Contracts are a core part of running a company. From formalizing a partnership to hiring employees to selling your product, even down to hiring a plumber to fix your office bathroom, contracts determine the details of how your business does business. Because contracts are so integral to running a company, having experienced corporate counsel who you can reach out to for help with your basic contracts (and who can answer questions about new contracts when they arise) is incredibly important. Though the contracts you’ll run into over the years will be remarkably diverse, they all tend to include a few standard clauses that could, perhaps surprisingly, end up being very important down the road.
In this post, we’ll outline five common contract clauses and why they’re important to your business.
- Indemnification: “Indemnification” occurs when one party agrees to be responsible for future problems or damages on behalf of another party. For instance, if your business enters into contracts to sell a particular product, you’ll probably agree to indemnify the purchaser of your product for any harm caused by a malfunction or defect. The important thing to watch out for with indemnification clauses is how broadly the clause is written. If you’re the seller, for example, you probably want to either limit the circumstances under which you can be held liable or cap the amount available in recovery to the value of the contract. Meanwhile, if you’re the buyer, you’ll generally want a broader indemnification clause, to ensure that you won’t be held liable for anything that goes wrong with the product or services you’re buying.
- Choice of Law: When there’s a contract dispute, the “choice of law” clause is what sets the terms of handling the dispute. A well-written choice of law clause will set forth both the law to be applied (for example, “the law of the state of California”) and the venue in which future disputes may be heard (for example, “in Los Angeles County”). In most cases, you’ll probably want to choose a local court to resolve the disagreement, to prevent the future inconvenience of having to travel long distances to deal with a lawsuit. However, sometimes you’ll have reasons for wanting to choose a different jurisdiction, such as the law in a different jurisdiction being more favorable for the sort of contract you’d like to draft. Your business attorney can advise you on how to proceed, particularly in these edge cases.
- Severability: Generally speaking, a “severability” clause allows courts to “sever” (or remove) certain portions of a contract without invalidating the entire contract. Without a severability clause, the general rule is that one invalid clause in a contract renders the entire contract invalid. Adding this sort of clause allows the court, when interpreting your contract during a dispute, to cut out the offending clause and leave the rest of the contract intact.
- Integration: A written contract is often the culmination of a huge amount of verbal discussion and negotiation, or sometimes even “back of the napkin” agreements. An “integration” clause states that the written, formal contract contains the entire agreement between the parties, superseding any prior agreements and discussion. This can significantly clean up a deal, as it allows parties to have only a single document to refer to after negotiations are complete. It also helps to mitigate the risk of one party to a deal showing up later with a fake “earlier” contract with entirely different terms. (Note that this clause does not prevent parties from amending a contract later, should they so desire; it simply states that the current contract supersedes any prior negotiations or understandings.)
- Attorneys’ Fees: “Attorneys’ fees” provisions can, in some cases, be the most important part of a contract. This clause serves to assign additional damages/monetary recovery in the case of a future dispute, by stating that particular parties are entitled to recover their attorneys’ fees incurred in a future contractual dispute. This clause can be written a number of different ways, sometimes limiting the parties entitled to attorneys’ fees or the situations in which attorneys’ fees can be recovered. Other times, this clause is mutually beneficial, with the “prevailing” (or victorious) party being entitled to this recovery. Given that attorneys’ fees incurred in litigation can often be substantial, knowing how that burden will be carried can be an incredibly important thing to establish upfront.
The team of experienced business attorneys at Chase Law Group, P.C. can help you better understand any contract your business needs. We help with operating and partnership agreements when you’re setting up a new company, employment and independent contractor paperwork as your team grows, licensing and franchising agreements as your business expands, and much more. Call (310) 545-7700 to schedule a consultation today.