What Should I Include In My Contracts?

For a non-lawyer business owner it’s hard to know what terms should be included in your contracts. Having a properly drafted legally enforceable contract is critical to avoiding or resolving contract disputes. Yet, to save money, many business owners are “do it yourselfers,” pulling from various forms or articles they see on the internet to draft a contract without really knowing whether the end result will hold up in court.? For that reason, while this article identifies some terms you should include in your contracts, it’s important to consider the cost of hiring an attorney vs. the money you might lose if a key provision of a contract you draft is unenforceable. Think of Joseph Addison’s idiom about being a “penny wise and pound foolish.”? So, here we go.

PARTIES?

• Identification:? Identify the parties involved using their full, correct legal names, addresses, and contact information. You can include a d/b/a but you should use the correct legal name:? e.g., John Doe, LLC or John Doe Company, Inc.
• Legal capacity:? Parties to a contract must have legal capacity.? Verify they are of legal age, mentally competent, and not under duress or undue influence.
• Authority:? The individual signing a contract on behalf of a party must have authority from the party to sign. This can be represented in the contract, but also can be proved with a company resolution or power of attorney.

SUBJECT MATTER

• Description:? Describe the goods or services in detail. This may include identifying a model number, a serial number, or other specific distinguishing information so there is no dispute later. Avoid industry specific terms that may be unfamiliar to one of the parties or define those terms in the contract. If there are goods being used for a very specific purpose, define, or refer to any applicable specifications.
• Quantity, Quality, and Specifications:? State the quantity of goods or services being exchanged. Specify the quality of the goods or services being exchanged. This may include performance standards or quality assurance requirements. Define any specifications or technical requirements the goods or services must meet.
• For a non-lawyer business owner it’s hard to know what terms should be included in your contacts. Having a properly drafted legally enforceable contract is critical to avoiding or resolving contract disputes. Yet, to save money, many business owners are “do it yourselfers,” pulling from various forms or articles they see on the internet to draft a contract without really knowing whether the end result will hold up in court.? For that reason, while this article identifies some terms you should include in your contracts, it’s important to consider the cost of hiring an attorney vs. the money you might lose if a key provision of a contract you draft is unenforceable. Think of Joseph Addison’s idiom about being a “penny wise and pound foolish.”? So, here we go.
• Delivery or Performance Requirements:? State the delivery date or performance deadline.? Indicate the delivery method for the goods or services. Describe the criteria that must be met for the goods or services to be acceptable.

PAYMENT TERMS

• Price:? Specify the price for the goods or services.
• Payment:? State the date on which payment is due or the schedule for when installment payments are due.
• Discounts:? State any discounts or early payment incentives.
• Late Payment: State any late payment fees or interest charges that may apply.
• Interest:? State the interest rate that will apply to late payments and be sure it does not exceed usury laws.

REPRESENTATIONS & WARRANTIES

• Condition:? The “seller” makes representations and warranties about the condition or quality of the goods or services it is providing.
• Legal Status:? This refers to the legal status of the parties and their ability or legal authority to enter into the contract.
• Intellectual Property:? This includes representations and warranties about ownership of patents, copyright, or other intellectual property in the goods or services.
• Access to Information:? The contract may contain provisions allowing each party access to information related to the goods or services.
• Disclosure:? The contract may contain provisions requiring the parties to disclose information that may impact on the other party’s decision whether to enter into the contract.
• Indemnification:? The contract may contain provisions for indemnification if any representation or warranty made by a party is determined to be false or misleading.

TERMS AND CONDITIONS

• Legal Rights and Obligations of Each Party:? The contract should specify the legal rights and obligations of each party, which may include: Performance obligations: Define the performance obligations of each party, such as delivery timelines, quality standards, and service levels. Liability: Specify the liability of each party in case of breach of contract or other legal issues that may arise during the transaction. Confidentiality: Define any confidentiality requirements associated with the transaction.
• Governing Law and Dispute Resolution:? The contract should specify the governing law and dispute resolution mechanism, which may include: Governing law: Define the jurisdiction (i.e., state, or federal courts) and law of the state that will govern the contract. Dispute resolution: The contract may outline a mechanism for dispute resolution, such as mediation or arbitration in lieu of a jury trial, and the procedure for initiating and conducting dispute resolution proceedings.

• Termination Clauses:? The contract may also include termination clauses that define the circumstances under which the contract can be terminated.

CONFIDENTIALITY AND INTELLTECTUAL PROPERTY

Confidentiality and intellectual property are important considerations, especially if the transaction involves exchanging proprietary information or technology.

• Protection of Confidential Information: The contract should include provisions for protecting confidential information that may be exchanged during the transaction, which may include: Definition of confidential information: Define what constitutes confidential information and potentially what information is not confidential. Restrictions on use and disclosure: Specify the restrictions on the use and disclosure of confidential information by the receiving party, and the steps that the receiving party must take to protect the confidentiality of the information. Term of confidentiality: Define the term of confidentiality, including the duration of the obligation to keep information confidential and the circumstances under which the obligation may be terminated.
• Ownership and Use of Intellectual Property:? The contract should define ownership and use of any intellectual property associated with the transaction, which may include: Intellectual property ownership: Define the ownership of any intellectual property created or used in the transaction and specify any limitations on the use of the intellectual property by the parties. Licenses and royalties: Specify any licenses or royalties associated with using intellectual property by one or both parties.

INDEMNIFICATION AND LIABILITY

• Allocation of Risk and Responsibility Between the Parties:? The contract should include provisions allocating risk and responsibility between the parties, which may include: Indemnification: Indicate which party is responsible for indemnifying the other party for any losses or damages resulting from the transaction. Insurance: Indicate any insurance requirements that must be met by the parties to ensure adequate protection against unexpected events. Force majeure: Define the circumstances under which either party may be excused from performance of the contract due to unforeseen events outside of their control.
• Limitation of Liability and Damages:? The contract may contain provisions limiting the liability and damages that may be awarded in the event of a breach of the contract, which may include: Limitations on liability: Identify the maximum liability that either party may be responsible for in the event of a breach of the contract. Exclusions of damages: Identify the types of damages that may not be recovered in the event of a breach of the contract. Liquidated damages: Identify any liquidated damages that may be assessed in the event of a breach of the contract. (This is tricky because if a court determines that the provision is really a “penalty” it will likely be held unenforceable.)

• Events Beyond the Parties’ Control:? A force majeure clause should identify the events that will trigger the clause, which may include: Natural disasters: e.g., hurricanes, floods, earthquakes, and wildfires. Government action: e.g., war, terrorism, civil unrest, and changes in laws or regulations. Labor strikes: e.g., strikes, lockouts, and work stoppages. Supply chain disruptions: e.g., shortages of materials or transportation disruptions.
• Excuse of Performance:? A force majeure clause should clearly state how the events identified will excuse performance of the contract, which may include: Suspension of performance: State that performance of the contract will be suspended until the force majeure has ended. Extension of time: Allow for an extension of time to perform the contract based on the duration of the force majeure. Termination of the contract: Allow either party to terminate the contract if the force majeure continues for an extended period.

• Notice Requirements:? A force majeure clause may also specify notice requirements, which may include: Notice of the force majeure event. State the time period within which the party must notify the other party of the occurrence of the force majeure. Duration of the force majeure event. State for how long the force majeure must last before the parties may invoke the force majeure clause.

MISCELLANEOUS

• Signatures and Execution:? Signatures are required to ensure a contract is valid and enforceable.
• Writing:? The contract must be in writing and signed by all parties involved. Electronic signatures are valid in many jurisdictions so long as they meet applicable legal requirements.
• Date and Place of Execution:? Indicate the date and place of execution in a contract. The date is important because it determines when the contract becomes effective, when it will expire, and may establish the timeline for performance and payment. The place of execution indicates the jurisdiction where the contract was formed. This can have legal implications, such as which laws apply in the event of a dispute.

CONCLUSION

As stated up front, these are some key provisions to include in your contracts. Other terms may be important to include depending on the nature of your contract and the jurisdiction(s) where you do business. Therefore, seriously consider seeking legal advice before signing the contract. An attorney can help you more before you sign a contract than after when the unfavorable terms have already been agreed to.

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