When your business is dealing with contracts, you need to understand the different terms that make up the contract. A common question I get from business owners (and non-business owners) is when you've been handed a big long contract, do you really need to read all of the contract?
As a lawyer, you know what I'm probably gonna say. That is, yes, you need to read the title. But to try to help you along today, we're going to look at nine different terms, nine different types of provisions you're going to see in your contract that you want to make sure you go through.
Common Contract Terms
There are going to be more terms in your contract, but there are some common provisions you want to look for when you are working on a contract.
- The first term, the first provision is actually called the term and the term is how long does your contract last? Is it a one-year contract? It is a multi-year contract. Does it have an automatic renewal clauses, does somebody have to send you a notice if they intend to renew it? Or do they have to send you a notice of intent to cancel it? So the first thing when you're looking at a contract is to understand how long that contract lasts? What is the time period.
- The second provision you need to look at which you're going to be very interested in any contract is the payment terms, whether you're the one paying the money or receiving the money? It's very important that everyone understands how the money is moving between the two parties or more parties, in any kind of contract, how much you're gonna get paid, or how much do you have to pay? What you think is gonna be a straightforward number may not be if there are other provisions later in the agreement, where there's a percentage of sales or maybe someone's own commission on something else we need to look at and understand all of the different payment terms.
- The third provision we're going to look at is what are your obligations and there's probably not going to be your obligations as the name of the provision, but you want to understand what you're obligated to do. Read through the agreement. Figure out what you have to do. What are you being paid for? Or what are you paying? And what is the other party doing to satisfy their terms under the contract.
- The fourth thing we want to look at is intellectual property. So this is a fancy legal word for your copyrights and trademarks, and your other property that is, you know, it's not like buying a car, you know, it's not your wheels for your car. It's all of the patents and the design that went into that wheel that went into that car. If you're working in a contract, and the two parties are going to be sharing some kind of intellectual property, we want to make sure we understand what that contract says, who's going to own it at the end of the contract. If somebody's bringing their own intellectual property into the contract, they usually want to make sure that it stays there after the contract is over. You don't want to endanger your intellectual property if you end up in a lawsuit.
- The next provision to look at is termination. How do we end the contract? So if you have a simple one-year contract at the end of the one year, you're done, however, in a lot of other contracts, you may have ways you can terminate the contract. And if that is the case, what do you have to do to terminate the contract? Is there a notice you have to send is there something else that has to happen? So make sure you understand how you can terminate that contract? And if there is no termination clause, then you may want to be concerned about whether or not you want to sign this contract. Because that may be that you're stuck in this contract and you're paying money, no matter what because there's no way for you to terminate the contract.
- In the next provisions, we look at our liability and indemnification. And these provisions say what happens when something goes wrong? Who is going to be responsible if somebody has an insurance policy is the insurance policy going to pay for it? And then we look at the word indemnification. This is another one of those big legal words that people often see and they stop and I didn't want to read this permission. I don't understand indemnification. So what it is, is it says that you're essentially insuring somebody else's obligation. So a subcontractor indemnifying. A contractor means the subcontractor will be responsible so that somebody couldn't sue the contractor for the subcontractor's work.
- The next provision we want to look at is tax issues. So depending upon the nature of the contract, if it's like an independent contractor or if it's an employment contract, we want to know if tax issues are spelled out. Independent contractors do not want to be treated as employees and companies do not want to treat independent contractors as employees. However, if it's an employee working with a W two at the end of the year, we want to make sure that the agreement is clear on what the tax implications are for both departments.
- And then Governing Law is another provision to pay attention to. A lot of times people gloss this one over because it's near the end. It's just it's gonna say in case of a dispute, the laws of blank so the laws of New York will governance dispute. If you have two people living in New York, exchanging goods, whatever they're doing in New York under the contract, that's perfectly fine. What I often say is, one party has gone online, and they've downloaded a contract template from somewhere they've gone to some website, and there's a great this will be fine. And so then they fill it out. They put their information in the Senate to the other party, and they sign it and everyone thinks it's good. Until there's a problem. And you find out that the first party is in New York. The second party is in New Jersey. But the contract has a governing law clause of Texas. There's no reason why a New Yorker and someone from New Jersey should have to then fly to Texas to have a lawsuit or have a dispute. You can easily do it in New York, you can easily do it New Jersey or you can fight over which state it should be in. But that governing law provision, it's important to understand where it's placed in the jurisdiction, so you know what court you have to go to, because in our example, if that New York party sues the New Jersey, defendant says New Jersey party in New York court, the jersey defendant say Ah, we have to go to Texas so we can dismiss this case and good luck figuring out how to file your case in Texas. And then you get to Texas where the Texas judge may say I don't want anything to do with this what do I want to do with a New Yorker, and somebody's going to Jersey. I don't want to be part of this either. And you're stuck in this weird limbo, because you downloaded some random contract from the internet and didn't look at what the government law provision was.
- And the final provision that we're gonna look at, which has been very important over the last couple of years is what's called a force majeure clause. The force majeure clause says, what happens under the contract if there's some catastrophic event. Now for years, we've had things in there we've actually had the word pandemic and a lot of our contracts were but nobody thought that pandemic is going to happen. And now here we are, we have to figure out what does their supply chain issues if there's some problem when you're unable to get the goods you need to ship to the other party? Is there a force majeure clause? If so, that clause was saying what happens in the event this catastrophic event is happening? Which party has to do what things do you still have to make a payment does the other party have to pay you? So you want to make sure you're looking at your force majeure clause these days? It does, especially in the last couple of years, we've learned it can be a very important plus. We want to make sure we got all of our bases covered.
The first way to approach a contract is that you could try to do it yourself. Go online and try to download some form and hope that you're not from New York with a Texas governing law provision, or hope that you don't have to download a contract without a force majeure clause. But the second way to do it, the smarter way to do it, which you'll probably do is to work with a professional. Even if you're just consulting with an attorney for an hour, bring them the contract, pay them for their time to review the contract, and make sure you've got the right contract with you and your business. Or if you're not sure if you should sign a contract, the same principle applies, meet with an attorney, talk to them and figure out whether or not you should be signing this contract. If you have more questions about your contract or some of these provisions, you can set up a Legal Strategy Session, a 15 or 20-minute phone call to get to know each other and figure out where you are in the process and what are those next steps because you don't want to be downloading some random contract on the web and not understand any of these provisions. Because if you sign it and the other party signs it, you may be stuck with it, no matter how bad that contract is.