Defining a Commitment Agreement
A Commitment Agreement is a legal contract used to formalize an agreement between two or more parties. The document generally outlines the commitments of each party, their responsibilities, and the consequences for failing to uphold their obligations. Commitment agreements come in a variety of forms, including but not limited to; Contracts, Letters of Intent, and Memorandum of Understandings.
In business transactions, a commitment agreement may be used to solidify a purchaser’s serious intention to acquire a product, service, or asset from a seller. We have all signed a Letter of Intent or Letter of Agreement when purchasing a home or piece of property and those essentially are forms of commitment agreements .
When seeking a bank loan, a bank may enter into a commitment agreement that provides for certain terms and conditions under which the borrower will borrow money and the lender lends. Essentially, a commitment agreement is a legally binding agreement between parties that outlines the intention and expectations of each party.
Commitment Agreements are particularly useful in the private business setting when one or multiple investors are looking to invest in a business and would like to bring in rules that govern the investors behavior (i.e. non-compete agreement). Legal Counsel would be best to provide insight in deciding whether a Commitment Agreement is appropriate based on the given circumstance.
Essential Components of a Commitment Agreement Template
A well-drafted commitment agreement template is a comprehensive legal document. To ensure that all essential components are covered, it is helpful to separate the areas they should address into different groups:
Parties Involved – The parties that will be involved in the commitment agreement template. These are usually separated into 2 groups:
Terms and Conditions – A brief listing of all the terms and conditions associated with the commitment.
Obligations – The obligations each party will have under the agreement.
Termination – The conditions under which the commitment agreement template will end.
How to Develop a Commitment Agreement Template
The whole point of developing a commitment agreement template is … well, to not have to draft so many individual commitment agreements in the future. So, we want to make this one count. How do we do that?
The process for developing a commitment agreement template is this:
- Read through the commitment agreement (or confidentiality agreement) document text of interest to you.
- Determine the language that is standard in the context of this type of agreement, and what language can be added to address your particular concerns.
- Begin drafting the template using carefully chosen standard language, as well as the additional clauses, sections, or specific definitions you are adding. (I only draft three, max four, drafts of a commitment agreement.)
- Share the template with interested parties and ask for their input.
- Revise the template and send it out to be used.
- Revise it again, or revise it upon request from your contact.
- File the template away to be used again.
When drafting a document template, it’s important to "save as" the document under a new name, e.g. using 15a-commitment-agreement-template.doc. That way, if the template is lost or erased, you aren’t stuck searching for the original (and there is no "ok, [lawyer] I need a new commitment agreement template") and if parts of the document have been changed, you aren’t left trying to "fix" (old) parts of the template you might want to keep, as well as parts that are, appropriately, different.
There is no hard and fast rule about length of commitment agreement templates (or documents in general). For simplicity, I might have a sample commitment agreement document that is only a page or two, but the general length of each document template and, specifically, each agreement template really depends on writer/editor’s recommendations, as described above.
Blackline document edits, or document comparisons, can be useful in developing a commitment agreement template, when working with other document management software. The same strategies suggested above apply to the revision process for your commitment agreement template.
Uses for Commitment Agreements
Commitment agreements are employed in a variety of circumstances. Their most common applications are in the sale of real property, loan transactions, merger and acquisition deals, employment contracts and partnership agreements.
In the real estate sector, commitment agreements are standardly used in commercial leases and purchase and sale agreements. Here, lenders and customers must typically execute a commitment letter so that the lender can secure a loan to finance a real estate deal. Thanks to the commitment agreement, the lender can preserve its capital and help customers procure a new home.
Within the commercial sector, commitment agreements are used between investors, business partners and shareholders. Often, the forms help act as a verbal contract prior to the finalization of a sale, as well as help execute transactions that will take place over a long period of time. In recent years, craft brewers have increasingly added the forms to their contracts.
In short, commitment agreements are used in nearly every industry.
Legal Implications of Commitment Agreements
In the context of commitment agreements, there is no shortage of potential traps that the untrained eye could miss. First and foremost, the most important consideration is whether the commitment agreement will be enforceable against the particular sales agent. Many factors play in to this, including the compensation model offered to the independent sales agent. This is particularly true where a compensation model is based on specific performance targets. It is essential to draft the agreement to avoid problems down the road, even if a contract is signed, sealed and delivered by any particular applicant.
The following is a partial list of issues to consider when drafting commitment agreements:
• Are key terms, such as the term of the agreement, salary, bonus opportunities , duties and responsibilities clearly set forth in the agreement?
• Is there the same understanding as to the nature of services to be performed by the sales person as well as the geographic territory?
• Have the symbols commonly used in the particular industry (such as assets under management) been clearly defined?
• Has the requisite minimum salary or any other benefits been provided to allow a particular sales person to pass muster?
• Does the language conform to the practice of the industry?
• If the sales person will be subject to non-solicitation provisions, are they reasonable in scope, both individually and in the aggregate?
• Has the entire document been reviewed to eliminate clauses which could not be enforced in a particular state?
By taking these and other issues into account, one can begin to mold a commitment agreement template and avoid the pitfalls often associated with their enforcement.
Commitment Agreement Template Example
Below is a simple commitment agreement template that you can use for your practice. Again, this is an example only and it is highly recommended that you modify the commitment agreement and consult an attorney regarding any templates you may use in your practice.
COMMITMENT AGREEMENT
This Agreement is made and entered into as of this ___ day of ____________, 20__, by and between [name of firm] ("Firm") and _______________ ("Lawyer").
1. Commitment to Accept Cases.
(a) Firm hereby commits to pay Lawyer a portion of its revenues generated from legal services rendered to clients of the Firm who are referred to the Firm by Lawyer and enact a formal fee-shifting agreement with Lawyer (a "Client"). Such a referral constitutes a "new client," and Firm commits to pay Lawyer 10% of the fees generated from the first $100,000 of legal fees paid from the Legal Services Agreement (the "LSA") signed by the Firm and Client, and 8% of the fees generated from legal fees in excess of $100,000. As exemplified above, the amount of the fee-shift paid to Lawyer is contingent on what the total amount of legal fees are, which may require additional work on the part of Lawyer to determine. Accordingly, upon execution of this Agreement, Firm commits to diligently inquire with each new client of the Firm about whether or not they signed an LSA, and if so, to make inquiries to determine the amount generated from the first $100,000 of legal fees paid under the LSA and the amount in excess of the first $100,000. Upon receipt of that information, Firm will provide payment to Lawyer in accordance with the provisions of this agreement.
(b) If the amount of legal fees generated during the pendency of this Agreement is not known because Client’s LSA has not yet been executed, then Firm makes a good faith estimate of the total fees being paid, and will pay the amount of needs-shifted revenue as if the maximum fee-shift provisions were in effect. Any amounts overpaid with a good faith estimate will be recouped from payments to be made hereunder until such overpayment is fully recouped.
- Duration. This Agreement will remain in force and effect, and the Firm’s obligations hereunder shall continue, until the client law firm terminates the relationship with Lawyer, or until such time as Firm may terminate this Agreement with 30 days notice to Lawyer.
- Amount of Payment. Payments shall be made no less frequently than once a month, by the [NOF] of the Firm, unless otherwise agreed to by Firm and Lawyer.
- Informed Consent of Client Required. It is understood that the fee-shifting provisions of this Agreement apply when the client for Firm has entered into an LSA with Lawyer, and the Firm has taken all reasonable steps to inform its client about the referral to Lawyer and this Arrangement to share revenues.
Advantages of Implementing a Commitment Agreement Template
Consider the following benefits of using a preformed commitment agreement lender template:
Time-saver
A great benefit of using a preformed lender commitment agreement template is that you will save a lot of time. You will no longer be spending time trying to figure out what is needed by reviewing a standard form commitment agreement over and over again. Instead you will know exactly what is needed after completing the lender’s templates several times.
Moreover, if you begin to create the lender’s own templates for the various contingencies that are the basis for the lender’s commitment, you can save even more time when completing your lender’s work .
Reduction of Errors
Because you will be using a preformed commitment agreement template (which now fits your lender), not only will you save time but you will be able to reduce errors because many questions have been answered and you will likely have a good idea of whether you will obtain the lender’s required signature on the commitment.
Keeping Track of All Required Information
The lender’s commitment agreement template will not only make it easier for you to complete the lender’s form, but you have a checklist of all the information, including representation and warranties, that has be obtained or will be obtained (usually) before the signing of the loan documents.