Quick Overview
What are the most common types of commercial contracts? The main types of commercial contracts include the following. The choice of contract depends primarily on what the parties are providing to each other and what obligations they wish to address.
| Type of Commercial Contract |
When to Use It |
| Sales Contract |
When selling goods or other items between businesses. |
| Contract for Services |
For the performance of work, such as construction work or custom software development. |
| Service Contract |
For the long-term provision of services, such as marketing or consulting. |
| Distribution Agreement |
For cooperation between a manufacturer and a distributor of its products. |
| License Agreement |
For granting the right to use intellectual property. |
| Franchise Agreement |
When conducting business under an established brand using its business model. |
| Loan Agreement |
When providing funds with an obligation to repay them. |
Not sure which type of contract will best protect your business? Our attorneys will help you draft a customized business contract tailored to your specific partnership to prevent unnecessary disputes.
What is a commercial contract, and why is it important?
A business contract is a legal agreement between two or more parties. As a legal agreement, it sets forth the terms and conditions of a business transaction between the contracting parties. A business contract may be in written or oral form. However, for legal certainty, it is generally always recommended to enter into a contract in writing. For certain contracts, such as a real estate purchase agreement or a license agreement, the written form is even mandatory.
A properly drafted and executed contract reduces the risk of disputes with the other party. Furthermore, the contract provides both parties with legal tools to enforce their rights should either party breach the agreed-upon terms.
The legal framework for commercial contracts is primarily governed by the Civil Code, which contains general rules of contract law. In addition to the Civil Code, however, other special regulations may also apply to contracts, such as the Business Corporations Act or international legal standards, for example, the Vienna Convention on Contracts for the International Sale of Goods.
The parties are free to decide whether to enter into a contract and what its terms will be. A contract may be amended or terminated only if all parties agree. However, a contract may also be terminated unilaterally in cases where the law permits it (typically, termination due to a material breach of contract).
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Types of Commercial Contracts
Given the large number of entities and their relationships, there is also a wide range of commercial contracts. These differ from one another based on the purpose and subject matter of the contractual relationship. The most common types include the following contracts:
Sales Contract
A sales contract is probably the most common type of commercial agreement that most of us will encounter. It is used for the sale of goods and governs the terms of delivery, quality, price, and warranties.
A sales contract may also include specific terms, such as provisions regarding the warranty period or liability for defects. For example, when companies plan large commercial transactions, it is quite common for them to include payment terms, delivery conditions, and penalties for missing deadlines in the sales contract.
When it’s used: An electronics supplier sells a large quantity of laptops to an online store. You enter into a sales contract with the supplier when you order the goods. At the same time, the supplier enters into contracts with individual laptop manufacturers.
Purchase Agreement Between Businesses
A sales contract between businesses is used, for example, in the supply of goods between a manufacturer, a wholesaler, and a retailer. Unlike in a typical consumer purchase, the buyer in this context generally does not enjoy the special protections afforded to consumers under the Civil Code. This makes it all the more important to pay close attention to the precise definition of the goods, the terms of delivery, and liability for defects.
The contract should clearly specify when the supplier is to deliver the goods, who is responsible for their transportation, when the risk of damage passes, and how any defects will be addressed. The business owner should inspect the goods as soon as possible and notify the seller of any defects found without undue delay. Otherwise, asserting rights arising from defective performance may be problematic.
It is also important to verify whether the supplier’s terms and conditions contain unreasonably strict penalties, limitations of liability, or unfavorable payment terms.
Real-world example: A company orders several dozen computers from a supplier, but the contract does not specify the exact specifications the equipment must meet. Upon delivery, it turns out that the computers do not meet the company’s requirements. The supplier, however, claims to have fulfilled everything that was agreed upon. Such disputes can be prevented by attaching detailed technical specifications directly to the purchase contract.
Contract for Work
This type of contract is used for the execution of projects, such as construction work or software development. The essence of a contract for services is the contractor’s commitment to perform the work under their own responsibility. The client, in turn, undertakes to pay for the work. This type of commercial contract should clearly specify completion deadlines, who bears what responsibility for defects, and how either party may terminate the contract.
When to use it: If an IT company commissions an external vendor to develop custom software, it enters into a contract for work with that vendor.
What to Watch Out For: Disputes in contracts for work often arise, for example, when it is not specified with sufficient precision what the contractor is required to deliver and when the work is considered complete. We therefore recommend specifying not only the specific scope of the work but also the method of its delivery, acceptance, and any rectification of defects.
Service Agreement
Formally, this contract serves as a contract for work or an unspecified contract. This type of contract is most commonly used in consulting, IT services, marketing, or legal services. A service agreement governs the relationship between the service provider and the client and sets forth the terms under which the services will be provided. Key provisions include payment terms, liability for damages, and the option to terminate the agreement.
When it is used: For example, a small business owner might commission a marketing agency to manage their social media accounts on a long-term basis.
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Distribution Agreement
A distribution agreement typically serves to govern the relationship between a manufacturer and a distributor. This type of contract sets forth the terms of product distribution, exclusivity, pricing, and marketing support. Distribution agreements often include provisions regarding the protection of trade secrets. They also frequently restrict the distributor’s ability to sell competing products.
When it is used: An automaker enters into an agreement with local car dealerships regarding the distribution of its vehicles.
License Agreement
This type of agreement is used when the owner of intellectual property (the licensor) wishes to grant a third party (the licensee) the right to use that intellectual property under predetermined terms. It most commonly applies to copyrights, patents, trademarks, or utility or industrial designs. It can be exclusive (the licensor cannot grant the same license to other entities and often cannot use it themselves) or non-exclusive (multiple entities can obtain the license at the same time, and the licensor may use it themselves), and must include terms regarding the license fee, the duration of the license, and the conditions for its termination.
When it is used: A company that manufactures toys obtains a license to produce action figures based on a popular movie franchise.
Franchise Agreement
This type of contract is a legal agreement between the franchisor and the franchisee, under which the franchisee is permitted to use a business model, know-how, brand, and support from the franchisor in exchange for a financial payment to the franchisor. While the franchisor typically provides know-how, training, and support, grants the right to use the trademark and trade name, and conducts marketing and promotional activities, the franchisee adheres to established operating standards, pays franchise fees, and uses exclusively the products and services approved by the franchisor. The agreement thus includes the terms of cooperation, license fees, and rules for operating the franchise.
When it is used: An entrepreneur opens a restaurant under the brand of a well-known fast-food chain.
Loan Agreement
You may have encountered this type of business contract if, for example, you took out a mortgage or a car loan. This contract governs the terms under which one party (the lender) provides funds to the other party (the borrower). The agreement must also specify all interest rates and repayment terms.
When it’s used: A company takes out a loan to have sufficient funds to purchase new production machinery.
Tip for article
Tip: Did you know that the moment you travel by plane or bus, you’ve entered into a contract of carriage? You can learn more about the terms and conditions related to travel in our article.
What is essential in any commercial contract?
It’s best not to look for a template for a commercial contract. Every situation is so specific that it requires careful, customized preparation. The commercial contract templates circulating online may not cover all the necessary information you need. So if you need to formalize a contractual relationship, take advantage of one of our services—which includes contract drafting—and we’ll help you with it.
If we were to look at a commercial contract from a very general perspective, then every such contract should include:
- Identification of the contracting parties – Complete details of the contracting parties, including company name, business ID, tax ID, registered office, names of representatives, and, if applicable, contact information.
- Subject matter of the contract – A clearly defined subject matter of the contract, including a specification of the products, services, or required activities.
- Price and payment terms – Specification of the price, due date, method of payment, and any penalties for late payment.
- Delivery Terms – Delivery dates and method, place of performance, transfer of title, and liability for damages.
- Liability for Defects and Claims – The procedure for asserting claims arising from defective performance, the duration of the warranty period, and options for compensation for damages.
- Penalties for Breach of Contract – Contractual penalties, late payment interest, and other measures protecting the contracting parties against breaches of the agreed terms.
- Termination of the Contract – Conditions for termination, withdrawal, and the option to extend the contract’s term.
- Dispute Resolution – Preferred methods of dispute resolution, such as mediation, arbitration, or litigation.
Do you have a commercial contract ready but aren’t sure if it provides you with sufficient protection? Have our attorneys review it. We’ll examine risky provisions, point out any potential shortcomings, and suggest amendments to help prevent future disputes.
Current Trends in Commercial Contracts
Advances and trends are also making their way into the field of commercial contracts. Technological developments are primarily driving the digitization of contractual processes. One of the most popular tools in recent years has been electronic signatures, which speed up the contracting process and ensure the legal validity of documents. Modern software tools, in turn, enable the automatic generation and management of contracts with minimal human intervention, saving companies a significant amount of time.
Today, virtually no business can operate without a high-quality commercial contract. Let our experts assist you in drafting them; they will carefully define the terms and help you minimize risks. A properly drafted commercial contract ensures that your business transactions proceed smoothly.
Summary
A commercial contract is a legal agreement between two or more parties that sets forth the terms of a business relationship—who will supply what to whom and what they will receive in return. It provides legal certainty, protects against disputes, and governs, for example, delivery terms, price, warranties, and liability for defects. The most common types include a sales contract (sale of goods), a contract for work (completion of an order), a service contract (e.g., marketing, IT), a distribution contract (relationship between a manufacturer and a distributor), a license agreement (use of intellectual property), a franchise agreement (operating a business under an established brand), and a loan or credit agreement (provision of funds). A properly drafted contract must include the identification of the parties, the subject matter of the contract, the price, the terms, liability for damages, and the options for terminating the contract.
Frequently Asked Questions
Can a sales contract be formed by confirming an order via email?
Yes. Unless the law or an agreement between the parties requires a specific form, a contract may also be concluded through electronic communication. It is important that it be clear what the parties have agreed upon and that the draft contract has been accepted.
Is it possible to enter into a single sales contract for repeated deliveries of goods?
Yes. Business owners can, for example, use a framework agreement that establishes common rules for long-term cooperation. Specific deliveries can then be made based on individual orders in accordance with the agreed-upon mechanism.
Can a sales contract between businesses be concluded in a foreign language?
Yes. Business partners may agree to draft a contract in English or German, for example. In the case of bilingual contracts, it is advisable to explicitly specify which language version takes precedence in the event of a discrepancy in interpretation.
What happens if an unauthorized person signs a commercial contract?
It depends on the circumstances and the scope of her authority to act on behalf of the business owner. In some cases, the actions may be binding on the principal—for example, if the principal subsequently approves them or if the legal conditions for protecting the other party’s good faith are met. Therefore, it is advisable to verify the signatory’s authority in advance.
What should you do if two provisions of a commercial contract conflict with each other?
First, it is necessary to evaluate the contract as a whole and determine the actual intent of the contracting parties. If the discrepancy cannot be reliably resolved through interpretation, it is advisable to enter into a written amendment to clarify any ambiguities.
