Business Owners - 5 "Standard" Contract Provisions That Can Bite You in the Bum

Like many lawyers, I often get asked to review contracts for business owners and consumers alike. One thing I’ve noticed recently is that a lot of the biggest problems I've seen over the years have often come from similar issues. So I’ve put together a list of 5 so-called “standard” contract provisions that can create big time headaches if a dispute arises. In fact, some of these can totally sink a business. And I want you to be aware of how important they are so you don't scan over them, assuming they are just "standard" contract language that is just "boilerplate."

1) Pricing/billing

This should be one of the easiest things to make clear in a contract, but when the arrangement is anything other than “this is what it costs, I’ll pay you, and you’ll give me the thing,” it’s easy for parties not to be 100% on the same page.

If there’s a payment plan, what are the terms and conditions for timing of payment and delivery of the service or product? Is the language a reflection of a crystal clear understanding shared by the parties? What about late fees? Is there a service charge for credit card payments (and are they permissible under your state law)? How is the interest calculated on overdue balances?

These are all important issues that may not be big deal, or they could become the straw that breaks the camel’s back if you have an already tenuous relationship with a customer.

So make sure your contract says what you truly want it to say.

2) Indemnification

Indemnification is a promise by one party to pay for any claims brought by the other party by someone else not involved in the deal. It's a way to shift the risk of loss from one party or the other. In other words, if you get sued by somebody else for work I did for you, then I may agree to deal with that lawsuit, pay your costs of defense, and handle the matter.

This kind of situation could arise in lots of ways, but it is SUPER important that everyone understands what it means, how it works, and what everyone’s duty is to cooperate, report, and respond to claims if they come in. It is also important to make sure indemnification provisions are ok with your insurance carrier.

Unless you truly understand what kind of risk you are assuming, and all the other issues that come with that risk, this is something that is worth discussing with your lawyer. Because not doing so could totally sink your business.

3) Intellectual Property

This is an area that is affected by state and federal statutes, common law, and the phases of the moon. Intellectual property is complicated and if you have some, are creating some for someone else, or are paying for someone to make it for you, then you better be sure you know how it all works. IP litigation and issues that arise require the use of highly specialized (and highly expensive – often $700 an hour and up expensive) lawyers to clean up messes when they occur.

Making sure you know what you have, what your rights are, and how to protect them is paramount to running a business and keeping it out of conflict.

4) Limitation of Liability

This is one contract provision that has created a big time surprise for people. It means that parties agree that no matter what, another party cannot be held responsible for damage they cause beyond a certain amount. Perhaps it’s a software vendor who charges $100 for the program, but you install it and it totally destroys your entire system due to its design. If your agreement limits their liability to what you paid for the software ($100), then you’ll be on the hook spending whatever it takes to fix the problem. You’ll get your $100 back (potentially), but whether you get all your lost client info back is another matter.

The key here is to be aware of what you are signing and be sure any limitation of liability is related to the amount of risk you are – or are not – willing to take.

5) Arbitration

Boy, oh, boy. This is one provision that has become more and more common in all sorts of agreements, from consumer and financial transactions, to your neighborhood car mechanic. The problem is that most small business owners don’t truly understand the implications of including an arbitration provision. They hear from one source or another that arbitration is less expensive and time consuming than court – and that’s all they need to know. The reality is, it could end up being neither of those things.

Arbitration has lots of advantages, but it also has disadvantages. It is important to know what those are for your business and the arbitration forum you want to include in your agreement – or that is included in an agreement you are asked to sign. It’s also important to know how the arbitration process works in the chosen forum and how (and how much) arbitrators get paid.

I’ve seen more than one commercial (i.e., B2B – the size of the businesses is irrelevant) arbitration require 6 figure deposits just to get them moving because of the complexity of the case and the cost of the arbitrators. They get paid by the hour and if you have three of them … that adds up real fast! They get paid to review the documents filed by the parties, their time traveling to, attending, and getting home from the hearings, and for the time it takes to review the evidence and testimony and eventually write the decision.

On the up side, arbitrations are generally private. The filings are private, the documents are private, and the hearings are private. That can be really important in some situations.

Arbitration can also have a lot more limitations on discovery, and flexibility with the procedure.

Ultimately, whether it is the right choice for you is something you should decide after discussing it with your own lawyer.

If you are at all concerned about any of these “standard” contract provisions in your own business, or have other issues you want to review (there are always plenty more!), I can’t say strongly enough how beneficial it can be to develop a relationship with a lawyer who understands you and your business. If that’s something you would like to do with us, reach out, book a free call, and we can talk about your needs and what we can do for you to take care of them.

Have a great rest of your day!

-Angela