If you are writing a new business contract, it is important for you to make sure that you do not overlook anything. There are several important contract clauses that you need to include. Make sure you put each necessary clause in your contracts before moving forward. Below, you can learn about the most important contract clauses your business contracts should cover.
What Is a Contract Clause?
So, what is a clause in a contract? The vast majority of contracts are going to contain a number of clauses that relate to the overall subject of the contract. Each contract clause is going to define different rights, privileges, and duties that different parties need to respect. Because clauses come in many shapes and forms, each one is going to have a slightly different purpose. If you are signing a contract with a variety of clauses in it, you must make sure you understand what each clause means before you agree to the contract as a whole.
Purpose of a Contract Clause
Generally, the purpose of a contract clause is to clearly define or outline a specific part of the contract or the agreement. Overall, each contract clause is going to do something different depending on where it is situated in the contract and how it is worded. Remember that you should ask a professional to help you if you do not understand a specific contract clause; However, there are a few common examples of clauses that you might find in your contract.
Important Contract Clauses Your Business Contracts Should Include
You need to make sure that each business contract contains the necessary clauses. If you do not include one of these clauses in your contract, there could be a loophole that could cause the contract to fall apart or make it unenforceable. Some of the most important clauses that you need to include in your business contract include:
Regardless of the industry in which you operate, if you enter into a contract with somebody else, you are going to exchange a significant amount of privileged information. You probably do not want that information to be made public, so it is important for you to ensure that the information remains confidential.
You must make sure your confidentiality clause is worded strongly. In this clause, your business should preclude the other side from divulging any information about you that they might learn during the transaction. Of course, the other party is going to ask you to do the same. This is especially important if there is information about intellectual property being revealed as a part of the contract.
You could also use a confidentiality agreement.
2. Termination and Force Majeure
You need to include a contract termination clause as well. When you enter into a business agreement with someone else, not everything is going to go as planned. If the agreement does not work out, you must have a way to terminate the contract and move on with your business. You need to lay out the circumstances under which one or both parties may agree to terminate the contract, regardless of the amount of time left in the agreement.
You may also want to include a force majeure clause as a part of your contract. There are some situations where an unforeseen issue could derail the business agreement. For example, a global pandemic could disrupt the supply chain, making it difficult for you to uphold the obligations in the agreement. Typically, a force majeure clause will include acts of God, but it is important to protect yourself against these issues in the event of a breach of contract.
In the event that an unforeseen circumstance derails the contract, you might not be held responsible even if you breach the contract as long as the contract has a force majeure clause in it that will stand up in court.
3. Dispute Resolution
No matter how carefully you word your contract, there is a chance that disagreements and disputes are going to arise. You need to clarify what will happen if there is a dispute between the two parties. You do not necessarily want to go to court immediately, as you will surrender control by setting foot in a courtroom.
For example, the contract could require you to enter into arbitration before you proceed to litigation. Going to arbitration is usually faster, less expensive, and more private; However, there might be other measures you want to include in this dispute resolution section.
Do not forget to include an indemnification clause in an employment contract. An indemnification clause is important because it specifies that one party is going to waive, or indemnify, the other party against specific damages, losses, or claims that could result from the contract. It is important for you to clearly specify the scope of the indemnification clause, as it will limit the obligations or liabilities of that other party. You need to clearly specify when the indemnification clause does and does not apply.
5. Limitations on Liability
The contract should have a section regarding limitations on liability. This is important for every party involved in the contract. This clause is going to specify exactly what each party is or is not liable for. This could be particularly important if a dispute or lawsuit arises.
Speaking of liability, you may want to include a statute of limitations clause as well. There is a chance that the statute of limitations clause in the contract could override the state law related to the statute of limitations, but this type of clause does not always hold up in court.
6. Warranties and Disclaimers
Do not forget to include a section for warranties and disclaimers. This is usually a section that specifies that the business does not accept liability for specific issues related to the contract. Even though you may want to include this clause to protect yourself, you need to remember that the clause will eventually be reviewed by a court system in the event of a lawsuit. You need to make sure that the clause will hold up in court.
7. Jurisdiction or Choice of Law
Today, the business world we live in is more global than ever before. Perhaps you are entering into an agreement with someone in another state or county, or perhaps you are entering into an agreement with someone in a different country. In your contract, you need to specify which jurisdiction is going to be responsible for resolving specific agreements. In the event that you have to go to court, the contract should specify where the case is going to be heard.
Other Contract Clauses to Consider
Even though you should certainly include the sections listed above, there are several other types of contract clauses that you might want to include. Some examples include:
- Damages: In the event of a breach of contract, this section is going to specify the damages that one party owes to another party. This section could be different for each party involved in the contract.
- Notice: This clause will specify the required means and method of delivery for formal notices. For example, if you want to provide the other party with a formal notice related to the contract, this clause will specify how it is to be delivered.
- Amendment: This section relates to changes that should be made to the contract down the road. If both parties agree to a specific change in the contract, this clause will specify how that change will be amended to the contract.
- Attorney fees and costs: In the event that a lawyer has to be hired to handle a situation relating to the contract, this section will specify who is responsible for handling fees and expenses related to the attorney.
- Severability: This clause is important because it specifies what happens in the event that a portion of the contract is rendered null and void. For example, the court system may state that one part of the contract is not legally enforceable. Generally, this clause will say that even though that clause might not be enforceable, the rest of the contract will still be enforced.
- Attachments: If there are certain diagrams, drawings, or pictures that need to be attached to the contract, this clause specifies that those attachments are to be considered an official part of the contract itself.
- Counterparts: There might be multiple representatives or parties who are involved in signing the contract. This section specifies that not all of the partners or parties need to sign the same copy. For example, if there are multiple copies of the agreement that each have different parties’ signatures on it, they will all be treated as the original contract.
- Copyright: This section specifies who has the rights to what intellectual property in the contract. It specifies what each individual party is able to do with intellectual property that might be included as a part of the negotiation or agreement.
- Use Restrictions: This section specifies what each user is able to do with various products and services included in this contract. It might also specify the penalties someone might face if they violate these use restrictions.
- Privacy: This section will clearly specify how each party collects information related to the other parties and users and how that information will be used or disclosed.
- Non-compete: A non-compete clause could also be included in a contract. In a non-compete clause, a specific party is unable to share certain types of information during or after the term of the contract. This could also restrict where someone can work after the term of employment is over. This clause is usually limited in terms of geographic distance and time, and it could also be subject to state laws regarding its enforceability.