Despite the wide variety of contract types you may encounter as a business owner, many contract templates include similar key terms and provisions. Several key contract provisions & their meanings are outlined below.
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Definitions / Defined Terms - Nearly all contracts include “defined” terms, and if they don’t, they should! Defining relevant key terms provides the clarity needed for interpreting the contract both before and after it’s signed. Defined terms also allow you to shorten the document by reducing a repetitive lengthy explanation of important aspects of your agreement that will be discussed multiple times throughout the document. For example, you may define the term “Confidential Information” to specifically list everything your company deems to be confidential, and the term “Services” to specifically list all anticipated actions that the servicing party may be taking. A defined term is typically capitalized, underlined, or italicized throughout the entire document.
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Purpose - Often located on its first page, a contract may narrowly define the “Purpose” to expressly limit which activities and items will be covered by (and thus governed by) that specific document. Contracting parties often have multiple agreements in place over the course of their business relationship (e.g. a CDA, master service or partnership agreements, SOW’s, purchase orders, etc). Narrowly defining the purpose of each individual document also eases the otherwise cumbersome process of internal contract management.
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Confidentiality - A confidentiality clause should be included in every agreement under which the parties may be sharing proprietary and/or sensitive information (unless a separate standalone CDA already exists between the parties). This ensures that confidential information is thoroughly protected at every stage of the relationship. Be sure to explicitly define what is, and what is not, considered “Confidential Information” by the parties by expressly defining this term.
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Term/Termination - Considered by some to be the most important term in a business contract, this term should set forth the procedure for terminating the agreement as may be appropriate based on the specific circumstances. For example, it should detail who may terminate, how much advance notice is needed, and what steps must be taken (and by whom) with respect to any confidential information, data, products, or IP developed under the agreement. Be wary of language around payments owed upon termination, e.g. the remainder of the contract even if products/services are not provided beyond the termination date.
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Dispute Resolution - This clause sets forth what happens when a dispute arises under the contract. The parties may agree to settle disputes out of court in order to avoid the high costs and uncertainty of lawsuits. They may first attempt negotiating a solution in “good faith” and/or enlist a mediator to do so. In some cases, where no resolution is achieved by mediation, the parties may opt for binding arbitration proceedings.
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Warranties - This term often sets forth what each party guarantees (or does not guarantee) to the other and will vary considerably from contract to contract. For example, a CDA may state that the disclosing party warrants that it has the right to disclose the information (via title or permission) but does not warrant that any of the information shared is accurate. In another example, a Purchase Agreement may state that the seller warrants that the goods do not infringe third party intellectual
property but does not warrant that the goods sold will meet certain quality standards. Be sure to read warranty clauses carefully and understand what you are really giving up.
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Limitation of Liability - Most contracts include a provision that specifically limits what each party may be held liable for or that completely disclaims all liability arising from either parties’ actions under the contract. For example, a software company may specifically disclaim liability for problems that arise from the customer’s use of their software. Alternatively, the software company may more generally disclaim all liability, i.e. for any problems whatsoever, that may arise from that contract. Be sure to read liability clauses carefully and understand what you are really giving up.
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Non-Solicit & Non-Compete - Sometimes a company will require the other party to agree not to solicit or offer to hire clients or employees of the company for a set number of years after the contract terminates. Similarly, a company may require the other party to agree not to perform similar services or obligations (or sell similar products) to a competitor of the company for a set number of years. These provisions can be overly broad and cumbersome, in particular where you are an individual or small company and have little leverage to negotiate with. Be sure to read these clauses carefully and understand what you are really giving up.
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Jurisdiction / Venue - Jurisdiction (or venue) defines where litigation arising from the contract must take place. If the other party insists on a venue located far from you, consider adding a requirement that the parties first attempt to negotiate a settlement “in good faith” before bringing a lawsuit, as the costs of traveling and hiring an out of state attorney may be overly burdensome.
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Kae Gruner, Founder, Start Up Heart Up
Patent lawyer, deal-maker, & lover of ideas, Kae founded Start Up Heart Up with the goal to empower everyday entrepreneurs. Whether building a new business or starting a side hustle, Kae’s expertise in intellectual property and business law can help you bring any dream business from idea to launch.