Contracts are an important part of every business. These can take the form of leases, franchise agreements, licensing agreements, purchase orders, sales contracts, service agreements, supply agreements, order forms, and promissory notes—to name a few.
Contracts govern the relationships between your company and vendors, customers, and employees. You need agreements that are drafted to protect your business and mitigate risks. Let’s look at some standard clauses included in business contracts, and why you should have an experienced attorney help you in negotiating these terms.
Indemnification clause. This clause is a critical component of every business contract. To indemnify someone means to make them whole, to compensate for the losses they may have experienced. This clause details how far that obligation extends to compensate the indemnified party. It’s a risk allocation tool that allows both sides to do the following:
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Modify the amount of risk they’re willing to accept;
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Shield themselves from lawsuits and damages; and
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Hold the other party accountable in the event that something goes wrong.
As the indemnification clause can have a significant effect on both parties, it can be the most rigorously negotiated section of the contract. That alone is a particularly good reason to work with an experienced New York small business attorney. You don’t want to be on the wrong side of a poorly drafted indemnification agreement.
Limitations of liability clause. This clause limits the amount that a party must pay to the other if the latter incurs losses because of the business contract. In addition, the clause will limit the types of compensation a party can recover from the other. This type of clause typically covers losses caused by negligence, breach of contract, infringement of intellectual property rights, or misrepresentation. It can set a hard dollar amount on losses (for example, $5,000) or it can exclude types of losses (for example, punitive damages).
Confidentiality. Also called a “non-disclosure” clause, this term is crucial to protect your company’s trade secrets, proprietary data, clients’ confidential information, sales and marketing initiatives, along with any other info you want to shield from the public. This defines what information is considered confidential, how each party must act to protect it, when it can be disclosed, and what happens if it is disclosed improperly. This is very important for protecting consumer information (for example, banking and credit card information) as well as the identity of your prospect list, marketing campaigns, and the like.
Use restrictions. You can limit how the other party uses your trade secrets, creations, and other confidential info with this type of clause. It states when the other party can use your confidential information and how they’re permitted to disclose your confidential information to third parties. For example, some of the use restrictions you can place on the other party are (i) modifying, reverse engineering, and creating derivative works based on your product or idea; and (ii) receiving, storing, accessing, viewing, or using confidential information for any purpose other than the authorized use.
Termination. This clause sets out how the parties can terminate the agreement and the way in which a party can terminate within a specified notice period.
Warranties and disclaimers. This clause protects your business from liability if the other party has a negative experience with what you’ve provided to them to honor your side of the contract. This clause can place a cap on the amount that the other party can claim if they aren’t satisfied with what you’ve delivered.
Dispute resolution. This clause sets out the way in which the parties will resolve any disputes that may stem from their agreement. One or more different methods of dispute resolution can be specified, including:
Negotiation: This is the least formal type of dispute resolution in which the parties come to a consensus on their own with the assistance of a neutral third party. After the negotiation, parties can begin litigation to obtain a legally enforceable judgment.
Mediation: Also an informal type of dispute resolution, mediation is similar to negotiation, but it involves a professional mediator as the neutral third party.
Arbitration: This is the most formal kind of dispute resolution. It is moderated by professional arbitrators, and the parties adhere to the rules in their arbitration agreement. The result is usually binding; as a result, the parties can’t initiate litigation afterward.
Force majeure clause. This clause removes liability for unavoidable and unexpected events beyond either party’s control, such as:
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An “act of God” (typically thought of as natural disasters, fires, hurricanes, and even pandemics);
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Wars or labor strikes; and
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Government actions restricting or prohibiting any party from performing its contractual duties.
Takeaway
Your contract needs to include these important terms, and they should be negotiated in your favor or, at a bare minimum, in a fair manner.
The review and negotiation of business contracts are typically not expensive, especially by an attorney who has experience in commercial transactions. The small amount spent upfront doing this can potentially save you thousands of dollars, as well as avoid a great deal of unnecessary stress later.
Contact LOVE LAW FIRM where we dedicate our practice to serving entrepreneurs, start-ups, and small businesses.
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Terminating a Business Contract - What Small Business Owners Need to Know
Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM, PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
