Understanding the critical provisions of a contract and negotiating the contract to ensure that your interests are safeguarded is crucial for any business owner. A well-drafted contract provides legal protection and sets clear expectations between parties, ensuring a smoother business relationship.
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I have negotiated hundreds of contracts throughout my years of representing various businesses, contractors, owners, subcontractors and insurance companies. Throughout these negotiations, there are several key provisions that many business owners either overlook or don't understand. Each of these has the potential to have a profound effect (good or bad) on business owners. I have drafted this blog post as a guide for business owners to highlight six key contract provisions that, in my experience, are commonly overlooked or misunderstood.
1. Attorney's Fees Provision
The attorney's fees provision specifies which party will be responsible for legal costs in a dispute. Including this clause can deter frivolous lawsuits and ensure that should you prevail in legal action, the other party is responsible for your attorney's fees and costs. This provision encourages parties to resolve disputes amicably before resorting to litigation, which can routinely result in hundreds of thousands of dollars spent on legal fees. Including a prevailing party attorney's fee provision in your contracts is essential in protecting your interests and discouraging frivolous lawsuits. For a more detailed explanation on resolving business disputes through mediation or arbitration, explore the linked blog post from our experienced business lawyer. https://www.bountifulplanning.com/blog/10-benefits-of-resolving-business-disputes-through-mediation.cfm
2. Venue and Governing Law Provision
Understanding which laws govern the contract and where disputes will be resolved is paramount. The venue and governing law provision determine the jurisdiction and the applicable law in case of litigation. This clarity can significantly reduce legal uncertainties and costs by preventing jurisdictional disputes and ensuring that both parties know the legal framework for their agreement. It is common for some businesses you are contracting with to include a venue provision requiring a venue in a distant state. This is often highly advantageous to one party. Be aware of these provisions and be willing to negotiate to a mutually beneficial or neutral venue location. Distant venues can have unfavourable laws and be prohibitively expensive to travel to should litigation occur.
3. Clear Payment Terms
Ambiguities in payment terms can lead to disputes and cash flow problems. Clearly defined payment terms, including amounts, due dates, late fees, and conditions for payment, set clear expectations and responsibilities for both parties. This provision helps to ensure timely payments and provides a clear recourse in the event of late or missed payments.
One payment provision all business owners should be aware of is conditional payment provisions. Sometimes called "pay if paid" or "pay when paid" provisions. A "pay if paid" provision in a contract, typically found in the construction industry, stipulates that a subcontractor will only be paid for their work if and when the general contractor receives payment from the project owner. This clause effectively transfers the risk of the project owner's non-payment from the general contractor to the subcontractors.
4. Indemnity and Insurance Provision
Generally speaking, indemnifying someone means compensating for harm or loss or providing protection against financial liability by offering to pay for any losses or damages. This term is commonly used in legal contracts where one party agrees to protect another from future losses or claims. The indemnity and insurance provision protects against losses and liabilities arising from the contract. This clause specifies the extent to which each party must indemnify the other in the case of damage, loss, or legal liability. Additionally, requiring adequate insurance coverage ensures that both parties are protected against potential risks, further reducing the financial burden in case of unforeseen events.
Always review a contract's insurance coverage section to ensure that your policy reflects the contract's requirements (and that you can procure such coverage if you don't already have it). Review the coverage requirements to ensure that the opposing party carries enough insurance to mitigate your risk in the contract. Finally, depending on the parties' relationship, some contracts require that one party name the other as an additional insured under a particular insurance policy. If there is such a provision in your contract, follow up and obtain a certificate of insurance from the other party to ensure that they have followed through and named you as an additional insured under their policy.
5. Clear Definitions of Scope of Work
A well-defined scope of work provision outlines the specific duties, deliverables, timelines, and standards expected from each party. This clarity helps prevent misunderstandings and sets the foundation for the agreement's expectations. It's essential to ensure that all parties are aligned on the project's objectives and the criteria for success.
Outlining expectations is critical in avoiding and mitigating disputes. If you are unsure of the scope of work expected or the import of a particular provision, seek additional clarification until you fully understand and, if needed, negotiate the language in the contract so your understanding and expectations are crystal clear.
6. Clear Termination Provisions
Finally, explicit termination provisions are essential for outlining the circumstances under which the contract can be terminated, the process for termination, and any penalties or obligations upon termination. These provisions ensure that both parties understand the exit strategy, providing a clear path in case the business relationship needs to be dissolved.
Conclusion
Incorporating these six essential provisions into your business contracts can significantly reduce legal risks and foster stronger, more transparent business relationships. By clearly outlining terms related to attorney's fees, jurisdiction, payments, indemnities, the scope of work, and termination, you set a solid legal foundation for your business dealings.
While understanding these key contract provisions is essential, consulting with a knowledgeable business lawyer to tailor and help negotiate your contracts to your specific needs and legal requirements is invaluable. Our team at McRae & Metcalf, P.A., is here to ensure that your contracts protect your interests and support your business's growth. Contact us today for personalized advice and contract drafting services tailored to your business's needs.
Ready to ensure your contracts are comprehensive and legally sound? Contact our expert business lawyers today for thorough contract review and drafting services that protect your interests and develop successful business relationships.
