Business Contract Provisions – Introduction
Business contract provisions are the terms and conditions under which two or more parties have agreed to engage in a business relationship. Just as there are hundreds if not thousands of types of business relationships, there are just as many (if not more) business contract provisions that might be found in a business contract. This article will describe some of the provisions often seen in business contracts, but it is not a comprehensive list. The list will be supplemented over time, so check back from time to time or feel free to send me an email if there is a provision you would like to see covered. The initial focus of the list will be specific risk allocation provisions that are sometimes used in business contracts relating to goods and services.
Whether or not a business contract has a specific provision and how that provision is deployed depends on numerous factors. For example, some businesses that want to close business transactions quickly have relatively short contracts. This means there are fewer terms and conditions to negotiate, but it may result in less coverage on issues that could give rise to risk and damages. Ultimately, what terms and conditions are included in a contract are business decisions made by a business owner based on their risk tolerance, time horizon, and business needs. In some cases, leverage impacts the terms and conditions, and the smaller player in a business relationship must take on obligations that it would not normally have to if it were dealing with a similarly-sized counterparty or one that is smaller than it.
Business contract provisions come in various shapes and sizes and can vary dramatically even if you see them with a common heading in a contract. Specific terms and conditions may be similar in different contracts and totally different in others. For example, a business that is licensing software to its customers will have a software license agreement that contains many terms and conditions to protect the business. But when that same business licenses software from its suppliers, it will want far more beneficial terms for itself than it would offer to its customers.
Ultimately, what business contract provisions are included in a business contract, and how those provisions are deployed establishes the deal between a business and its customer, vendor, or other counterparty. Business lawyers can assist a company in aligning their business contracts with their goals and objectives and assisting businesses with negotiating and closing commercial transactions.
Risk Allocation Provisions In Business Contracts
While virtually all contractual provisions can impact a business contract’s risk allocation, certain terms and conditions often play a more significant role:
Warranties and Representations. Warranties and representations are included in contracts to provide assurances about certain specific items of concern. For example, a business contract may contain warranties regarding the quality or nature of goods or services offered or provided or about a business being compliant with applicable law. Some business contracts may have numerous wide-ranging warranties and representations covering many topics of concern. In contrast, other business contracts may have a focused set of warranties and representations that tie primarily to contractual performance. In some cases, business contracts expressly state that no warranties and representations are provided and that services or goods are provided “AS IS” and “WITH ALL FAULTS.”
Disclaimers of Warranties and Representations. A disclaimer of warranties provision is typically included in a contract to limit the liability of the party providing goods or services (such as a manufacturer, vendor, or licensor). In many cases, it is included to avoid certain statutory warranties and representations from applying to the business transaction. If these representations and warranties are not disclaimed, they may be found to apply to the business transaction even if the affirmative warranty or representation is not spelled out in the business contract.
Remedies and Exclusive Remedies. Business contracts often provide for what happens if something goes wrong and what remedies a party has in such an event. These can range from termination provisions (as discussed below) to specific remedies that a party may want to be exclusive to limit risk. For example, service providers often request that if there is a problem, they get a chance to fix it after receiving notice. If they cannot fix it within a specified period, the service recipient can terminate the business contract and receive a refund of an amount attributable to the non-compliant goods or services (i.e., and not the entire business contract value).
Term and Termination. When business contracts aren’t working out, a primary remedy is termination. Business contracts often have detailed provisions relating to termination for “cause” (which gives the breaching party an opportunity to cure in most instances) and sometimes termination for “convenience.” Convenience termination provisions provide a party the right to exit the contract for any or no reason subject to a specified period of notice. Most termination provisions in business contracts provide some details on the effects of termination and the parties’ obligations in a termination scenario. Termination provisions may also contain details on transition services, such as a provider transitioning services directly to the customer or a new provider.
Indemnification. An indemnification provision is a clause in a contract requiring one party to compensate the other party for any losses or damages that they incur due to certain specified events or actions. These provisions are often included in contracts to shift the risk of certain types of losses or damages from one party to another. In some business contracts, indemnification provisions may cover areas such as personal injury or property damage, and in technology-related agreements, such as software license agreements or master services agreements for technology development, you may find an intellectual property infringement indemnification provision. Like all risk allocation provisions, indemnification provisions are often the subject of extensive negotiation, with providers preferring narrow provisions and customers seeking broader provisions. Indemnification provisions also relate to insurance requirements, as insurance is often the funding source for indemnification-related claims.
Confidentiality and Security. One risk commonly addressed in business contracts concerns the exchange of confidential information, which may include third-party confidential information held by a party, including personally identifiable information (PII), personal health information, and sensitive data and information. Depending on the nature and type of the information exchanged between the parties, business contracts often also have detailed security-related provisions that are driven by regulatory or other legal requirements. In some cases, specific regulatory structures apply, including those of jurisdictions outside the United States, which may require specific language to ensure compliance. Read more about confidentiality provisions in business contracts.
Limitation of Liability. A limitation of liability provision is a clause in a business contract that limits the amount of damages that one party can recover from the other party in case of a breach of contract or other legal claims.
Limitations on Damages. A limitation on damages provision is a clause in a contract that excludes a party’s ability to recover certain types of damages from the other party. This provision is often used in business contracts with a limitation of liability provision, typically in the same part of the business contract. Both provisions are often part of significant negotiation in some transactions including as to amounts, scope and exclusions from the coverage of the applicable limitations.
Governing Law, Jurisdiction and Venue. The governing law of a contract can have a significant impact on a business contract’s interpretation by a Court. Typically, the governing law of a contract is the law of the State in which one of the parties has its headquarters, but that is not always the case. Parties often negotiate what law governs and sometimes, if permitted by law, choose a different State’s law to govern the business contract.
Force Majeure Provisions. A force majeure provision is a clause in a contract that excuses a party’s nonperformance due to circumstances beyond their control, such as natural disasters or pandemics. These provisions allow for temporary suspension or termination of the contract, depending on the language of the clause and the specific circumstances of the case. Read more about force majeure provisions.
Insurance Requirements. Many business contracts contain provisions requiring one or both parties to maintain certain types of insurance to cover risks and losses that may arise during the performance of the business contract. These provisions can be detailed and are often reviewed by a party’s insurance advisor. The insurance advisor may also review the underlying policies of insurance of the other party to ensure that they are properly endorsed to provide coverage to their client. Insurance advisors are often quick to remind parties that certificates of insurance, by themselves, do not provide coverage or give a party holding one the right to seek coverage from the applicable carrier. Indeed, the certificates of insurance themselves often indicate this with express language in bold letters.
Payment Terms. Payment terms are often key elements in the risk allocation of the parties to business contracts. In many cases, especially with longer-term engagements or relationships, the parties tie payments to agreed-upon milestones or acceptance criteria so that each side understands what the triggers are for payment and payment obligations. Providers often seek to protect their payment risk by adding provisions that permit them to recover their attorneys’ fees and collection costs if their customer does not pay as agreed. Without such provisions in a business contract, courts are unlikely to award attorneys’ fees as the law in most jurisdictions is that if it is not expressly agreed in the business contract, both parties pay their own legal fees unless a specific statute or court rule says otherwise (which is not the case in most instances). As part of the process of negotiating business contracts, some parties will evaluate the creditworthiness of the other party and where insufficiencies or other issues are found, a party may require a third party (such as a parent company or an affiliated company with sufficient assets and creditworthiness) guarantee the the business contract.
Identification of Goods and Services. While it may seem obvious, adequately defining the specific goods and services to be provided under a business contract is an important part of allocating risk between the parties. While some goods and services may be commodity items and require simpler details that are unlikely to become areas of disagreement, longer term relationships relating to the creation or provision of unique or customer-specific goods and services may give rise to differing ideas between the parties once performance commences. In some contracts, such as master services agreements, the details of the goods and services are included in detailed statements of work.
Intellectual Property. Many business relationships are designed for one party to create or deliver items to the other, and business contracts often contain intellectual property ownership provisions that make clear that the customer owns the items and associated intellectual property rights. If a business contract is silent on intellectual property ownership issues, the provider may retain ownership of what is created and the customer may only receive an “implied license” to the items which can lead to significant disagreements down the road. In some business relationships, each party brings their own intellectual property to the table or brings the intellectual propery of third parties. In these situations, the business contract often contains detailed provisions regarding the use of pre-existing intellectual property and third party intellectual property, which also may require addressing related issues in the business contract’s representation and warranties and indemnification provisions.
Restrictive Covenants. In addition to confidentiality provisions, business contracts may often include other restrictive covenants such as a prohibition of each party from soliciting the other party’s personnel for employment or engagement. Depending on the nature or sensitivity of the business contract, other restrictive covenants may be added such as those relating to solicitation of customers, the ability of a party to compete with the other in certain areas and other provisions that a party deems necessary to protect their business interests. Restrictive covenants are often coupled with a provision designed to increase their enforceability as restrictive covenants law is evolving and in some jurisdictions certain restrictive covenants may not be permissible or may be subject to significant scrutiny and modification by courts.
Dispute Resolution. While many business contracts address only governing law, jurisdiction and venue with respect to disputes, other business contracts may set forth frameworks for dispute resolution that include mediation, arbitration and access to the courts in different ways. These provisions may be binding or non-binding but may give the parties an off-ramp to a business relationship that has soured without resorting to an expensive litigation process. However, many parties have found that these alternative dispute resolution paths may ultimately not save time or money and may turn out to be more expensive than litigation.
Miscellaneous Provisions. While many business contract readers lose steam as they approach the “Miscellaneous” section of the agreement, they should not do so. There are areas of risk allocation that customarily involve provisions in the “Miscellaneous” section of a business contract. For example, a business contract often includes a provision that clarifies that the business contract is the parties’ entire agreement, supersedes prior agreements or understandings, whether written or oral and may only be amended by a specific procedure. In addition, the business contract may contain terms restricting a party’s ability to assign the business contract to a third party or delegate obligations to others. These are just examples of certain miscellaneous provisions in business contracts.
Business Contract Provisions – Conclusion
Provisions in business contracts can help the parties allocate risks efficiently. What business contract provisions are chosen and how they are deployed are ultimately the parties’ decisions. Business lawyers can assist companies in designing and negotiating business contracts to match the risk tolerance, time horizon, and business needs of the business. Many businesses maintain a business contract template library for commonly used agreements so that they can close business transactions efficiently. This contact template library may also include an “alternative langugae” library for certain business contract provisions that are commonly requested in different forms than in the base template. With alternative language ready, the business owners can spend less time negotiating business contracts and more time closing new deals.
Shared by Geoffrey G. Gussis, Esq., a business lawyer and technology lawyer licensed in New Jersey and New York. Learn more about me, the legal services I provide, and articles I have written. Contact: email@example.com or (732) 898-0549 or (646) 389-2946 for a free consultation.
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