Part 2: What’s in a Contract?

This resource has multiple chapters. Use the navigation on the side or below to browse each chapter.

Last time we talked about different ways of forming a contract, some shakier than others. To be on really solid ground, you want a written contract that covers the basics of your agreement. You also need to think about the terms of the contract.

Leave Out Important Pieces of the Contract at Your Own Risk.

Every important piece of your agreement should be there, so that anyone reading it would know exactly what the parties had agreed to. What happens if there are missing pieces, such as a date, quantity, or financial term? If there is a dispute, the court could take more than one approach. One possibility is that the terms missing are important enough that there has been no “meeting of the minds”—in other words, no contract. Another possibility is that the judge will assume that you meant reasonable terms, and add those for you, especially if there is a standard practice in your industry. Or the judge could take additional evidence, if there is any, on what the parties intended for the missing terms. If you think this sounds time-consuming and expensive, it is. Make sure your contract is complete!

Let’s review some of the common contract clauses, and discuss why they are there, and how they might or might not benefit you.

Clauses About the Parties

The contract usually defines who the parties are and the relationship between them, as well as what power each party has to act on the other party’s behalf (if any), so that is clear throughout.

An assignment clause clarifies whether you or the other person can or cannot assign or subcontract your rights and duties in the contract to another person or entity. There may be times when you don’t care—Company A or B can provide your widgets—or times when you do care—only the famous artist can create your fabulously expensive sculpture. This may be important when one of the companies is being sold or acquired.

Be sure that the signature on the contract is right. For instance, if the contract is with a business entity, it should be signed by an officer on behalf of the entity, and not personally. This is important to avoid personal liability.

Negligence and Liability in Contracts

An indemnification clause has one party indemnify the other for any negligence, or perhaps the parties mutually indemnifying each other for their own negligence. Supposing you contract with a contractor to work on your property. You may ask the contractor to indemnify you for any accidents that happen on that job, so that your liability insurance won’t have to cover it.

The contract may also limit liability in some way, by defining what type of damages will create liability. For instance, a company might be liable for direct damages, like property damages, but not indirect damages like loss of business.

And speaking of indemnification, you’ll certainly want to define who carries insurance, and how much is a commercially reasonable amount. Uninsured liability can destroy a business.

These are a few of the important clauses. In Part Three, we will continue with more important clauses.