Commercial Agreements

The term ‘commercial contract’ is frequently used to refer to sale-purchase agreements; ostensibly, commercial contracts could refer to other agreements of similar nature. For example, it is sometime used to refer to distribution agreements or agency sale agreements. More generally, it would not be incorrect to use it to refer to any contract made between business for commercial reasons. However, given the prevalent use in the market, in this note, we will assume that ‘commercial contract’ refers to sale-purchase agreements.

With reference to ‘off-take contracts’, it often specifically refers to sale-purchase agreements. The use of the term may point to the fact that the vendor is the producer (or a member of the producer’s group). ‘Off-take contract’ is also frequently used in the project finance context to refer to (long-term) contracts generating income for the project. In the eyes of law, in business-to-business transactions, there is rarely any distinction between buying from a producer and buying from an intermediary. For that reason, we will also use the term ‘off-take contract’ as synonymous with sale-purchase contracts.

If we assume English governing law, as is often the case in cross-border transactions, then we can point to some general characteristics of all above agreements.

The very basic term of a sale-purchase contract is the item been sold and acquired. If we focus on goods, as we will, then we should note that the law distinguishes between description and quality. The scope of contractual terms, on the one hand, constituting description and, on the other hand, setting out quality, will depend on the circumstances. However, description is something that can be seen as basic, primary characteristic; whilst, quality will refer to more minute features. Generally speaking, remedies where the goods fail to meet description are more dramatic. For that reason, when negotiating a commercial contract, it might be prudent to keep the mind on the distinction.
The next important item will be quantity of the goods. We will only note here that even minor breaches of quantity may give the buyer the reason to reject (unless falling within certain statutory exceptions).

Whilst price is assumed to be a key commercial matter, the law does not strictly require that the price shall be set out in the contract (or even agreed).

Many commodities contract set out the price by reference to benchmarks and quotational periods. From experience, the relevant clauses may be seen clear for the business persons negotiating the contract, but might turn out to be incomplete or imprecise should a dispute arise. With reference to both benchmarks and quotational period, certainty is a very welcome thing. In addition, with reference to benchmarks, the parties might consider any fallbacks; and with reference to quotational periods, the resilience of the nomination / selection procedure.

Another rather common feature of commercial contracts – there are typically specific provision on finality of quality and quantity determination. At English law these types of provision have the desired effect, except for very limited circumstances, such as fraud.

To conclude the discussion, cross-border sale purchase agreements typically incorporate by reference Incoterms basis, such as FOB or CIF. These significantly reduce amount of drafting required to document a particular transaction.
If we turn to a discussion of other types of agreement referred to in the beginning of this note, to a degree, they draw on the basics of sale-purchase agreements. There are also specific considerations, among others, the competition law aspect. For agency-based agreements, there are issues of principal / agent’s liability plus additional specific regulation arising out of Commercial Agents Regulation 1993 or similar legislation.