Commercial contracts are essential tools for many companies to formalize particularly important business transactions. This occurs, for example, when the obligations assumed are complex, the amount involved is significant, the business relationship is intended to extend over time, or a breach by one party could cause significant financial harm to the other.
As long as both parties fulfill their obligations, the contract primarily functions as the framework governing the business relationship and as a safeguard providing security regarding the agreed-upon goods or services. However, the real difficulty arises when any of the contractual obligations are breached or not properly fulfilled.
In such a scenario, the party that considers itself aggrieved will undoubtedly seek to ensure that the formalized business agreement is fulfilled in its entirety. Thus, the contract becomes the primary tool for enforcing the fulfillment of an obligation or consideration. If such fulfillment is not obtained voluntarily, the affected party may resort to legal action, either to enforce the agreed-upon terms or to claim penalties and damages arising from the breach.
It is precisely at this moment that the essential clauses of any commercial contract take on special relevance. These clauses must clearly define the obligations and considerations of each of the participating companies, as well as the manner in which they are to be performed—that is, how, when, and where. They must also precisely establish the price or method of payment, the duration of the contract, the penalties or sanctions applicable in the event of breach, and the mechanism provided for dispute resolution.
This last aspect is particularly important, as the contract must specify whether disputes will be heard by the ordinary courts or whether the parties have agreed to submit to arbitration. In the latter case, the dispute will be resolved by an arbitral tribunal, under the terms agreed upon.
All of the above is fundamental because it is precisely these elements that will allow for an assessment of the merit of a potential claim, the type of evidence that will need to be presented, and the jurisdiction in which the dispute will be heard and resolved. Based on this, it is also possible to estimate the approximate duration of the litigation and the associated costs, which, as a general rule, are initially borne by the party initiating the action.
Despite the importance of these aspects, one of the most common mistakes is that contracts are reviewed in detail only when the need to enforce them arises, and not before they are formalized. This often occurs because companies seek to close deals as quickly as possible and because, in many cases, good faith prevails in commercial relationships. However, as part of proper risk management and mitigation—including potential financial losses resulting from a possible breach of contract—it is always advisable to carefully review these clauses before signing.
When the wording of these elements is deficient or incomplete, various issues may arise, including:
- The rejection of a claim because the obligations alleged to have been breached are not clearly defined.
- The difficulty of proving that an obligation or consideration was not fulfilled, since the manner in which it would be deemed fulfilled or breached has not been established.
- The absence of a contract term, which can create uncertainty regarding when certain obligations become enforceable.
- Lack of clarity regarding whether the contract could be renewed or if it was strictly for a fixed term.
- Filing a lawsuit in a regular court when the contract included an arbitration clause, which could lead to the case being dismissed.
- Lack of precision in defining the arbitral tribunal’s jurisdiction, which can result in unnecessary costs, such as paying arbitration fees and expenses without obtaining a ruling on the merits of the dispute.
The aforementioned difficulties, in addition to entailing higher legal costs, also result in a drain on human resources within the company, delays in resolving the issue, and the potential suspension of the delivery of the goods, services, or consideration that gave rise to the transaction.
In this context, the importance of a comprehensive legal review of contracts formalizing business transactions is reiterated—beyond mere compliance with formal requirements—to ensure they contain the essential elements that will allow, if necessary, for the proper performance of the contract and the pursuit of a solid claim before judicial or arbitral tribunals.
Timely review and proper drafting of contractual clauses can make the difference between a difficult-to-resolve dispute and a legally sound claim.