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Does Your Contract Protect Your Business?

November 17, 2022

Small and mid-size businesses tend to have more informal business dealings than large companies. They may have verbal contracts or written ones that do not lay out every term. This is because they often don’t have in-house lawyers and they think they can rely on their relationship with the other party to resolve problems. However, these actions can cause considerable problems if a dispute does arise that cannot be easily settled. Businesses should treat every agreement as important. They must ensure that core business terms are well-documented and the contract protects the business from significant liability. The best way to do that is to consult an attorney.

What Contract Terms Should Be Detailed in Writing?

In a perfect world, you would have an in-house legal department that would review every contract before it is signed and negotiate terms that are favorable to you. For smaller companies, that’s not practical because it is costly to have full-time lawyers on staff. Instead, non-lawyers are given responsibility for reviewing the company’s contracts. To minimize risks to the business, the following are some key provisions that should be evaluated and clearly documented:

  • “Business” Terms. These are the heart of the agreement. Terms material to the deal must be spelled out in the agreement, including price, quantity, deadlines, etc. If any business terms are missing, there must be a mechanism for filling in that information. For example, if the specific price is not included, the agreement might instead include a provision regarding how to calculate the price.
  • Confidentiality. In most vendor relationships, confidential or sensitive information or trade secrets will likely be disclosed. As a result, it is essential to have a non-disclosure agreement (NDA) in place. Often, the parties sign a separate NDA when they first begin discussions and then incorporate it into the final contract.
  • Limitation of Liability. Such clauses are often considered nonnegotiable boilerplate. While it has become standard practice for vendors to seek to limit their liability for their own negligence, it is important to decide whether you are prepared to accept the consequences of that if something goes wrong. In some cases, those consequences may be too expensive, and you may want to walk away from the deal or try to negotiate if possible.
  • Indemnification. It is also standard for vendors to seek to have their clients indemnify them for any third-party claims. However, it is not reasonable to indemnify them for their own negligence. Therefore, you may want to negotiate this clause.
  • Term and Termination. The term of the contract is an important decision as are termination rights. Contracts must document how and when the contract can be terminated and whether the contract auto-renews if the specified deadline is not met. Automatic renewals can be expensive if businesses are not careful about keeping track of cancellation dates.
  • Dispute resolution. Mediation and arbitration are generally best for resolving disputes. However, if litigation is used and there is a forum selection clause, the business should consider the practicalities of the venue. For example, is it feasible for witnesses to fly to another state for a court hearing or deposition? With alternative dispute resolution, such as mediation and arbitration, the parties have more flexibility in choosing convenient locations to resolve their disputes.

Should You Hire an Attorney?

Many business owners believe that it is too expensive and not worth getting legal advice for every contract. However, it may be well worth the extra expense upfront to avoid the consequences of a bad contract later. Our fractional general counsel services allow small companies to obtain skilled, affordable, reliable legal assistance when and how they need it. Contact us today to help ensure that your contracts protect your business.

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