Commercial Contracts
Contracts become irrelevant when the business relationship evolves beyond what the contract contemplated. A supplier and manufacturer sign a contract for delivering specific components at fixed prices. Over time, the manufacturer's requirements change. New products need different specifications. Volume increases or decreases. Market prices for materials fluctuate. The parties adapt informally because forcing strict compliance with the original contract would destroy the relationship. They might exchange emails adjusting terms, or simply operate based on mutual understanding that differs from the written contract. The contract sits in a drawer, technically governing the relationship but functionally ignored.
Contracts become weaponized when the relationship breaks down. The same clauses that both parties ignored during the good times suddenly become leverage points when disputes arise. A party scrutinizes the contract looking for technical breaches to justify terminating the relationship or refusing payment. Force majeure clauses that nobody thought about during negotiation become critical when one party wants to avoid its obligations. Liquidated damages provisions that seemed reasonable in principle become punitive when actually invoked. The contract transforms from a framework for cooperation into ammunition for conflict.
The fundamental problem with how most commercial contracts are negotiated and drafted is that lawyers focus on protecting their client from worst-case scenarios rather than facilitating a successful business relationship. Every risk gets identified and addressed through protective clauses. Indemnities for every possible liability. Warranties covering every representation. Termination rights for every contingency. The resulting contract is legally comprehensive and commercially unworkable. Neither party can actually comply with every obligation. The contract creates a relationship based on mistrust rather than cooperation. Paradoxically, the more protective the contract, the more likely it is to either be ignored during good times or weaponized during bad times.
We've seen patterns in how commercial contracts fail across businesses in Kolkata and Mumbai. Price and payment terms generate the most frequent disputes. A contract fixes prices for a specific term. Market conditions change. Input costs increase. Currency values fluctuate. One party gets squeezed. Without a clear mechanism for adjusting prices, the disadvantaged party either breaches the contract or renegotiates under duress. Sophisticated contracts include price adjustment mechanisms tied to objective indices or regular review periods. Most contracts don't, either because the parties didn't consider the issue during negotiation or because they couldn't agree on an adjustment mechanism.
Delivery and performance obligations create another common source of conflict. Contracts specify delivery schedules, quality standards, and performance benchmarks. Reality intervenes. Supply chains get disrupted. Quality issues arise. Performance falls short of expectations. The contract might provide remedies: penalties for late delivery, rejection rights for non-conforming goods, termination for material breach. Actually invoking these remedies often escalates the situation beyond what either party wants. The buyer needs the goods even if they're late. The supplier can't afford the penalties. The relationship becomes adversarial when both parties would prefer to find a workable solution.
Intellectual property provisions in commercial contracts reveal how apparently simple clauses create complex disputes. A company engages a vendor to develop custom software or create marketing materials or design a product. Who owns the intellectual property rights? The contract might say the company owns all IP developed under the contract. Sounds clear. But what if the vendor used pre-existing code or designs? What if the vendor wants to reuse similar solutions for other clients? What if improvements or modifications are developed after delivery? The contract might technically address these issues, but the provisions are often ambiguous or don't anticipate actual scenarios that arise during the relationship.
Confidentiality and non-compete provisions create enforceability challenges. Contracts routinely include broad confidentiality obligations prohibiting disclosure of any information related to the business relationship. Non-compete clauses prevent parties from engaging in competing activities during and after the contract term. These provisions look protective during negotiation. Enforcing them proves difficult. What information is actually confidential versus general industry knowledge? What constitutes competing activity? What geographic scope and time period are reasonable? Courts often refuse to enforce overly broad restrictive covenants. The protective clauses that looked so important during negotiation end up being unenforceable when tested.
Dispute resolution clauses in commercial contracts deserve more attention than they typically receive. Most contracts include arbitration clauses without much thought about how arbitration would actually work if invoked. The parties agree to arbitrate disputes under some institutional rules in some neutral venue. This seems professional and forward-thinking. But arbitration is expensive and time-consuming. For smaller disputes, the cost of arbitration might exceed the amount in dispute. For urgent matters, arbitration provides no faster relief than court litigation. We've seen situations where parties were forced into arbitration that made no practical sense simply because their contract required it.
The relationship between contract terms and actual business practices creates interesting dynamics. Businesses often operate based on course of conduct that differs from contract terms. Payment terms might say thirty days but the parties habitually operate on forty-five days. The contract requires written change orders but the parties regularly implement changes based on verbal discussions. Technically, someone is always in breach. Practically, the relationship works because both parties accept the informal arrangements. Problems arise when one party suddenly insists on strict compliance with the written terms, weaponizing technical breaches that both parties previously ignored.
What makes a commercial contract effective isn't legal sophistication or comprehensive protective provisions. It's alignment between what the contract says and how the parties actually intend to operate. A simple contract that accurately reflects the business deal and provides workable mechanisms for addressing common issues serves the parties better than a complex contract that tries to anticipate every contingency but creates obligations nobody can meet. The goal isn't protecting clients from every possible risk. It's facilitating a business relationship that both parties want to maintain while providing clear frameworks for resolving problems when they inevitably arise.
The test of a commercial contract's value comes when something goes wrong. Does the contract provide a framework for resolving the issue? Do the parties refer to it for guidance? Or do they ignore it and negotiate a solution based on their business interests? If parties consistently ignore their contracts when problems arise, those contracts aren't serving their intended purpose. The contract should be a tool for managing the business relationship, not just documentation filed away until litigation.
