If you're running a business, you likely know how important contracts are to your business. Sometimes, those contracts can be brief, maybe even just one page long. Other times, the contracts can be much longer, and it can be intimidating to even think about reading the entire contract. Whether it's a short contract or a very long one, there are some common clauses that you'll want to consider when you are putting together (or reviewing) a contract.
Trying to do this yourself by copying someone else's contract or downloading a form that you found on a website may seem like an easy fix, but without professional guidance, you can end up with an agreement that isn't actually in your best interests to sign.
Whether you're doing it yourself or working with a professional, there are five main clauses that you should consider for your business contract.
Scope of Work (SOW) or Services Description
One of the most critical elements of a contract is a clearly defined Scope of Work (SOW) or services description. This clause outlines exactly what each party is responsible for, ensuring there is no ambiguity regarding the expected deliverables, timelines, and performance standards. These clauses are important as they:
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Prevents scope creep by setting clear expectations
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Provides a reference point in case of disputes
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Ensures accountability and smooth execution of services
Without a well-defined SOW, parties may have different expectations, leading to delays, additional costs, and dissatisfaction. This can become a common source of disagreement between the parties that can even lead to lawsuits.
Payment Terms and Schedule
This is one of the clauses that everyone looks for when they first receive a contract. Clearly outlining payment terms ensures that all parties understand how and when payments will be made. This clause should include details such as the total amount payable, due dates, late fees, acceptable payment methods, and any conditions for refunds. These clauses:
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Ensure timely payments and cash flow stability
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Reduce disputes related to financial obligations
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Protect against non-payment or late payments
Without clear payment terms, clients may delay payments, leading to financial difficulties and operational disruptions. It should be clear to anyone dealing with contracts why this clause is so important to your contract.
Confidentiality and Non-Disclosure Clause
A confidentiality clause, sometimes referred to as a Non-Disclosure Agreement (NDA), protects sensitive information shared between parties. This is crucial when dealing with proprietary data, business strategies, customer lists, or intellectual property. Some considerations for you if you'd like to add this to your contract:
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It provides safeguards for trade secrets and business information
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It builds trust between parties
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It prevents unauthorized sharing or misuse of confidential information
Without a confidentiality clause, sensitive information could be misused, harming a business’s competitive advantage and reputation.
Dispute Resolution Mechanism
No matter how well a contract is drafted, disputes may arise. A dispute resolution clause outlines how disagreements will be handled, specifying whether the parties will use negotiation, mediation, arbitration, or litigation. Some advantages can include:
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Saving time and money by avoiding lengthy court battles
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Providing a structured approach to resolving conflicts
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Ensuring disputes are handled in a neutral and fair manner
Before you even consider this type of clause, however, you need to understand that each of these paths to resolution have their own pros and cons and you need to understand them before putting them into your contract.
Termination and Exit Strategy
Every contract should include a termination clause outlining the conditions under which the agreement can be ended, the notice period required, and any associated penalties or obligations upon termination. These clauses:
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Provide clarity on how and when a contract can be ended
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Reduce risk of sudden disruptions or losses
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Protectsparties from premature or unfair contract terminations
A cousin to the termination clause is the force majeure clause, which provides circumstances where a catastrophic event intervenes and a party can be excused from having to perform under the terms of the contract. Generally, without a termination clause, businesses may face difficulties ending unproductive or unfavorable agreements, leading to unnecessary financial and operational strain.
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A well-drafted contract is a crucial tool in safeguarding your business interests and ensuring smooth professional relationships. By including these five must-have clauses—Scope of Work, Payment Terms, Confidentiality, Dispute Resolution, and Termination—you can protect your business from misunderstandings, financial losses, and legal issues.
Whether you’re drafting a new contract or reviewing an existing one, make sure these essential clauses are in place. If needed, consult a legal expert to ensure your contracts are comprehensive and enforceable. A strong contract doesn’t just protect your business—it sets the stage for long-term success and professional integrity.
Do I Need a Business Attorney?
If you're putting together contracts for your business and want to discuss the clauses in your contract, let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you and your business.
