How to Draft Commercial Contracts That Protect Your Business and Enable Growth

Commercial contracts are not just legal documents. They are commercial instruments that define how a business deals with its customers, suppliers, partners and competitors. Done well, they protect the business, allocate risk fairly, and create the foundation for growth. Done poorly, they create exposure, friction and disputes. Here are the principles we apply to commercial contract drafting.

Start with the commercial deal

Most contract problems start with unclear commercial intent. Before drafting begins, the parties should be clear on:

• What is being delivered, and by whom
• The price, payment terms, and payment mechanics
• The timeline, milestones and key dates
• The performance standards expected
• Who bears which risks
• What happens if performance fails
• How long the relationship will last
• How disputes will be resolved

A clear term sheet or summary of key terms shortens drafting time and reduces misalignment.

Write for the reader

Contracts are read by the parties who signed them, by their successors, by judges, and by counterparties' lawyers years after signing. They should be:

Clear. Plain English, where possible. Avoid unnecessary legalese.

Structured. Logical headings, numbered clauses, and consistent defined terms.

Specific. Avoid vague concepts ("reasonable efforts" can mean anything; specify what is actually required).

Complete. Cover the issues that will matter, including those that may not have been negotiated.

Key clauses that matter

Definitions. Establish a clear set of defined terms. Inconsistency in definitions is a frequent source of dispute.

Scope of services or supply. What exactly is being delivered? Define it specifically. Use schedules and specifications where useful.

Price and payment. When is payment due? In what currency? With what consequences for late payment? GST treatment?

Term and termination. How long does the contract run? What rights do the parties have to terminate? What happens on termination (handover, transition, post-termination obligations)?

Performance standards. Service levels, KPIs, response times. Make these measurable.

Warranties. What is each party promising about themselves and their performance?

Indemnities. What specific risks will one party take on behalf of the other?

Liability caps and exclusions. Most commercial contracts cap liability and exclude certain types of loss (consequential, indirect, lost profits). The level of the cap and the scope of the exclusions are heavily negotiated.

Insurance. Often required, with minimum levels of cover specified.

Intellectual property. Who owns IP created during the contract? What licences are granted? What happens on termination?

Confidentiality. Standard, but check the duration and scope.

Data protection and privacy. Increasingly important, particularly where personal information is shared.

Force majeure. What happens if performance is prevented by external events (pandemic, war, regulatory change)?

Dispute resolution. Negotiation, mediation, arbitration or court? Choice of law and jurisdiction?

Boilerplate. Notices, assignment, severability, entire agreement clauses. These matter more than they look.

Risk allocation

The most negotiated parts of any contract are usually the risk allocation clauses: warranties, indemnities, liability caps, exclusions and insurance. The principles to apply are:

• Each party should bear the risks they are best placed to manage
• Risk should be priced (parties taking on more risk should be compensated)
• Indemnities should be specific, not open-ended
• Liability caps should be commercially proportionate to the value of the deal
• Exclusions should be clearly drafted to avoid ambiguity

Common pitfalls

Pitfall 1: Using last deal's contract. Templates need updating for each new deal. The risk profile, scope and counterparty are different.

Pitfall 2: Vague performance standards. "Best efforts," "reasonable timeframes," "industry standard" all invite dispute. Be specific.

Pitfall 3: Inconsistent defined terms. A defined term that means one thing in clause 4 and another in clause 12 creates ambiguity.

Pitfall 4: Mismatched warranties and indemnities. Warranties without indemnity protection, or indemnities without supporting warranties, create gaps.

Pitfall 5: Inadequate termination rights. Forgetting to plan for what happens at the end of the contract is a common error.

Pitfall 6: Boilerplate that does not match the deal. Standard boilerplate clauses can be inconsistent with negotiated provisions. Check carefully.

Pitfall 7: Schedule drift. Schedules that drift from the body of the contract, particularly when negotiated separately. Read the whole contract together.

Practical drafting tips

• Use plain English where possible
• Number clauses logically and use cross-references sparingly
• Define terms once and use them consistently
• Use schedules for technical content
• Run a clean read-through after final negotiations to catch inconsistencies

How Luma Legal can help

We draft, review and negotiate commercial contracts across a wide range of industries. Our focus is on contracts that work for the business, not just for the lawyers, balancing protection with practicality. Whether you need a new template, a one-off agreement, or help negotiating a high-value deal, we can help.