DEALING WITH BUSINESS CONTRACTS: KEY CLAUSES TO REMEMBER FOR EVERYONE

Well, there is no doubt in the fact that commercial contracts establish business relationships across numerous industries.

But what is a business contract? 

A business contract is a legally binding agreement between two or more parties outlining the terms and conditions of a business relationship. These binding legal documents outline the expectations, obligations, guarantees, and terms that govern these relationships. A well-crafted contract helps ensure a smooth and efficient fulfillment of responsibilities.

On the other hand, a contract filled with ambiguous clauses and loopholes can expose a business to significant risks. Hence, companies need to understand which clauses to include in a contract template and prioritize during the review, as this is the key to efficient contract negotiation. In this blog, we have discussed the importance of business contracts along with key clauses to remember for every business. Let’s jump right into the deets!

Understanding the Types of Business Contracts

Let’s begin by understanding some major types of business contracts, including:

• Confidentiality Agreements (NDAs): Protect sensitive information from unauthorized disclosure during business exchanges.
• Business Entity Contracts (Operating or Partnership Agreements): Define roles, responsibilities, profit-sharing, decision-making, and exit strategies between business partners.
• Sales Contracts: Outline terms of sale, payment methods, delivery, warranties, and defect responsibilities between buyer and seller.
• Service Contracts: Specify service scope, timelines, payment, confidentiality, and ownership of work.
• Employment Contracts: Detail job responsibilities, salary, benefits, and termination conditions between employer and employee.
• Licensing Agreements: Permit use of intellectual property (IP) in exchange for royalties, specifying scope, exclusivity, and payment terms.
• Franchise Agreements: Grant rights to operate a business using the franchisor’s brand, with terms on fees, operational standards, and territory.
• Joint Venture Agreements: Define contributions, profit-sharing, and decision-making in a collaborative project between separate parties.
• Indemnity Agreements: Protect against financial losses or liabilities, specifying coverage and conditions for indemnification.
• Distribution Agreements: Allow a distributor to sell or market products, defining payment, marketing duties, and exclusivity rights.
• Non-Compete Agreements: Restrict competition within an industry or region for a set period, commonly used when employees or partners exit a business.
• Loan Agreements: Outline terms between lender and borrower, including loan amount, interest rate, repayment, and collateral.

Key Clauses to Remember for Every Business

Now that you are thorough with the importance of business contracts let’s get down to confer the key clauses to remember for every business:

Parties Involved Clause

This clause identifies all parties entering into the agreement. It’s crucial to include the correct legal names of individuals, companies, or entities involved, ensuring clarity on who is bound by the contract. Each party should be legally capable of entering into a contract, and their status (such as company representatives or individuals) should be clearly stated to avoid disputes about who the contract applies to.

Scope of Work/Services Clause

One of the most important clauses, the scope of work or services clause, outlines the specific duties, responsibilities, and deliverables of each party. It provides a clear definition of the nature and extent of the work to be performed. This clause helps avoid future misunderstandings by ensuring all parties are aligned on what is expected in terms of quality, quantity, and timing. It can also serve as a point of reference if one party fails to meet the agreed-upon terms.

Payment Terms Clause

The Payment Terms Clause sets out how and when payments will be made, as well as the agreed amounts. It may include details about:

• Payment schedules (lump sum, installments, or milestone-based payments)
• Methods of payment (bank transfer, check, etc.)
• Penalties for late payment
• Invoicing procedures
• Any discounts or advance payments. 

This clause is critical for ensuring proper cash flow and avoiding disputes over payment delays or missed deadlines. It also protects both the service provider and the client.

Confidentiality and Non-Disclosure Clause (NDA)

A Confidentiality or Non-Disclosure Clause protects sensitive information shared during the course of the contract. For businesses dealing with proprietary data, trade secrets, customer lists, or intellectual property, this clause is essential to prevent unauthorized sharing or use of confidential information. This clause should define:

• What constitutes confidential information
• The duration of confidentiality
• Exceptions (e.g., information already public or legally required disclosures).

Breaches of confidentiality can lead to significant legal consequences and reputational damage, making this clause critical in safeguarding business interests.

Intellectual Property Rights Clause

The Intellectual Property (IP) Rights Clause specifies ownership of any intellectual property developed, used, or shared during the business relationship. This clause is particularly crucial in industries like technology, media, or creative services, where products, ideas, or processes are often created. It outlines:

• Who owns the intellectual property created (client or service provider)
• Licensing rights and terms, if applicable
• Restrictions on usage. 

Indemnity Clause

An Indemnity Clause protects one party against loss or damage caused by the other party. For example, if Party A’s negligence or actions result in damage to Party B, Party A agrees to compensate Party B for that loss. This clause is particularly important for limiting risk and liability, especially in high-stakes or complex transactions. 

Termination Clause

The Termination Clause defines the circumstances under which the contract may be ended before its completion. This clause should detail:

• The conditions under which either party can terminate the contract (e.g., breach, insolvency, or mutual agreement)
• Notice period required for termination
• Any penalties or obligations after termination (e.g., outstanding payments).

A clearly defined termination clause provides a safe exit strategy and prevents unnecessary disputes or ongoing obligations after a business relationship has soured or ceased to be profitable.

Force Majeure Clause

A Force Majeure Clause addresses unforeseeable circumstances that prevent one or both parties from fulfilling their contractual obligations. Events such as natural disasters, war, pandemics, or government actions that are beyond anyone’s control are covered under this clause. This clause usually suspends contractual duties for the duration of the event or allows for termination if the event lasts for a prolonged period. This helps both parties avoid liability for failing to perform under extraordinary circumstances and provides a path forward in uncertain times.

Dispute Resolution Clause

This clause outlines how disputes between the parties will be resolved. Common mechanisms include:

• Mediation: A neutral third party facilitates a negotiation to help resolve the dispute.
• Arbitration: A binding decision is made by an arbitrator.

A well-constructed Dispute Resolution Clause prevents costly and prolonged settlements by ensuring both parties agree on handling conflicts in advance, thus protecting their interests and maintaining the business relationship.

Governing Law and Jurisdiction Clause

The Governing Law clause specifies which country’s or state’s legal system will apply to the contract. It is especially important in cross-border agreements where different legal systems may apply. Jurisdiction establishes which court or authority will have the power to interpret and enforce the contract. This clause ensures that parties are clear about where and how legal disputes will be settled.

Amendment Clause

Contracts often need to be adjusted as circumstances change. An Amendment Clause outlines how modifications to the contract will be made. This clause ensures that any changes must be agreed upon by both parties and are documented in writing to prevent informal, undocumented changes that could lead to disputes.

Limitation of Liability Clause

A Limitation of Liability Clause caps the amount of compensation a party can claim in case of damages or breaches of contract. This clause is vital for businesses to avoid exposure to unlimited financial risk. It often excludes liability for indirect or consequential damages and sets a maximum cap for direct damages, ensuring that financial losses from unforeseen circumstances do not cripple the business.

Conclusion

Understanding key contract clauses is essential for safeguarding your business interests. By clearly defining roles, payment terms, and dispute resolution, you can ensure smoother operations and reduce risk. Have questions about a business contract? At Mazurek, Belden & Burke, P.C., we customize our legal advice to fit your specific needs. As experienced Contract lawyers in San Antonio, we work to find the best solutions for our clients. To schedule a consultation with one of our lawyers, call us at 210.824.2188.