of the agreement and define their position with the respect to clauses of the agreement clearly during negotiations.

Drafting: Drafting of an agreement is done with an utmost understanding of law of contract act and other important laws related to product or services or payment and facts should be stated precisely and carefully. Each and every statement should be clear defined in the agreement. Definite words and sentences should be used and non-commitment language must be avoided at all cost.

Stamp Duty: Instruments such as agreement are chargeable to stamp duty. However there are few types of commercial agreement which are exempted from stamp duty by the state laws. Agreement which are executed in India they must be stamped before or at the time of their execution . An instrument which are not duly stamped those cannot be accepted as evidence under evidence act and cannot be accepted in the courts in India.

Registration: It is recommended to record the contents of agreement with a registration officer as it gives proof of originality of documents, a registered document is of legally valid under Indian registration Act. But not all documents require registration under Indian Laws.

Types of Commercial Agreement

When your business starts to make agreements with other businesses for supply or sale of goods and services, then a proper a commercial contracts to record these agreements and protect themselves in case of a dispute between the parties to contract. There are so many different kinds of commercial contracts, and some are highlighted below:

Purchase and Sale Agreements: Purchase and sale agreements are one of the most basic and popular of commercial agreement. These contracts cover one party’s agreement to buy goods from the other parties to the transaction. In this type of contract, it is important to specify the quantities or specify the goods that are needed, the amount of payment and manner of the payment, time and date of delivery, what happens if the goods are not available, and what happens if other disputes arises between the parties.

Services Agreements: One other type of commercial contract is the services contract. In a services contacts, someone agrees to provide services for someone else. For example, a dry cleaning service could agree to come in thrice a month for cleaning your business’s premises. The contract should specifically detail about services are to be provided and who  how it will be provide by them. It should account for any I basic  requirements, liability of the parties to each other damage caused by the services provider or researcher, and more.

 Distribution Agreements: Distribution agreements cover how goods will get from the production department to the ultimate consumers. Some organization specialize in distribution of goods, which may include transportation, logistics, and even advertisement of the goods. A good distribution agreement will specify which duties of the distributor and which the production company will retain.

 Production Agreements : Finally, production of goods or services are agreements arise when one company needs a detail part of good made, and so it’s an agreement with another organization that will produce the part. Its’s same as a purchase and sale agreements, production agreements should made with a clear intention on how much of the part is needed and what to do if something goes wrong.

 Benefits of Commercial Contracts

 Proof of details

This is definitely one of the reasons why a written contract is essential for your organization or any type of agreement –it can legally serve as evidence for the proof of details on whatever parties have agreed in the agreement. It provides the ultimate understanding of the agreement between the both the parties to the contract, , or payment liability that one party need to comply with hired employees. All these things should be stated in the written agreement as legal evidence.

 Prevent misunderstanding from arising

A written commercial agreement is usually documented for  a sensitive between parties entering into a business transaction. The main objective of this agreement is to give all parties to the agreement a chance read and have a clearer understanding of the terms or conditions of the transaction, including the expectations and liabilities of each party and what they have come to terms after negotiation.

Provide’s security

In any commercial transaction, an agreement can provide security and confidence to each parties to the agreement involved in the transaction. For example, an employment contract between the employer and an employee with regards to their duties and responsibilities, payment and overall relationship. An employer is legally responsible in complying strictly with the employee’s salary under industrial act and other benefits stated by Indian laws, whereas the employee has to perform all his or her duties assigned duties by employer as mentioned in the job description.

Guaranteed confidentiality

One of the most important benefit of having written agreement in commercial transactions is the to have confidential clause to protect business secrets and other parties has to agree to the confidentiality and non-disclosure provisions. As part of the agreement, all parties to the contract are legally bound to hold in secrecy as mentioned by the other parties and the information exchanged between the parties, and the party that violates this clause under the agreement would be held liable under the agreement.

Serve as an record of business transaction

A written agreement is used as record of business transaction the parties to the contract and what they have agreed on in the agreement.


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