COMMERCIAL CONTRACT

DRAFTING AND NEGOTIATION

The Definitive Contract Checklist
Commercial Contract Drafting And Negotiation
The Definitive Contract Checklist

No. Heads of Clauses

1. Title ❏
You can give any title to the agreement. It is best if the agreement has a
title that is commonly understood in the market, e.g. Leave and License
Agreement, Services Agreement, Shareholders Agreement, etc., or
something that describes the relationship between the parties, e.g.
Affiliate Marketing Agreement, Distribution Agreement, etc.

2. Preamble / Recitals ❏
The Preamble is worded as short sentences separated with semicolons.
These precede the first clause of the contract, and provide a background
to the contract, explaining what is the purpose behind entering into the
contract.

Recitals will usually begin with ‘Whereas’ and will give a background to
what existed before the contract and how the parties came together to
enter into the contract.

3. Definitions ❏
Define any terms which have a technical meaning or to which you intend
to give a technical meaning. Make sure you capitalize the terms wherever
you use them in the contract.

4. Effective Date (or sometimes, a Conditions Precedent clause coupled ❏

with Completion)

Mention the date when the parties’ obligations are triggered / active. It
can be a specific date or a situation when certain prerequisite conditions
are met (called a Conditions Precedent clause). When these conditions
are met, a ‘Completion’ action from both the parties will activate the
agreement. For example, in an investment agreement, it can be the issue
of shares by the board and payment of money by an investor.

5. Obligations of the Parties + Consideration ❏

The key obligation of the parties (e.g. license of intellectual property in a

work / performance of services, etc.) and the consideration for the same
(in the above examples, the license fee or the remuneration) must be
specified.

6. Term ❏

Mention the duration of the agreement - i.e. how many months, years,
etc. It is closely tied to the termination and renewal clauses.

7. Termination ❏

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Mention circumstances under which the agreement can be terminated.

Make sure you mention termination for convenience (i.e. no reason and
at the free will of either party, and termination for breach). Defining
breach is critical and gaps here can often lead to disputes in future.

8. Covenants / Duties of Each Party ❏

Every action that each party commits to undertake or abstain from must
be mentioned here. Breach will lead to a default situation, leading to a
release of the non defaulting party from its obligations and the right to
claim compensation / seek specific enforcement.

9. Representations and Warranties ❏

Every transaction is based on a set of underlying statements of fact (such

as having ownership and title), or assertions about the quality of
something (i.e. Factory X is fit for the manufacture of semiconductor
materials) - this clause lists down all such ‘representations’ and
‘warranties’ by the parties. Breach of these triggers the right to seek
compensation. It can also lead to a release of the other party from its
obligations.

10. Indemnification ❏

Sometimes, breach of responsibility by one party can lead to losses for

the other. Will these losses be made good and to what extent? For
example, if you license IP you don’t own, the licensee may end up paying
damages to the owner. He will want to be ‘indemnified’ by you. To what
extent will ‘indemnification’ be applicable?
11. Method of Payment ❏

This clause lays down the mechanics of payment, such as the date of
payment, mechanism (bank transfer, cheque, etc.), invoicing, etc.

12. Governing Law ❏

The law applicable to the contract. Selection of a governing law is very

important in international contracts.

13. Dispute Resolution ❏

How will disputes be resolved? Usually parties specify alternate dispute

resolution methods, such as consultation, mediation and arbitration, or a
combination of them. It is very important to keep your dispute resolution
clause tightly worded so that the contract is speedily enforceable.

14. Waiver ❏

Does non-insistence on performance of particular contractual provisions

imply that the party has waived off its rights? Usually, parties will include a
specific clause stating that waiver cannot be inferred simply from a failure

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to insist on performance, and a waiver needs to be expressly provided in

writing.

15. Non-compete & non-solicit ❏

A non-compete clause is inserted with the intention that a collaborator,

consultant, partner or any other person that you enter into a relationship
with does not directly compete or work with your competitors.

A non-solicit clause is inserted to ensure that people who work with you
do not engage your employees or consultants to work with them.

16. Assignment ❏

Receipt of benefits can usually be assigned (under Transfer of Property

Act, 1882), but are the parties agreeable to assign responsibility for their
own performance to another entity? If so, under what conditions? The
assignment clause will provide for this.

17. Confidentiality ❏

With whom can the terms of the agreement be shared and under what
circumstances? What measures should be taken to keep its contents
confidential? Are there any exceptions? This looks like a plain cut, copy
and paste clause but can be worded in many ways.

18. Severability ❏

If some portion(s) of the contract are struck down or declared illegal, what
happens to the rest of the contract? To avoid any confusion, parties
simply state that the remaining portions will continue to be valid.

19. Intellectual Property Rights (If intellectual property is involved) ❏

Who owns the intellectual property that is created out of the contract?
Will it be transferred or licensed? This clause may also cover the
assignment of the intellectual properties.

20. Amendment ❏

How can the contract be amended? This clause describes the procedure.

21. Breach, Consequences of Breach and Remedies ❏

What amounts to breach and what are the consequences of breach?

Many agreements have an ‘Event of Default’ (or EOD) clause explaining
what is considered to be a breach. Consequences of breach also need to
be defined. For example, in loan agreements, an ‘Acceleration’ clause,
triggered at the time of an EOD typically states that all loans plus interest
due needs to be repaid immediately.

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What kind of remedies can be sought in case of breach? Are damages the
only remedy or can a defaulting party be compelled to perform the
contract, or be prevented from taking a specific action? The specific relief
statutes state that specific performance of a contract can be insisted
upon if monetary compensation is inadequate. Parties tend to include a
specific term stating that they ‘agree’ that in case of a breach, monetary
damages may not be adequate.

22. Entire Agreement ❏

This clause states that the contract captures the entire understanding
between the parties and that no evidence of there being any other terms
in the transaction will be accepted.

23. Notices ❏

What is the specific procedure to give a notice? This clause serves the
advantage that if you serve a notice as per the procedure specified under
the contract, then the notice is considered served and is not dependent
on actual receipt.

24. Jurisdiction ❏

Which courts have jurisdiction to deal with disputes? Make sure you write
the words ‘exclusive jurisdiction of the courts of X only’ if you want to limit
the jurisdiction to one place.

25. Liquidated Damages / Limitation of Liability ❏

The liquidated damages clause specifies a particular amount of money

that will be payable in the event of default.

The Limitation of Liability clause limits the liability for breach to a

pre-specified amount. It is very often included in software and technology
contracts.

(The difference is that the Liquidated Damages attempts to quantify

damages on the higher side, a Limitation of Liability clause limits the
quantum of damages. Both are included with a view to avoid uncertainty).

26. Force Majeure ❏

This clause specifies situations which are outside the control of parties
and are unforeseeable, and under which the parties cannot be compelled
to perform under the contract.

27. Exclusivity (in some contracts) ❏

This clause states that both parties will be in an exclusive commercial

relationship, or if a term-sheet is being signed, in exclusive discussion

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about crystallizing a final commercial relationship. This clause may state

some period as ‘period of exclusivity’.

28. Signature sections (for execution of a contract by the parties) ❏

Typically, first and last pages contain full signatures, and all the others are
initialled by the parties. Certain contracts (e.g. for transfer of immovable
property) may require ‘attestation’ by a witness, who will also need to
place his signature in the same way as the parties.

29. Schedules or Annexures (in some contracts) ❏

These can be used for describing the subject matter of a transaction or

providing details for payment or wherever in the contract there are
details which are too lengthy to be used at various places in the contract -
for example details of a property being sold or details of contents in an
apartment or details of shares being transferred or details of bank
accounts to which payment is to be made etc.

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