5 Contract Clauses Every Business Owner Should Understand

Every business owner signs contracts, but not every business owner understands what they are agreeing to. Among the dozens of provisions in a typical business contract, five clauses deserve your careful attention because they have the greatest potential to impact your financial exposure and business flexibility.

1. Indemnification

Indemnification clauses determine who pays when things go wrong. If you agree to indemnify the other party, you are agreeing to cover their losses, including potentially their attorney fees, arising from specified circumstances. The key issues to watch for are whether the indemnification is mutual or one-sided, whether it is limited to losses caused by your breach or negligence (reasonable) or extends to any losses related to the contract (dangerous), and whether there are any caps on your indemnification obligation. Always negotiate for mutual indemnification limited to each party's own breach, negligence, or willful misconduct.

2. Limitation of Liability

Limitation of liability clauses cap the maximum amount you can be liable for under the contract. Without one, your exposure is theoretically unlimited. A good limitation of liability clause caps direct damages at a reasonable amount (often the fees paid under the contract in the past 12 months), excludes consequential, incidental, and punitive damages, and carves out appropriate exceptions for IP infringement, confidentiality breaches, and indemnification obligations.

3. Termination Provisions

Termination clauses define how and when either party can end the relationship. Key elements include termination for convenience with reasonable notice periods, termination for cause with defined triggers and cure periods, wind-down procedures for work in progress, post-termination survival of confidentiality and IP provisions, and return of property and data.

4. Non-Compete and Non-Solicitation

In service and employment contracts, restrictive covenants limit what you or the other party can do during and after the relationship. As discussed in our non-compete guide, enforceability varies by state. Make sure any restrictive covenants are reasonable in scope, duration, and geography.

5. Dispute Resolution

The dispute resolution clause determines where and how disagreements are resolved. Arbitration is typically faster and less expensive than litigation but may limit discovery and appeal rights. Litigation preserves full procedural rights but can be costly and time-consuming. Mediation offers a non-binding middle ground. Most importantly, the clause should specify a convenient venue and governing law. Never agree to resolve disputes in a distant jurisdiction unless there is a compelling reason to do so.

Understanding these five clauses puts you in a much stronger position when negotiating business contracts. For a thorough review of any contract before you sign, contact Zara Business Law.