Regardless of size or industry, businesses usually have contracts. Contracts help parties document their expectations, rights and responsibilities, helping ensure that business moves forward as expected. Whether you’re looking at leases, considering consulting agreements or meandering through a master services agreement, this article describes some essential terms to include in your contract toolkit.
Allison Kuepper
Parties. While it may seem obvious, it is very important to ensure that the contract correctly identifies the parties involved, as these are the parties that will have enforceable rights and obligations once the agreement is signed. This is generally easy to confirm and easy to fix.
The official name and a short description of the parties should appear in the introductory paragraph to the contract and should match the parties on the signature page. When the contract is made in a business capacity, as opposed to an individual capacity, the official name of the business entity should always appear as the party. On the signature line, the preferable practice is to name the business entity and have an officer sign on a line below, prefaced by “By” and with his or her printed or typed name and title indicated.
Payment terms. Clarity with payment terms is crucial to avoiding delay and conflict. Payment terms should specify how and when the fees are paid, any invoicing requirements, method of payment, interest charges, and whether one party is allowed to set off fees against amounts owed to the other party or be reimbursed for additional related expenses.
Products and services. A clear description of the goods or services is the substance of the agreement. The terms should describe the product or services being provided, responsibilities and performance expectations of each party, and the timeline for delivery, if applicable. These provisions are very transaction-specific.
Representations and warranties. Representations and warranties are promises made by one party to the other that certain things are true, typically as of the date of the contract. They disclose information, establish trust and allocate risk. Although both parties may provide representations and warranties regarding their authority to enter into the contract and its enforceability, for example, the seller of the product or service typically also makes representations and warranties regarding performance.
These may include statements regarding the character and quality of the product or service, compliance with law, and non-infringement of intellectual property rights.
If such statements prove untrue, the other party may have a claim for breach or a right to terminate the agreement.
Term and termination. Term and termination provisions indicate how long the agreement will last, how the parties can terminate and what happens if they do. The length of the agreement, or “term,” may be project-based, time-based or otherwise based on the specific arrangement between the parties. If there is a right to renew or auto-renewal, it should also be included here. The termination provisions describe when and how the parties can terminate the contract. Typically, each party will have the right to terminate if the other party materially breaches the contract and does not “cure” or “fix” the breach within a certain amount of time after receiving notice of the problem. The contract may also allow the parties to terminate for convenience, without any reason at all, which typically requires advance notice to the other party.
Confidentiality. Many business transactions involve the exchange of information that at least one party considers confidential. This information may include customer information, financial information, business plans, trade secrets, or even protected health information or personally identifiable information specifically protected by law.
Any contract involving sensitive information of any type should include strong confidentiality protections that describe the information that is considered confidential and require the receiving party not to use or disclose such information, except as required to perform its obligations under the contract. Confidentiality provisions should also state how long the protections will last and the consequences of a breach or threatened breach, which should include the right to seek an injunction to prevent further disclosure.
Ownership. For contracts involving the creation of any work product or intellectual property, such as patents, copyrights and trademarks, it is important to confirm there is language regarding who owns the works developed under the agreement, and what rights, if any, the client has to continue using the works going forward. This is often heavily negotiated.
Generally, clients want ownership rights to the works because they paid for them, and a service provider wants to retain ownership for future use, or because it has incorporated its own materials and information into the works.
Limitations of liability. A limitation of liability provision sets limitations on the types of damages, amount of damages or both, that the parties will receive in the event of a claim related to a breach. Without these limitations, a party may be subject to liability that is disproportionate to the payments and other benefits received under a contract.
Service providers typically want to exclude all types of damages except direct damages, and may also try to set a dollar cap on the amount of damages, whereas customers want all types of damages to be available with as few limitations as possible.
Governing law and jurisdiction. The governing law and jurisdiction provision specifies which state’s or country’s laws apply to the contract, and where any disputes will be handled. As long as there is a relationship between the parties and the selected state, there is generally some flexibility of choice. Each party typically tries to negotiate for the law of the state where it is located.
Overall, clear and well-drafted contracts can pave the way for smooth and predictable business transactions. By carefully considering and including the key “tools” outlined above in your contracts, you can avoid delays, financial loss and costly disputes, and get back to business.
Allison Keupper is an associate attorney in the Corporate Department at McLane Middleton, P.A., where she represents clients in all stages of the corporate life cycle and across a wide range of industries.
