Businesses continually enter into contracts as a routine part of conducting business. Most of the time, everything goes according to the parties’ expectations, and the contract itself is just a formality. It’s usually when something goes wrong that the actual terms of the contract becomes important.
When business contract clauses are drafted properly, the parties should be able to resolve differences with a minimum of conflict and delay. The business litigation attorneys at Feldman & Feldman recommend these 13 essential clauses every business contract should include, as well as what to do if you need help clarifying expectations, minimizing disagreements, and protecting your business interests.
Why Contract Language Is Critical to Success in Business
The language chosen when drafting a business contract has everything to do with efficient performance. Problems can arise when the language used is ambiguous or not sufficiently specific. Failing to adequately proofread language before executing a contract can lead to unintended disputes that could have easily been avoided.
When contract disputes arise, the first place to look for resolution is the contract itself. Assuming the parties have a valid contract, the focus moves to the contract language to understand what the parties intended.
The words used in the contract are given their most common meaning – what a reasonable person would understand them to mean.
It is only when analysis of a contract’s language cannot resolve the disagreement that information outside the contract, such as prior dealings or surrounding circumstances, is necessary to determine intent. If business contracts use language that is unclear or fails to address potential issues, resolving disputes can end up costing time, money, and relationships.
So many problems can be avoided when care is taken to ensure the language used in a business contract is clear, accurate, and thorough. Plain language should be used and terms defined that are not generally understood or could be interpreted to have more than one meaning. Contracts should always be proofread, and any laws referenced in the text should be verified.
13 Issues That Should Be Addressed in Every Business Contract
The language used in a business contract must not only address an issue, but it must also be clear in its meaning. It’s not enough to merely include something to ensure it’s addressed. The language used must clearly express the intentions of the parties and convey a similar understanding to an objective third party.
Here are 13 essential clauses and provisions that should be included in all business contracts, which must be carefully drafted to protect businesses from exposure to unnecessary risk and liability:
- Scope of Work (SOW) – This clause is crucial as it states the purpose of the agreement, the work that will or will not be done, and outlines the expectations of the parties. It should include a procedure for making changes to the scope or responsibilities of the work. It should also indicate the timeline for completion.
- Payment – Payment terms are unlikely to be overlooked in a business contract, but they can be a source of disagreement if any aspects of the payment process, such as when, how, and through what acceptable methods, are not sufficiently explicit. The payment clause should also specify what happens if payments are not made on time, including any interest, fines, or other penalties.
- Unforeseen Circumstances – Force Majeure – A force majeure clause excuses a party from performance when an unforeseen event beyond any party’s control makes performance unreasonably difficult or impossible, such as a natural disaster. These clauses need to be specific about the events or types of events that will excuse performance and any obligations on the party claiming inability to perform.
- Non-Disclosure – A confidentiality clause protects sensitive or valuable information from being shared beyond the business relationship. These clauses need to be clear about the information that is to be kept confidential. If the provision is not sufficiently clear, it may not be enforceable.
- Termination – Termination clauses describe the conditions and circumstances under which a party can terminate the contract, often in situations where another party has not performed as promised. These clauses should also address how anything outstanding will be wrapped up when the contract terminates.
- Dispute Resolution – Parties should decide how they will resolve disputes to avoid having minor issues become major litigation. Clear provisions help the parties know what to expect and promote stability in business relationships.
- Indemnification – Indemnification clauses allocate the risk of liability for business losses among the parties. Liability exposure is a crucial consideration for businesses, and indemnification circumstances need to be carefully negotiated and clearly expressed in the agreement.
- Integration – An integration, merger, or entire agreement clause is an acknowledgment that the written contract represents the entire agreement of the parties and that nothing outside the contract affects the agreement. These provisions minimize the opportunity for disputes and make clear the intentions of the parties.
- Governing Law and Jurisdiction – Selecting the laws that will govern the contract and the location for any legal action provides certainty about how and where the contract will be interpreted and enforced.
- Regulatory Compliance – These clauses may be general or specific to regulations that are relevant to the contract. A compliance clause can reduce the risk of non-compliance and provides legal protection against a non-complying party.
- Severability – Severability clauses protect the integrity of the agreement should any provision within the contract be determined invalid or unenforceable. The remainder of the agreement continues to be valid and enforceable.
- Intellectual Property (IP) – An IP clause protects business ideas, innovations, designs, and other creations of the mind by specifying the ownership of intellectual property, usage rights and obligations, and remedies in case of infringement. These provisions safeguard the created property’s value and help the business maintain a competitive advantage.
- Guarantees and Warranties – These clauses specify assurances the parties make as to their performance under the contract. Goods or services may be required to meet industry quality standards. All parties should take care to define the scope of the assurances and under what circumstances they will or will not apply, and include acceptable remedy actions for contract breaches.
The Benefits of a Well-Drafted Contract
A well-drafted contract isn’t an unbreakable guarantee that there won’t be a snag or two along the way. Yet, good planning goes a long way toward business success. The parties to a well-drafted contract can expect to enjoy the following benefits:
- Contract enforceability
- Clarity regarding performance expectations and obligations
- Strengthened business relationships
- Protection of business interests
- Fewer disagreements
- Fewer performance delays
- Liability protection
- Risk mitigation
- Faster dispute resolution
- Litigation avoidance
It was Benjamin Franklin who famously advised, “An ounce of prevention is worth a pound of cure.” One of the goals of a well-written contract is to anticipate and prevent problems from coming up and keep businesses running smoothly.
Work With Feldman & Feldman in Texas and Do Business Better
When you’re in business, time is money. A poorly drafted contract can cause a lot of wasted time and cost a whole lot of money, not to mention the strain on business relationships. At Feldman & Feldman, our contract attorneys understand clients’ business operations and draft comprehensive contracts that allow businesses to move forward with confidence.