Contracts can be boring. I rarely walk into a cocktail party and hear folks wanting to talk about contracts. Actually, I do. As a lawyer folks actually do want to talk about this subject that most of society finds boring.
Love them or hate them contracts are key parts of our business loves. In today’s article we’re going to explore 10 key contract clauses to know. Knowing these 10 Clauses will allow you to better focus on the future of your business and it’s success. With this guide you negotiate better contracts that are more meaningful that will help to get you to your business goals.
While it seems pretty basic one of the key terms in all of your contract is who are the parties.
Who is legally bound to the agreement?
This becomes particularly important with respect to personal liability. Is an LLC or a corporation bound to the contract or is the individual bound to the contract? This could make a big difference in the event of a litigation. You can generally only sue the party that signed the contract – so that makes a big difference.
Connected to this is looking at the asset base of the persons persons bound by the agreement. Does the LLC you’re signing the agreement with actually have assets? Will they be able to pay you damages for your losses if they don’t perform a contract? Or would you be fighting a litigation to get a piece of paper that said you won which cannot be turned in the money?
In many situations we may want parties to have personal guarantees. This would mean that an LLC’s obligations, for instance, will be backed up by the assets of the owner of said LLC. The key here is to think in terms of who’s going to be responsible in the event something goes wrong.
So know your contract parties and your path to collect if things go wrong.
Another key term, often found at the end of the contract, is the termination clause. Despite its typical placement at the end this is a key contract item. If something goes wrong with the contract you are probably wanting to get out. And that’s when many people look at the termination clause for the first time.
The termination clause provides what causes the contract the end. It’s often tied to the passage of time (one year, two years, etc.) or the completion of a project. And while these types of termination events work fine in most cases, sometimes things go wrong. Maybe the other person doesn’t do their part or they do something unexpected or bad and you want out of the contract with them. When you no longer want to be in a relationship with somebody you want to be able to terminate the contract.
Typically what parties do in such cases is allow a termination for “cause”. Cause is usually defined in the agreement and when a “cause” event happens the contract can be terminated sooner than otherwise.
So you’ll want to look at a termination provision understand how to termination works. You should do some what if gaming to determine whether you’ll be able to get out of the contract if the situation changes.
3. Dispute Resolution
Usually buried towards the end of the contract is the dispute resolution provision. This tells you what happens if you end up in a dispute with the other party. And while it seems somewhat mundane whether you do mediation, arbitration or litigation it can have a real effect on the outcome and how taxing the dispute process is for you.
For instance, I encourage my clients to use arbitration in many cases when there’s a routine repeating contract of low significance to the long-term operation of the company. This is because the arbitrations are typically private and they could be more controlled than a standard litigation. But for bigger issues that may really affect the company and it’s long-term future, it’s often good to have all the process of a full-blown court litigation along with the safeguards of appeals. Appeals usually aren’t available in arbitration.
When you review and negotiate contracts know what dispute resolution process will be used in the event you end up in a disagreement, and think about whether that meets your business needs.
4. Merger (Integration) Clause
In most contracts you’ll find a merger (also referred to as an integration clause) which provides that all prior agreements among the parties are brought together in this agreement. This is usually desirable because we want a contract that is complete and is the only document governing the relationship among the parties for that particular item. Talk about confusion if multiple documents governed the relationship!
However, you when you use an integration clauses you need to be careful that everything is spelled out within the contract. Sometimes parties forget to include something or have a side deal. The merger clause could prevent you from bringing in evidence of such additional agreements.
For instance, if there was a bonus or additional offer that was made to induce you to enter into the contract, not putting those bonuses or offers into the contract might mean that such offers are not legally enforceable. Also, the overly broad use of a merger clause may eliminate an agreement previously entered into by the parties that was intended to continue.
Suppose, for example sake, that Party A and Party B entered into Contract 1 with respect to vehicle maintenance. Later Party A and Party B entered into Contract 2 with respect to building maintenance. An improperly worded merger clause in Contract 2 could accidentally wipe out Contract 1 where the parties is intended to continue Contract 1.
The important point is to remember that the merger clause language needs to be looked at to make sure it works in the context of the parties’ agreement and intentions.
5. Governing Law
Most contracts will contain a clause that says which law (state or otherwise) will govern the contract. It’s important to understand this because in the event of litigation courts often will respect that clause and use that law in the litigation. And sometimes there is a substantive difference between the laws of different states that could change the outcome.
Because of this we want to understand whose laws being used, why they are being used, and make sure it’s optimal for our situation.
Many commercial agreements contain one or more clauses on confidentiality. It’s standard that you want to keep sensitive information among the parties without leaking it out to third parties.
What’s important here is to think about the scope of the confidentiality. Is it too broad or is it too narrow? For instance, some parties may not want everything they say between themselves to be confidential but they might want to make discussions about the super secret missile project confidential.
An overly broad confidentiality clause in such a case could be an administrative burden (figuring out what’s in and out) and lead to unintended violations.
You should really review the confidentiality in light of the business deal and make sure it makes sense.
7. Non-Compete and Non-Solicitation
Many agreements will call for non-competition and/or non-solicitation clauses. The non-competition clause prevents a party from competing against the other using the information from their prior relationship for some period of time. The non-solicitation clause typically prevents one party from taking the employees, customers or other commercial relationships of the other party for some period of time.
Both are generally important clauses to include in an agreement and both have a lot of commercial protection for the parties.
Because they can do so much we want to think carefully about them, particularly if we are the person restricted. Is the non-compete overly restrictive? Does it allow us to move on from the business relationship with the skills and relationships we built? Can we still make a living or get revenue for a business if this contract ends?
Another provision that is common in contracts is the indemnification provision. What the indemnification does is shift risk from one party to another. It’s often appropriate in commercial arrangements to understand who is taking the risk for various actions.
A indemnification provision typically kicks in when one party to the agreement violates the rights of another person or entity, typically a non-party to the agreement. For instance if both Party A and Party B sign a contract and Party A violates the rights of party C, typically Party A will agree, through the indeminificaiton provision, to pay back any expenses incurred by Party B because of Party A’s missteps.
These indemnification provision can be very powerful. But we won’t understand where the risks are allocated and make sure that our insurance is aligned with these arrangements.
Another key clause in contracts are non-violation provisions. These provisions typically provides each of the parties will not violate agreements with other parties. It Party A and Party B are entering into a contract it is not uncommon for Party B to want to be sure that Party A is not breaking a contract with another person by entering into the agreement.
Before signing an agreement with such a provision each party should make sure they can do so.
Another key provision in contracts is the scope, geography and coverage of the contract. Usually won’t have a particular clause or heading that refers to this. However, there’s typically language in the contract that talks about who is responsible for what and for geography.
For instance in a book deal, there’s often a provision with respect to the rights to distribute the book in various countries and regions of the world. If you’re the author it’s important to know which scope and geography your publisher or distribution company is taking responsibility for.
You want to look carefully at such provisions and make sure they match your expectations.
Contracts are often complex from the outside. But usually they’re just a grouping of different legal arrangements all in one document and should be thought of as such.
I hope that you found this overview helpful that helps you better understand what the key parts of contracts are. By understanding these 10 items you’ll be a better negotiator for your next contracts.
NOTE: I am a lawyer currently licensed in 12 states and Washington, DC. In this article I have discussed general concepts of law. While we have attempted for accuracy the laws of your state or jurisdiction may be different. Additionally the nature of this article does not permit me to give you the type of one-on-one advice that is tailored to your situation you should expect from an attorney. As such you should not view this article as legal advice and should consult your attorney before taking any legal action including using the discussion in this article.
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