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This post is part of the “Launch It Legally: An Attorney’s Guide to Starting Your Business” series.
As a small business owner, it’s exciting to land your first client contract. Your business is finally starting on its journey of becoming profitable and growing! But while it may be tempting to skim past the details so you can get started on your primary work, taking a step back to review the agreement thoughtfully can help prevent costly disputes down the road.
Customer or client contracts contain a multitude of clauses, and it can help to know which ones are most significant and how they should be crafted to protect your interests. Below are the key clauses to consider (and potentially negotiate) in your first client contract.
Payment Terms
Arguably the most important part of any client contract, the payment terms should outline specifically how much you charge for your services and how you will receive payment. Do you charge hourly and require an initial deposit to get started? Or do you charge a flat monthly or project-based fee? If you send invoices to collect payment, how long does your client have to pay the invoice? Also consider including late fees or interest on late payments, and language that allows you to suspend services in the event your client does not pay pursuant to the agreement.
Term and Termination
This provision defines how long the agreement is in effect and how either party can end it. Many business contracts are for a set term (1 or 2 years) but can be terminated in the event a party breaches the agreement. From a practical standpoint, it generally makes sense for either party to be able to terminate for any reason (with or without cause) with advance notice (14 or 30 days, depending on the services rendered). Be careful not to lock yourself into a long, inflexible contract, especially if you are an early-stage business.
Scope of Work
Clearly defining the work you will be performing for your client is paramount to a successful client contract and a rewarding ongoing client relationship. Setting deliverables and timelines can be very helpful in ensuring both parties are aligned on the services.
The contract should also outline how changes can be made to the deliverables and if any change will result in a price modification For example, if the client asks for a last-minute change, will you agree and if so, do they owe more money? Finally, make sure anything that you and the client discussed or agreed on over emails, phone calls, meetings, or texts are included in the agreement.
Intellectual Property
All client contracts should include intellectual property (“IP”) language, though the breadth of the language depends on the services you provide. Questions to consider when preparing and negotiating the agreement are: Who will own the deliverables? Which IP will remain yours, and which IP will be the clients? Are any license rights being granted, and if so, are they limited or a full assignment? Also consider whether you will want to showcase your work or utilize your client’s name or logo for marketing purposes. If so, this usage should be specifically stated in the agreement.
Client Obligations and Cooperation
Will you require your client to provide any information or otherwise cooperate with you (responding to emails, allowing access to systems, etc.) in order for you to perform the services? Describing in detail what you expect from the client is key for ensuring mutual understanding between the parties. Such detail can also provide a defense in the event a client alleges that you did not effectively perform the required services, if your lack of execution was a result of the client failing to cooperate according to expectations as required under the agreement.
Indemnification/Limitation of Liability
Simply put, indemnification shifts liability and responsibility for certain claims between parties, dependent on particular circumstances. For example, if an accident would normally cause your business to incur liability, but you discover that the accident was a result of your client’s negligence or because your client materially breached the agreement, the client could be held liable if the indemnification clause is drafted appropriately.
Most business-to-business agreements contain mutual indemnification clauses. These can be quite technical, so it’s always a good idea for an attorney to thoroughly review them to ensure you are protected. It is also beneficial to negotiate a limitation of liability clause, depending on the services you provide. For example, you may want to include that any party’s liability under the agreement will not exceed a certain amount.
Representations and Warranties
Most agreements contain representations and warranties, whereby each party will represent certain facts to the other party. Common representations are that the party has authority to sign the agreement, that it will comply with all applicable laws, and that the services do not violate any third-party IP rights. Parties rely upon these important representations when deciding whether to enter into a contractual relationship with one another.
Confidentiality
Every business agreement should contain confidentiality language. Usually this provision is mutual; that is, both parties agree not to disclose the other party’s “confidential information,” such as client lists and contact information, business plans, or marketing strategies. It is also common to sign a separate “Non-Disclosure Agreement,” but usually the confidentiality language can simply be included as part of the larger client agreement.
The above provisions are commonly the most impactful and help determine the quality of a business relationship. Thoughtfully drafted agreements with strategic terms can help prevent disputes from becoming more problematic and, when they do, can streamline efforts towards resolution.