Demystifying Key Contract Terms

Contracts can be scary and confusing for people unfamiliar with them. However, they are a critical piece in protecting yourself and your business.  To try to help demystify contracts, below is an overview of the key terms that should be included in your contracts, and what the purpose of each of the terms is. 

Parties 

If you operate your business as an entity, such as an LLC or corporation, then it is critical to make sure that your entity is the party to your business-related contracts, otherwise you will be personally liable under the contract. If you do business under a name different than the legal name of your entity, you need to make sure the party identified in the contract is the legal name of your entity, not the name you may otherwise be doing business as. 

Scope of Work 

Especially for businesses providing a service, rather than a tangible product, ensuring that that scope of work details the specific services to be provided, and what happens if any additional services are requested or ultimately required, is critical.  A detailed scope of work helps to establish the parties’ expectations and avoid conflict down the road.  It also makes it more likely that you’ll be able to enforce your contract to get paid for your services and defend against claims that you failed to provide a service outside of the scope of work. 

Payment Terms 

In every vendor and client agreement, the payment terms should be clearly set forth outlining when payments are due and what happens if a payment is late or simply not made.  While this doesn’t guarantee timely payment, it does at least outline the terms should you need to pursue legal action and can also provide for recovery of attorney’s fees.  

Ownership of Work 

If you’re purchasing or providing a unique/custom product or service, then the agreement should outline the parties’ rights regarding ownership and/or use of the delivered product or service.  Usually, the client that is purchasing the product or service will become the owner of the final delivered work product.  But what about things used to create that final work product, such as code, processes, and other products or information for which ownership should not be transferred to the client?  The agreement should establish what parties retain ownership and/or use rights over both the final work product and the materials that went into creating that work product. 

Termination 

A critical issue that should be addressed in an agreement is if and how a party can terminate the agreement and what happens upon termination.  The parties’ termination rights and remedies should depend on the type of product or service being offered, what the payment terms are, and whether performance is limited to a single event or occurs over a longer period of time.  Not only should the agreement specify under what conditions a party can terminate, but also what each party’s rights are if terminated. What happens to fees already paid?  What happens with the fees yet to be paid? 

Force Majeure 

Before Covid, not many people were aware of a force majeure clause. Now, it is something people expect to see. It essentially forgives the parties’ performance of their contractual obligations if certain events outside of their control occur, like fire, war, pandemic, or government order. Although parties should not be penalized for these events, one party should not bear more of the burden than the other if such an event occurs.  

Indemnification 

Indemnification means one party being responsible for defending against and paying for claims made by third parties against another party to the agreement. Your agreement should identify if and when one party must indemnify the other.  For example, if you sell a product to a client and a third party makes a claim against you for an injury caused by the client’s use of that product, why should you be liable? 

If you would like to retain NextGen Counsel LLC to review or prepare contracts, contact Michael H Ansell, Esq., via email or telephone, to discuss retaining NextGen Counsel LLC. 

Information contained in this post is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular situation, we urge you to consult with Michael H Ansell, Esq., or other competent legal counsel. 

NextGen is not engaged in the providing of tax advice.  NextGen does not offer, nor profess to provide any information or advice regarding the application or impact of federal, state, or local tax statutes, regulations, ordinances, guidelines, advisory opinions or other requirements or information provided by governmental agencies and authorities.  NextGen strongly recommends that you consult with your tax professional regarding the applicability and impact of the foregoing.