STRATEGY GUIDES: BEFORE YOU SIGN: 12 CONTRACT PROVISIONS EVERY BUSINESS OWNER SHOULD ACTUALLY UNDERSTAND

Most business owners know they should “read the contract.” The problem is that commercial contracts frequently contain dozens of provisions that appear routine until a dispute occurs. The first page tells you what you are buying. The last page contains the signatures. The provisions in between often determine who carries the financial risk when the transaction does not go as planned.

At Elkhalil Law, P.C., we encourage business clients to approach contract review differently. Do not simply ask whether the price is correct. Ask what the agreement requires if something goes wrong.

Start With the Identity of the Parties

The first question is deceptively simple:

Who is actually entering the contract?

If your company is XYZ Holdings, LLC, the agreement should correctly identify the entity.

Do not casually substitute your individual name.

Do not assume a trade name is the same thing as the legal entity.

If multiple related companies are involved, determine which one is responsible for performance.

That decision affects liability, payment rights, insurance, and enforcement.

Define the Scope of Work With Precision

Ambiguous scope provisions create expensive disputes.

“Consulting services” may sound adequate when everyone gets along.

It is nearly meaningless when one party says the consultant failed to perform and the consultant says the requested work was outside the agreement.

Describe deliverables.

Identify responsibilities.

Establish deadlines.

Address customer dependencies.

Specify what is excluded.

If additional work will be billed separately, explain how additional work is approved.

The more complicated the project, the more valuable clarity becomes.

Understand Exactly When and How Payment Occurs

Price is only part of the payment provision.

When must invoices be issued?

How long does the customer have to pay?

Is a deposit required?

Are expenses reimbursable?

Can work be suspended after nonpayment?

What happens to a disputed invoice?

Are late fees or interest allowed under the agreement and applicable law?

Is the fee refundable?

For many companies, poor payment provisions can create more practical difficulty than almost any other contract term.

Revenue that cannot be collected is not useful revenue.

Pay Attention to the Term

How long does the agreement last?

One year?

Three years?

Until the project is complete?

Month to month?

Does it automatically renew?

Automatic renewal language can be especially important.

Businesses frequently discover they have renewed a contract they intended to cancel because no one calendared the notice date.

Contract-management systems should therefore track renewal and termination deadlines.

Know How to Get Out Before You Get In

The termination provision deserves as much attention as the commencement provision.

Can either party terminate for convenience?

Is advance notice required?

Can the agreement be terminated immediately for material breach?

Does the breaching party receive an opportunity to cure?

What happens to outstanding payments?

What provisions survive termination?

What happens to customer data, confidential information, or unfinished work?

A relationship may look excellent at signing.

The termination clause is written for the relationship you may have three years later.

Search for Personal Guarantees

Business owners should examine commercial agreements for language that creates personal liability.

Guarantees may appear in a separate document, in an exhibit, or near the signature page.

Do not assume the LLC protects you from a debt that you separately agree to guarantee.

If a guarantee is required, consider whether the scope or duration can be negotiated.

Understand Indemnification

Indemnification clauses are among the least understood and potentially most important provisions in commercial contracts.

In simplified terms, an indemnity can require one party to bear specified losses or claims involving the other.

But the details matter enormously.

Does it apply only to third-party claims?

Does it cover intellectual-property infringement?

Negligence?

Data breaches?

Employment claims?

Violation of law?

Does the indemnifying party control the defense?

Can the protected party settle without consent?

The word “indemnify” may occupy one line while transferring a very large amount of risk.

Find the Limitation of Liability

Many sophisticated agreements limit the amount or type of damages one party can recover.

For example, liability might be capped at fees paid under the contract during a particular period.

The agreement may exclude consequential, incidental, special, or lost-profit damages.

Whether that allocation is reasonable depends upon the transaction.

A $10,000 vendor should reasonably be concerned about accepting unlimited exposure to a customer's multimillion-dollar operation.

A customer may be equally concerned if a critical vendor seeks to limit liability so dramatically that the vendor bears almost no consequence for catastrophic failure.

This is risk allocation, not boilerplate.

Determine Who Owns Intellectual Property

If a business pays another company to create software, photographs, written content, designs, marketing materials, processes, or other intellectual property, the contract should address ownership.

Does the creator retain ownership and grant a license?

Is ownership assigned to the customer?

Are preexisting tools excluded?

Can the vendor reuse portions elsewhere?

What happens after termination?

These provisions should be negotiated intentionally.

Protect Confidential Information

Commercial relationships frequently require businesses to exchange sensitive data.

The agreement should identify confidentiality obligations, permitted uses, permissible disclosures, security requirements, and post-termination obligations.

Highly sensitive transactions may justify a separate nondisclosure agreement.

The key is to align the legal agreement with how information actually flows between the parties.

Examine Dispute Resolution and Venue

A dispute-resolution provision that receives little attention during negotiation can determine the cost of litigation years later.

Will disputes be resolved in court?

Arbitration?

Mediation first?

Where?

Which state's law applies?

Is a jury trial waived?

Are attorney's fees recoverable?

A Georgia company may be surprised to discover that a contract requires it to pursue a relatively modest claim through arbitration in California.

Read the provision before signing.

Read the Entire-Agreement and Amendment Language

Many contracts state that the written agreement constitutes the parties' entire agreement and supersedes prior representations.

They may also require amendments to be written and signed.

That means a salesperson's statement that “we never enforce that provision” may be considerably less useful after a dispute.

Important promises should be placed in the contract.

Important changes should be documented.

Georgia law separately requires writings for certain categories of contracts under its Statute of Frauds, making documentation especially important in transactions falling within those provisions.

Do Not Ignore Insurance Requirements

Commercial agreements increasingly require one or both parties to maintain specific insurance coverage.

Review those requirements before signing.

Does your existing policy satisfy the required limits?

Must the other party be named as an additional insured?

Is professional liability coverage required?

Cyber coverage?

Contractual requirements should correspond with actual insurance coverage, not assumptions.

The Contract Is a Business Decision

The goal of contract review is not to eliminate every possible risk.

Business requires risk.

The goal is to understand which risks you are accepting and determine whether the economics of the transaction justify them.

At Elkhalil Law, P.C., we assist Georgia businesses with drafting, reviewing, negotiating, enforcing, and defending commercial contracts across a wide range of industries.

The best time to negotiate an unfavorable contract provision is before you sign it.

Afterward, the question is usually not what the agreement should have said.

It is what it actually says.