Every business owner signs contracts. Whether it is a commercial lease, a vendor agreement, or an employment agreement, contracts are a routine part of doing business. However, “routine” does not mean unimportant or harmless.
Too often, business owners focus on the terms they negotiated—the price, scope of work, length of the term—and skim over “boilerplate” provisions. Those sections may be less exciting, but they can have some of the biggest consequences when a relationship goes sideways.
Before signing a contract, business owners should understand not only what the contract requires them to do, but what happens if something goes wrong. The following provisions deserve particular attention.
Indemnification provisions determine who is responsible for certain losses, claims, or expenses arising out of the parties’ relationship. For example, imagine a business hires a contractor to perform work at its facility, and a visitor is injured because of the contractor’s negligence. A well-drafted indemnification provision may require the contractor to defend and indemnify the business against the resulting claim. But if the provision is drafted too broadly, the business could find itself responsible for claims that have little or nothing to do with its own conduct.
Business owners should pay attention to whose conduct is covered, and ensure the obligations are clearly defined and appropriately tailored to each party’s responsibilities.
A limitation-of-liability provision caps the amount one party can recover from the other if something goes wrong. These provisions are common in vendor and service agreements, but the amount and scope of the cap matter. If a business pays a technology vendor $25,000 per year and the contract limits the vendor’s liability to that amount, the business could have little recourse if the vendor’s error causes $200,000 in losses.
Business owners should understand the cap and what it covers. Also important to identify are exclusions from the cap, such as consequential or incidental damages. These provisions can significantly limit your ability to recover losses.
Representations and warranties are statements one party makes about itself, its authority, or the goods or services being provided. They can seem routine, but they can provide important protection when a transaction does not go as planned.
Business owners should pay attention to what is actually being represented, whether the statement is qualified by terms such as “to the best of the party’s knowledge,” and how long the representation or warranty remains in effect. They should also understand what happens if a representation or warranty turns out to be inaccurate.
In larger transactions, representations and warranties can be an important part of how the parties allocate risk and may provide a basis for a claim if the facts turn out to be different from what was represented.
A contract may tell you how to get out of a relationship—but that does not necessarily mean getting out is easy or inexpensive. Some agreements allow termination for convenience with advance notice. Others permit termination only if the other party breaches the agreement. Still others automatically renew unless one party provides notice within a specific window.
Before signing, identify how the agreement can be terminated, how much notice is required, whether there are termination fees, and which obligations survive termination.
Assignment provisions determine whether a party can transfer its rights or obligations under a contract to someone else. Business owners should consider whether assignment requires the other party’s consent and whether there are exceptions, such as an assignment in connection with a merger, sale of substantially all assets, or change of control.
Ultimately, assignment provisions are about more than paperwork. They can determine whether the business has a say in who it is actually working with.
These provisions can feel like boilerplate, but they can have very practical consequences. A governing law provision identifies which state’s law will govern the agreement. A venue provision addresses where a dispute may be brought. A dispute-resolution provision may require mediation or arbitration instead of litigation in court.
Arbitration provisions also deserve a careful read. Arbitration may have advantages, but it can affect discovery, appeal rights, costs, and other procedural rights, including rights to a jury trial. Before signing, understand where a dispute will be resolved, how it will be resolved, and what rights or remedies may be affected by that process.
Force majeure provisions address what happens when circumstances outside a party’s control prevent or delay performance. Natural disasters are the classic example, but contracts may also address events such as government orders, labor disruptions, epidemics, transportation interruptions, or significant supply-chain problems.
Business owners should look not only at which events qualify, but what the clause actually does. Does it extend the deadline, excuse performance, require the parties to mitigate the effects, or allow either party to terminate after a certain period? The provision should address the risks that are relevant to the particular transaction rather than relying on a generic list of events.
None of this replaces legal counsel. An attorney can help identify potential risks and determine which terms are worth negotiating for your particular business and transaction. The “fine print” may be the least exciting part of the contract, but it can be the most important when something goes wrong.
