People often say that contracts are the lifeblood of a business. It is certainly true that written agreements dictate a company’s revenue and obligations to a great extent. However, contracts don’t always guarantee performance by the parties involved, and mistakes or omissions when drafting a contract can limit how much a contract’s terms can ultimately protect the business.
The best contracts are custom documents drafted for specific scenarios. Including the following options when drafting a business contract can potentially strengthen a company’s position. Unfortunately, a contract rarely can provide complete protection because disputes can arise regardless of how careful someone is when drafting their contract.
1. Severability clauses
A business needs to determine whether a violation of one aspect of the contract would invalidate the rest of the agreement or not. Severability clauses can impose an obligation to continue with the contractual agreement despite a breach or can absolve an organization of responsibility to continue a working relationship with a party that has not upheld their end of the agreement. This provision commonly appears in business contracts.
2. Conflict resolution clauses
When the parties that sign a contract end up disagreeing with one another, the matter can end up in civil court, which can be both expensive and embarrassing for everyone involved. Including alternative dispute resolution requirements, such as a promise to attempt mediation before filing a civil suit, could potentially help businesses limit their costs related to contract issues. Some contracts include arbitration clauses, but including those needs to be carefully scrutinized because some types of arbitration can be more costly than a lawsuit filed in Court.
3. Confidentiality clauses
Whether a company is about to hire a new engineer or start acquiring merchandise from a new vendor, they may not necessarily want the details of their relationship or of their business operations shared with others. Confidentiality clauses in contracts prevent the disclosure of private information that could affect a company’s competitive edge or reputation.
4. Penalty clauses
Different kinds of contracts may necessitate different types of penalties. For example, a contract with a client or customer might include a penalty for late payment, while contracts signed with new employees might impose a penalty if a worker goes on to share trade secrets with a competitor later. Acknowledging risks inheritance in the contract relationship and imposing a financial penalty for certain breaches can deter bad behavior in some cases and help people pursue a more equitable outcome if they do go to court. One example of this type of clause is a “liquidated damages” clause which predetermines damages in the event of a contract breach.
Contracts are only as effective as they are thorough. Including carefully drafted clauses in every contract can help maximize the protection for the businesses that are affected by their terms.