Ensure Your Contracts Provide Protection from Liability and Loss

Ensure Your Contracts Provide Protection from Liability and Loss

Small businesses are less likely to use written contracts; often agreements are based on handshakes or even unspoken understandings. The problem with oral or unspoken understandings is that misunderstandings can and often do occur. A written contract creates proof of agreement between two parties; that proof can make all the difference if the other party fails to deliver on promises made.

In short. If it matters to your business, put it in writing. That way:

  • Each party understands his or her obligations
  • Each party understands what they will provide or perform
  • Parameters for performance, delivery, and cost are established
  • Payment terms are established
  • Risks and responsibilities are clearly defined
  • Liability is limited

Contracts are agreements. The contracts you create should favor your needs and requirements and also protect you from liability. To create a contract that protects you from liability and loss:

Establish specific payment terms:

  • The amount of payment
  • The date of payment(s)
  • The form of payment (check, cash, credit card, etc.)
  • What services will be provided in order for payment to be made

Clearly describe obligations and responsibilities:

  • What actions or services each party will perform
  • The date those actions or services must be performed
  • Standards for performance (quality, etc.)
  • Any consequences for failing to meet obligations and responsibilities

Describe conditions:

  • Representations and warranties (in short, what you expect of the other party)
  • Evidence that representations and warranties are in fact true
  • No legal issues preventing a valid contract from being reached

Those are the basics. To further protect your business from liability and loss, consider adding a few "boilerplate" statements to all of your contracts. Here are some common clauses and phrases that can protect you in the event of a dispute or a lawsuit:

  • Entire agreement. This clause states that the contract is a final and complete document of the agreement you reached. The "entire agreement" clause protects you if another party claims that additional agreements – even verbal agreements – were in place and should also be enforced. In effect this clause states, "This is it. This is our agreement in its entirety."
  • Modifications of agreement. This clause states that the contract can only be amended or revised if both parties do so in writing. In effect, oral agreements to modify the contract will not be accepted or enforceable.
  • Notices. This clause requires information regarding a contract to be made in writing and delivered to the other party. In short, "We tried to call…" does not constitute a legal Notice.
  • Assignment. The assignment clause details the conditions under which a contract may be assigned (basically, assignment means "sold to another party"). Most contracts are assumed to be non-assignable, but if both parties agree to assignment, one or both parties' interests in the contract can be transferred to another party. (Different states have different conventions regarding assignment; for example, in many states real estate contracts are considered to be assignable unless assignment is expressly forbidden in the contract. Check with a local attorney for guidance for your area and your type of business.)
  • Jurisdiction. The jurisdiction clause establishes where disputes will be resolved. Many contracts expressly state that the contract is subject to the laws of a particular state and lawsuits can only be filed in that state. (The goal is to keep any disputes close to home.)
  • Attorney's fees provisions. If a contract dispute arises between the two parties, this clause ensures that the prevailing party recoups its attorney's fees and related costs.
  • Ambiguity. If two parties are in dispute, this clause states that any ambiguities in a contract should be interpreted fairly and not for or against either party.
  • Arbitration or mediation. This clause requires any dispute to first be subject to mediation, then to arbitration, etc. Arbitration clauses should specify whether arbitration is binding, what rules must be followed, and where arbitration will take place. Signing a contract requiring arbitration for dispute-resolution binds you to that process.

The goal of a contract is to clearly define expectations as well as protect your interests. No matter what you do:

  • Read everything first
  • Make corrections and additions where necessary
  • Make sure requested corrections and additions are incorporated into the final contract
  • Have an attorney review the contract, especially if you are unsure or if the stakes are high
  • Keep a signed copy of every contract and agreement
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