Important Contract Clauses for Business Contracts
At first glance, business contracts appear to be like any other type of contract. Like other contract types, these contracts are written promises where one party offers a product or service to a second party in exchange for a benefit.
However, there are some things you should watch out for when drafting business contracts. Because these contracts form the backbone of all commercial transactions, you must include key clauses when creating business agreements. These include indemnification, limit of liability, copyright, use restrictions, and more. Without these clauses, the parties may be exposed to unnecessary risks, since they may not have the legal rights to resolve certain issues if disputes arise. A poorly drafted business contract may also damage your reputation and cause you to lose potential business partners and investors.
Read on to learn more about the important contract clauses you need to include in business contracts to protect your business from risk.
What is a business contract?
A business contract is a binding agreement between two or more businesses. Examples of business contracts include partnership agreements, property and equipment lease contracts, and licensing agreements.
Essentially, a business contract is a promise where one party agrees to provide services or products to another party in exchange for money or some other benefit. It also gives both parties protection in case one of the parties fails to fulfill their obligations or something unexpected (i.e., a natural disaster) prevents the parties from closing the deal.
Like other contracts, business contracts have six essential elements.
- Offer: This is an invitation to enter into a contract. It’s also a promise made by one party in exchange for the other party’s performance.
- Acceptance: Once one party has presented an offer, the other party can decide whether to reject or accept the offer.
- Consideration: This is the value that the two parties exchange as a result of the contract.
- Awareness: Both parties are aware that they are entering into a contract and are not signing under duress, misrepresentation, or fraud.
- Capacity: Both parties have the legal capacity to sign the contract, which means that they can demonstrate that they understand all of the terms, obligations, and consequences of the contract before agreeing to it.
- Legality: The contract is created for a legal product or action and adheres to the law in the jurisdiction where it’s signed.
If any of these elements are missing, your business contract will not be legally binding. However, having all of these elements doesn’t necessarily mean your contract is well-written. You still need to see if you have included the following important clauses. Without these clauses, you and your company may be exposed to a lot of unnecessary risks. These include sky-high legal fees, seemingly unending court cases, and having your patents, logos, and trademarks stolen and misused by competitors and third parties.
Important clauses for business contracts
Every business is different, which means that your needs might vary depending on location, industry, and business model. But as your contracts govern the relationships between your business and employees, vendors, and clients, it is important that they are designed to protect your business and mitigate risk. Below are some standard clauses included in business contracts. Please note that this does not constitute legal advice.
The indemnification clause is one of the most important parts of your business contract. Sometimes, it can be extracted into its own contract, the Indemnity Agreement. It shows what the indemnifying party will do to compensate the indemnified party for certain expenses and costs. In short, your business contract’s indemnification clause is a risk allocation tool. It lets both sides:
- Adjust the amount of risk they are willing to accept
- Protect themselves from lawsuits and damages
- Hold the other party or parties accountable in case something goes wrong
Since a contract’s indemnification clause can have a large impact on both parties, it’s usually the most heavily negotiated part of the contract. As such, you should consider our tips for successful contract negotiation before writing your business agreement’s indemnification clause.
Force majeure clause
Another important clause to include in your business contract is the force majeure clause. Force majeure removes liability for unavoidable and unexpected events that are beyond either party’s control. These include:
- “Acts of God” like hurricanes, tornadoes, tsunamis, typhoons, explosions, pandemics, and earthquakes
- War, explosions, strikes, lockdowns, lockups, or a prolonged shortage of energy supplies
- Government actions limiting or prohibiting any party from performing its contractual obligations
Without a force majeure clause, parties would have to turn to common law doctrines such as “frustration of purpose” and “impracticability,” which are unlikely to remove liability. As such, parties need to include a force majeure clause to protect themselves in case something unexpected happens.
Limitations on liability clause
Limit of liability, also known as a limitation of liability, is a clause that limits the amount a party has to pay to the other party if the latter suffers losses due to the business contract. It also caps the types of compensation one party can recover from the other.
This clause typically covers losses caused by the following:
- Negligence: One of the parties fails to meet a reasonable duty of care and causes harm to someone.
- Breach of contract: A party fails to fulfill its contractual obligation.
- Infringement of intellectual property rights: One of the parties infringes on the others’ intellectual property rights (i.e., patent, copyright, design right, or trademark).
- Misrepresentation: A party makes a false statement that misrepresents an aspect of the contract, such as the quality of the products they’re selling.
A confidentiality clause, also known as a non-disclosure clause, is vital to protecting your trade secrets, clients’ confidential information, sales strategies, and anything else that you want to keep from the public. Add this clause to your business contract if the other party is going to be exposed to confidential information that you want to keep private. Sometimes this is expanded upon further in an NDA.
If your business transaction involves using or selling your intellectual property, you should add a copyright clause to your business contract. This clause serves as a reminder to the other party that your intellectual property is protected by copyright and other intellectual property laws.
Here’s an example of what a typical copyright clause looks like:
The [invention or product name], along with its documentation and any associated component, is the proprietary product of [Company Name], [Company’s Address]. As such, they are protected by copyright and other intellectual property laws. None of the provisions in this Business Contract are intended to deprive [Company Name] of its rights as the copyright owner of [invention or product name]. [Company Name] shall retain at all times all title, rights, intellectual property rights, and interest in the [invention or product name].
You can further limit the way the other party uses your trade secrets, inventions, and other confidential information through the use of a restriction clause. This clause establishes when the other party can use your confidential information and what process they have to go through if they want to disclose your confidential information to third parties.
Here are some examples of use restrictions you can place on the other party:
- Modifying, reverse engineering, and creating derivative works based on your product or idea.
- Receiving, storing, accessing, viewing, or using confidential information for any purpose other than the authorized use.
A termination clause defines how the parties can terminate their agreement and establishes how each party can terminate within a specified notice period. It’s included in every business contract template and generally doesn’t require too much customization.
However, that doesn’t mean you shouldn’t pay attention to this clause. Read through it and talk to the other party to see if the termination provisions are reasonable for both of you. If they’re not reasonable, you need to talk until both sides are in mutual agreement about how each party can terminate and what the notice period should be.
Warranties and disclaimers
This clause will protect you from liability if the other party has a negative experience with what you’ve given them to honor your side of the contract. Like the limit of liability clause, the warranties and disclaimers clause puts a cap on how much the other party can claim if they’re dissatisfied with what you’ve given them.
For example, your warranties and disclaimers clause can establish that you’re offering your product or service on an “as is” basis. “As is” means that you are selling your services or products the way they appeared to be when you sold them to the other party. If the other party isn’t satisfied with the quality of the products or services, that’s on them. By signing this contract, the other party has accepted that:
- They may encounter problems when using your product or service.
- They will not take action against you if this happens.
A dispute resolution clause establishes how the parties intend to resolve any disputes that may arise from their business contract. Depending on both parties’ feelings on the issue, you can include one or more different methods of dispute resolution, including:
- Negotiation: This is the least formal type of dispute resolution. Negotiation allows the parties to come to a consensus on their own with the help of a neutral third party called a negotiator. At the end of the negotiation, parties can initiate litigation to get a legally enforceable judgment.
- Mediation: This is the second least formal type of dispute resolution. Mediation is a lot like negotiation, only that it involves a professional mediator as the neutral third party.
- Arbitration: This is the most formal type of dispute resolution. It’s overseen by professional arbitrators and parties must follow the rules in their arbitration agreement. The outcome of an arbitration is usually binding, which means that parties typically can’t initiate litigation after arbitration.
Finally, you should include a privacy clause in your business contracts. This is a simple statement that shows you are compliant with the relevant privacy rules and regulations. Having a privacy clause will boost your company’s reputation and show the other party that you are dedicated to privacy rights.
Write effective business contracts with Ironclad Editor
To write effective and enforceable business contracts, you need to include a number of contract clauses. These include indemnification, force majeure, copyright, termination, warranties and disclaimers, and privacy. Without including these important clauses in your business contracts, you may find yourself facing exorbitant legal fees, legal battles that could last for years, and intellectual property theft.
Ironclad Editor comes with templatable workflows that give you all of the legal language and clauses you need to write effective business contracts. To see how Ironclad Editor can transform the contract management process, try out our sandbox demo today.
- What is a business contract?
- Important clauses for business contracts
- Indemnification clause
- Force majeure clause
- Limitations on liability clause
- Copyright clause
- Use restrictions
- Warranties and disclaimers
- Dispute resolution
- Write effective business contracts with Ironclad Editor
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Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.