Drafting and reviewing commercial contracts: essential clauses and mistakes to avoid

Every commercial contract your company signs —for supply, distribution, services, agency or sale— sets out, with the force of law between the parties, who owes what, when, and with what consequences if something goes wrong. Drafting commercial contracts, and reviewing them before signing, is therefore one of the legal decisions with the greatest impact for a business: a precise contract prevents disputes, an ambiguous one causes them. This guide sets out, in an orderly way, what a commercial contract is, what elements and essential clauses it must contain, and the risks of neglecting its drafting.

What a commercial contract is and which rules govern it

A contract is commercial where it is entered into between traders in the course of their business activity, or where the law expressly classifies it as such. Its regime is twofold. Under Article 50 of the Commercial Code, commercial contracts are governed, as to their requirements, interpretation and termination, by the Commercial Code itself and by special laws and, in whatever they do not provide for, by the general rules of common law —that is, the Civil Code. This is why many of the rules set out below come from the Civil Code, even though the contract is fully commercial.

Two principles govern the matter. The first is freedom of contract, or party autonomy: under Article 1255 of the Civil Code, the parties may establish whatever covenants, clauses and conditions they see fit, subject to a single limit —that they not be contrary to the law, to morality or to public policy—. The second is the binding force of what has been agreed: Article 1091 of the Civil Code gives obligations arising from a contract the force of law between the parties, and Article 1258 adds that a contract binds the parties not only to what is expressly agreed, but also to all the consequences which, by their nature, accord with good faith, usage and the law. In commercial matters, Article 57 of the Commercial Code reinforces that duty of good faith in performance. It should be added that, under Article 51 of the Commercial Code, commercial contracts are valid and effective whatever form they take: as a general rule, a written instrument is not a condition of validity, but it is the best evidence of what was agreed.

The essential elements: without them there is no contract

Before discussing clauses, it is worth recalling that a contract only exists where three elements are present. Article 1261 of the Civil Code is categorical: there is no contract unless there is the consent of the contracting parties, a definite object forming the subject matter of the contract, and a cause for the obligation established. The absence of any of them renders the contract void; it does not even come into being.

Consent is the meeting of wills which, under Article 1262 of the Civil Code, is formed by the concurrence of offer and acceptance as to the thing and the cause. The object must, under Articles 1271 to 1273 of the Civil Code, be possible, lawful and determined —or determinable without a fresh agreement between the parties—. And the cause —the economic and legal rationale of the contract, the consideration each party pursues— must exist and be lawful under Articles 1274 and 1275 of the Civil Code. A contract without cause, or with an unlawful cause, produces no effect whatsoever.

The essential clauses of a commercial contract

Once the elements are in place, the quality of a contract is decided in its clauses. These are the essential clauses that, as a general rule, every commercial contract should expressly provide for:

• Object and price. A precise description of the performance —what is delivered, manufactured or provided— and the determination of the price and the method of payment. The price must be fixed or determinable by an agreed objective criterion, and must not be left, as Article 1256 of the Civil Code prohibits, to the discretion of only one of the parties.
• Term, duration and renewal. The date of performance, the duration of the contract and, in continuing contracts, the regime for renewal, notice and termination. A failure to provide for this creates uncertainty as to when the relationship ends.
• Obligations of the parties and guarantees. A clear allocation of obligations, the applicable quality standards and the guarantees —bank, personal or in rem— securing performance.
• Breach and penalty. It is advisable to agree a penalty clause which, under Article 1152 of the Civil Code, replaces damages unless otherwise agreed, quantifying the consequence of breach in advance. Bear in mind that, under Article 1154 of the Civil Code, the court equitably moderates the penalty where the obligation has been performed in part or irregularly.
• Termination of the contract. The power to terminate for breach exists by law in reciprocal obligations under Article 1124 of the Civil Code, but regulating it —defining which breaches give rise to termination and by what procedure— avoids disputes as to its scope.
• Confidentiality. The duty of secrecy over the information exchanged, with its duration and the consequences of any breach, particularly relevant where know-how —undisclosed technical or commercial knowledge— or sensitive data are involved.
• Governing law and jurisdiction or arbitration. Relying on the freedom of contract in Article 1255 of the Civil Code, the parties must decide where and how disputes will be resolved: by express submission to a given court, permitted by Article 55 of the Civil Procedure Act, or by an arbitration agreement under Law 60/2003 of 23 December on Arbitration. In contracts with a foreign element, this decision takes on a dimension of its own, which we analyse in detail in our guide to the key clauses of an international contract.

When consent is defective: mistake, fraud, violence and intimidation

A contract may have all three elements and still be challengeable if consent was given defectively. Under Article 1265 of the Civil Code, consent given by mistake, violence, intimidation or fraud is void. Mistake invalidates the contract where it concerns the substance of the thing or the essential conditions that prompted its conclusion, under Article 1266 of the Civil Code. Fraud —defined in Article 1269 of the Civil Code as the insidious words or manoeuvres by which one party induces the other to contract— vitiates consent where it is serious and decisive. These defects do not render the contract void ab initio, but voidable: the action to set it aside, under Article 1301 of the Civil Code, lasts four years. Careful drafting of the parties' representations and warranties significantly reduces the risk that, later, one party alleges having contracted by mistake or deception.

The risks of a poorly drafted contract or generic templates

The most costly problems rarely arise from an obviously unfair clause; they arise from silence and ambiguity. Where the contract does not provide for a situation, the gap is filled by default law, which does not always match what the company would have wished to agree. And where a clause is unclear, Article 1288 of the Civil Code provides that its interpretation shall not favour the party who caused the obscurity —a rule that usually harms whoever drafted the contract carelessly—.

Generic templates downloaded from the internet concentrate these risks. They are usually designed for a different type of transaction, refer to repealed or foreign legislation, mix mutually incompatible clauses and omit precisely the specific provisions of the particular deal. A contract that does not fit the actual transaction is a source of latent conflict: the parties believe they agreed something the text does not say, or says differently.

Reviewing the contract before signing

Hence the value of a legal review before signing. Reviewing a contract is not correcting spelling: it is verifying that its essential elements are present, that its essential clauses are complete and consistent, that it allocates risk in a balanced way and that it provides an orderly exit for each breach scenario. A contract lawyer identifies what is missing —not only what is superfluous— and translates the company's commercial intent into a text that protects it when disagreement arises. That work, done before signing, costs a fraction of an avoidable dispute.

How we help with drafting and reviewing commercial contracts at RCM Legal

There are two recurring mistakes that, in practice, generate most contractual disputes: signing generic templates that do not fit the transaction, and neglecting the clauses on breach, termination and dispute resolution —precisely those invoked when the relationship goes wrong. The difficulty lies not in drafting what the parties want while everything runs smoothly, but in anticipating with precision what happens when something fails; a contract that does not answer that question leaves the company exposed to litigation of uncertain outcome.

At RCM Legal, lawyers specialising in commercial law in Murcia, we draft and review commercial contracts tailored to each transaction —supply, distribution, services, agency, sale or confidentiality—, negotiate their clauses and verify their robustness before signing, for both SMEs and large companies. If you are about to sign or negotiate a contract that matters to your business, tell us about the transaction and we will tell you how to protect it.