If you want your agreement to be legally binding, you must know how to write a financial contract correctly. Contract management software makes this process more efficient and helps avoid common challenges. Here are some tips on how to write a financial contract with an automated management platform.
What are Financial Contracts?
Financial contracts allow individuals to negotiate securities, commodities, currencies, or other financial or economic interests. This form of contract is used to buy, sell, lend, swap, or repurchase assets within the financial market. The rights and duties of these agreements are governed under financial contract law. Depending on the type of financial contract your business enters, you will need to draft a variation that works for your specific purpose.
Economic assets that are included in financial agreements are:
- Interest or other rates
- Other economic or financial interests
How to Write a Financial Contract?
There are some key clauses in financial contracts that must be present in order for your agreement to benefit your organization. These clauses will prevent the other party from violating the terms that they agreed to and serve to ensure that your contract is upheld in court. You must take care when drafting a financial contract and ensure that all key clauses are present. Otherwise, your company could face serious monetary losses or legal penalties.
The key elements of a financial contract include the following terms and provisions:
Identification of Parties
This clause states who is legally bound to the agreement. You will want to be sure to include whether you and the other parties are LLCs, corporations, or individuals, as this could make a significant difference if litigation occurs. When identifying parties, it’s important to include whoever will be responsible if something goes wrong since you can only sue the party who signed the document.
Purpose of the Agreement
For a legally binding financial contract to exist, there must be a purpose or something being exchanged between the two parties. This section will cover whether you and the other party are trading currency, commodities, securities, etc. It’s critical to be specific when stating the purpose of your agreement, as you can only collect damages for whatever is included in the document, which could create trouble for your business if you slip up and put less than what was actually being exchanged.
A simple but necessary clause of a financial contract is the dispute resolution clause. This section gives you direction on what happens if there’s a disagreement between you and the other party.
A dispute resolution can go in one of three directions- mediation, arbitration, or litigation. Since arbitrations are typically handled between the two parties privately, they’re best suited for contracts with less monetary value, whereas litigations are better suited for agreements with more at stake.
Another key term of financial contracts is the termination clause. This clause determines what circumstances cause the contract to be voided. Typically, termination is determined by a specific time period or the end of a project. However, if an unexpected issue arises, it’s vital to allow termination for “cause” in your agreement. This means that if one party doesn’t follow through with their obligations, such as their agreed-upon payment, or does something against the terms, then the agreement can be terminated.
Governing law is the clause that says which state’s laws will govern the financial contract. In the event of litigation, the courts will defer to whatever state’s law is written in the agreement. Even though this section seems minuscule, it’s important to take caution because state laws vary greatly regarding monetary contracts.
Indemnification shifts the risk from one party to the other. This clause is important in financial agreements between corporations to understand who is taking the risk for what. For example, if both company A and company B are bound to a contract, and company A violates the rights of company C. Company A agrees to pay back the expenses that company B incurred due to company A’s mistake. This clause can be a little hard to grasp, but it’s essential to include it if you want to avoid paying for the other party’s mistakes.
The non-violation clause provides that by entering an agreement with each other, they are not violating the terms of a previous agreement with another company. For example, when you agree to hold your company’s securities with one financial institution, they might include a non-violation clause in your contract. This ensures that you don’t have securities with another company that prohibits you from doing business with other financial institutions at the same time.
Common Pitfalls of Creating and Managing Financial Clauses in Contracts
- They are high-risk and high-value, making it necessary to handle them with great caution
- State, industry, and fiduciary compliance regulations are often complex and overlooked by individuals
- Sensitive customer information and privacy regulations require increased data security
- Audit-ready records need to be readily available due to strict internal and external financial audit guidelines
- Lack of centralized cloud-based storage across departments leads to poor financial agreement visibility
- Financial agreements need to be updated and monitored throughout their lifecycle, which many businesses fail to keep up with
The Advantages of Automated Contract Management for Financial Services
Contract management for financial services is often a tricky task that requires copious amounts of time, money, and resources. Many institutions still rely on manual management practices, which leads to financial agreements not meeting their full potential or even accidental breaches. An automated finance contract software allows businesses to create financial agreements with less effort and manage them efficiently throughout their lifecycle.
Some of the benefits of using contract management software for financial agreements include:
- Complete visibility into the contract process and administration
- Easily identify financial risks and assess the probability and effects of it using data-driven insights
- Locate cost-saving opportunities, unpaid revenue, and under-performing agreements
- Ensure accounting compliance by automatically tracking key dates and terms and keeping an accurate record for audit purposes
- Automatically keep an accurate record of key dates and terms for auditing and accounting purposes
- Pre-made templates that allow for any financial agreements to be drafted effortlessly
Financial agreements are necessary for every business. By following our tips, you now know how to write a financial contract correctly with contract management software. Good luck!