A well-drafted contract is the cornerstone of any successful business transaction because the charm and business acumen that established the relationship, on its own, may not protect you when things go south later.
Regardless of whether you are contracting with a client, a vendor, a supplier, a contractor, or a partner, clear contracts with the right clauses can protect your business and prevent costly disputes (an ounce of prevention is worth a pound of cure, after all). In this post, we discuss some essential clauses for your business contract and explain why they are important.
1. Parties
Clearly identify all parties entering into the agreement, including legal names, addresses, and roles, to avoid ambiguity later. This ensures that all parties know who is responsible for what. Be precise as to the names, particularly the legal name when identifying your business. Many business owners enter into contracts using informal names of their business rather than the correct legal name – including the corporate identifier (like LLC, Inc., P.C., etc). Failing to correctly identify the party as a separate legal entity can potentially create personal liability for the signor down the road.
2. Scope of Work or Services
In many ways, this is the “meat” of your business contract where the thing being purchased/sold (goods, services, etc) is identified. Define the exact services or products at issue. A detailed scope avoids misunderstandings later and sets clear expectations. To the extent possible, quantify deliverable metrics because amorphous scopes and descriptions can create problems down the road when one party does not get what they were expecting (or hoping for).
3. Payment Terms
This is a business contract, so money is probably important to someone involved (if not the most important thing). Ensure that your contract identifies the payment amounts, due dates, and acceptable methods of payment. Be sure to include terms for interest, late fees, and conditions for refunds to avoid any fighting about money down the road.
4. Confidentiality/Non-Compete/Non-Solicitation
In lawyer terms, these are “restrictive covenants.” In practical terms, these are the provisions that can protect your business interests outside of the transaction itself. Confidentiality clauses can protect your sensitive business information (like client lists, pricing information, etc.) that could be used against you by competitors. Confidentiality clauses are particularly important for business transactions involving proprietary data or trade secrets. Further, depending upon the business relationship at issue, you may want to consider a non-compete clause (which prevents one party from engaging in competition for a specific period of time and in a defined geographic area) and/or a non-solicitation clause (which prevents a party from trying to poach clients or employees). While this area is in seeming constant flux these days, Arizona law generally enforces such clauses if they are reasonable and not overly restrictive (although what that means is deserving of its own blog post).
5. Termination
Identify how and when the contract can be terminated, including notice periods and conditions for early termination to prevent abrupt disruptions to your business.
6. Indemnification
Indemnification clauses protect a party from losses caused by the other party’s negligence or wrongdoing. Often, these clauses may be coupled with insurance requirements for one or both parties. Indemnification (and insurance requirements) are especially important in contracts involving liability risks such as construction or professional services.
7. Limitation of Liability
Contracts are not only about a good or service being sold for a price; they also involve allocating risk between the parties. Risk is partially allocated through indemnification and insurance, but you may also want to include a “limitation of liability” clause. This clause restricts the amount of financial or legal liability that one party may face if things go wrong. Depending upon the circumstances, Arizona courts will enforce limitation of liability clauses that are clear and not unconscionable, which makes this a powerful tool in your business risk management toolbox.
8. Dispute Resolution
Decide how you want disputes to be handled. Everyone hates calling the lawyer (which is probably why you are reading a blog post rather than calling a lawyer) so consider whether disputes should be resolved through an alternative process (such as mediation or arbitration) rather than running to the courthouse. Dispute resolution clauses can save time and money if conflicts arise. Also, for your Arizona business, be sure to include a mandatory attorney-fee shifting provision for a prevailing party to ensure that, if things go sideways and you need to call that lawyer, you can recoup your fees.
9. Governing Law
Now we are moving to the “boilerplate” that you have probably often glossed over when reading contracts. In business, particularly in the internet age where interstate business is easier than ever, make sure to state which state’s laws will apply to the contract. Be sure to include a venue clause that identifies which forum will hear the dispute if litigation becomes necessary.
10. Force Majeure
In that glossed-over boilerplate is often a “force majeure” clause, which addresses unforeseen events like natural disasters, labor strikes, and acts of God. The days of COVID (which are fortunately behind us) served as a reminder of how important the boilerplate force majeure clause may ultimately be when something completely unforeseen comes along that completely disrupts normal operations at your business and beyond.
Conclusion
Business contracts that include the above can help safeguard your interests and maintain productive professional relationships. Arizona business and contract law can be complex on many of these issues and may include nuances that non-lawyers may overlook or misunderstand (and be wary of relying on AI to identify and address those issues). Further, contracts are not a one-size-fits-all product. A contract that may have worked for one transaction can fail to address unique issues arising in a different transaction (so be careful revising on your own a prior contract that a lawyer may have drafted). If you need assistance drafting or reviewing a contract for your business, the experienced business lawyers at Engelman Berger, PC are ready to assist.
Matthew A. Klopp practices in complex commercial, construction, and appellate litigation, drawing on over 20 years of experience to provide strategic legal counsel for businesses and professionals.