If you're running a business or frankly, you're in any kind of organization, chances are you deal with contracts all the time. When you first start your business, it's really important that you work with an attorney on your first contract. That contract will probably evolve over time. Hopefully, it's going to grow with your business. And as you get bigger and you have different issues, that contract can be constantly updated so that you have the best version for you and your business.
However, when you're starting out, you probably don't know what most of the issues are that your business is going to face. You're not sure where you're going to run into problems with customers, and that's why it's important to work with professionals to get a good first foundational contract for your business. After that point, we can then go back and tweak it and you'll probably understand it, and you won't need an attorney to review every single contract revision with you. But when you start out make sure you understand your contract.
You would be amazed how many business owners sit down and meet with an attorney and they have no idea what the contract says. They probably know a couple of terms like how much money they're getting paid and maybe what they're supposed to do. But do they dive into the rest of the contract provisions? Do they understand what they really signed? And sadly, and don't be embarrassed if you're in the same boat, most business owners don't necessarily understand the entire contract, especially new entrepreneurs who are just starting out and have never dealt with contracts before.
Common Contract Terms
Your contract is going to be much more specific than anything I can cover in a blog post, so we'll review a few general provisions in the contract that you want to make sure you understand. I want to make sure that all of my clients understand any document they sign whether it's a business contract, whether it's an estate plan, it's your document and you need to understand what it says. Some common contract terms include:
- The Term ~ How long does it last? Is it a one-year contract? Is it a two-year contract? Does it automatically get renewed? Does somebody have to send a notice to renew it so you want to make sure you know how long that contract lasts?
- Payment Terms ~ How much are you getting paid under the contract? Or how much are you paying someone under the contract? While that number at first may be straightforward, there can be other provisions in the contract that affect how much you have to pay or how much you're getting paid.
- Your Obligations ~ What are you expected to do under this contract? Is there an exhibit with a scope of services actually described in the contract itself. But however, you're going to deal with that and your contract, you need to understand what is expected of you under this contract.
- Intellectual Property ~ If there are copyrights, trademarks, customer lists, and specific software that you've created, who owns that intellectual property? If you're going to let somebody else use it on behalf of your company, you want to make sure you have the right provisions so that you don't accidentally sign away your ownership to them and they take it and go to your competitor and use your intellectual property.
- Termination ~ How can you end the contract? If you're not happy with what's going on, can you just end it? Do you need a reason to end it? Do you have to give them notice and wait 30 days or 60 days or 180 days before it actually ends? It's important to understand how you get into the contract as well as how you can get out of the contract.
- Liability and Indemnification ~ What happens if something goes wrong? Especially if you're in a line of business working with subcontractors, what happens if one of them messes up? Who is the person that's liable for that which party? And indemnification is a big legal word that a lot of business owners don't understand. Indemnification is if somebody sues you, you're going to cover somebody else's liability so that they're not liable. And the indemnification provision is very important in any of your contracts.
- Tax Issues ~ If you're trying to choose between an employee and an independent contractor, they both have very different tax consequences. And you want to make sure you understand what those are under that contract.
- Governing Law ~ It's usually near the end of the document, you're going to have a provision that says governing law or jurisdiction. What that tells you is, if there's a problem under the contract, if somebody has to sue somebody, where does that lawsuit have to happen? If you're located in New York, and you're working with somebody in Idaho, and your contract says that you have to sue somebody or mediate a dispute in Idaho, as a New Yorker, that's a big trip to go all the way out to those Idaho courts to deal with that. So if you're going to sign that contract, you want to make sure that you understand what that provision says. (As a fun little side note to that, I've helped a couple of different clients over the years who have created contracts by downloading them off the web. And I'll give you one guess what's that provision they forgot to look at? It's the governing law. So I've had New York clients who have a contract with Texas as the jurisdiction, even though nobody under the contract has any connection to Texas, but what happens is they just went to some form website, downloaded the form it didn't realize that they had downloaded a Texas contract.)
- Force Majeure Clause ~ This is what happens when some catastrophic event happens. What does the contract say? Who's liable? What do they have to perform? Of course, for years we have had these clauses in our contracts. And one of the events in there is what if there's a global pandemic? And for years, everyone said, don't worry about it. It's just in there, there won't be a global pandemic. Well, here we are. And what does your contract say about what happens? You can't get any supplies because the supply chain is broken because of the pandemic What are you going to do next? What does the contract require?
Even if you don't want to have the attorney draft the entire agreement or you're the one receiving the agreement from a customer or from a supplier, sit down with an attorney, pay for that time for them to review the contract with you to make sure you understand what you're signing. Because you don't want to be caught off guard. Six months, nine months down the road when you think everything's great and then you find out you're not getting paid anything because you didn't follow the terms of the contract. If you need help with your contract, let's set up a Legal Strategy Session. We'll talk for 15 or 20 minutes about your current situation and give you some best options for the next steps. I know they can be long and they can seem convoluted, but it's very important that you understand those contracts that you're signing for your business.