As every business owner knows, the language formalizing any agreement requires precise care and crafting. Doing so ensures that the agreement protects each party’s interests and clarifies each party’s contractual obligations. As a result, business owners can limit the risk of costly litigation by ensuring that their agreements are drafted carefully from the start. While you might think that you can turn to Chat GPT to try and draft your contract, the reality is that a few poorly written or overlooked clauses could undermine everything you are trying to build by failing to provide all of the necessary and appropriate protections or by including provisions that could wind up doing more harm than good.
Here are some key contract clauses that can make or break a business agreement:
Insurance Clauses
Ensuring that you, and any party you enter into an agreement with, have the proper insurance, is of the utmost importance when entering into an agreement. Insurance clauses are necessary because you want to ensure that you’re entering into an agreement with someone, or an entity, that has adequate insurance to protect not only themselves, but you as well, from any claims, lawsuits, or liabilities (“Losses”) that might arise. Why? Because certain jurisdictions, such as Illinois, cause defendants to be found “jointly and severally liable” for a verdict. What this means is that each defendant is liable, not just for its own percentage of liability, but potentially for the entire amount, depending on a co-defendant’s inability to pay. If a co-defendant can’t pay, and you can’t pay, then a plaintiff might have the ability to go after your personal assets to satisfy the terms of the judgment. Thus, you want to ensure that any party you enter into an agreement with has adequate insurance for Losses, because, if they don’t, then the individual or entity that filed a lawsuit may turn their attention to you.
Indemnification Clauses
A strong indemnification clause in a contract essentially shifts the financial risk and liability of certain specified events from one party to another. An indemnification clause (also known as a “hold harmless” provision) reflects that one party (the indemnifier) has agreed to protect the other party (the indemnitee) from Losses that may arise from specific events or situations set forth in the agreement. It acts as a further layer of protection meant to insulate you and your business from liability caused by the actions, inactions, or negligence of the other party. If drafted poorly, an indemnification clause could be viewed simply as a “contractual contribution” clause, as opposed to an actual indemnification provision, thereby removing any duty from the other party to cover, or pay, for any such Losses. Without the proper protection, you could end up exposing your company, and everything you’ve built, to significant financial harm by shouldering risks and liability costs that aren’t yours.
Termination Clauses
When entering into a contract, the parties may not be thinking about how the relationship will ultimately end. However, it is crucial to ensure you have a way out of the contract, so you are not stuck in the agreement when the relationship sours or when business slows down. Additionally, you want to ensure that the other party cannot get out of the contract too easily when you are relying on them to hold up their end of the deal.
Oftentimes termination clauses are slanted to favor one side over the other. For example, a contract may allow one party to terminate the agreement at any time for any reason, while the other party has few, if any, opportunities to exit the agreement, with a list of requirements for doing so. Contracts that involve an ongoing relationship should have a defined “term” stating when the contract begins and ends and the conditions, if any, for renewal. It is important to confirm that the term is a reasonable length, that you have the option not to renew the contract, and that there are fair rules for terminating the contract before the term ends. These may include allowing both parties an option to terminate, requiring timely advance notice of termination or that the termination be “for cause,” or imposing other restrictions on termination early in the relationship.
Dispute Resolution and Governing Law Clauses
No one enters a contract expecting conflict, but disagreements happen. A dispute resolution clause outlines how conflicts will be handled—whether through litigation, arbitration or mediation—and where those proceedings will take place—whether locally or in the courts of another state. The last thing you want is to fight to enforce an agreement in a jurisdiction other than where your company is based. A well-considered clause can save both parties time and money, while an unclear or missing dispute resolution clause can lead to jurisdictional battles and costly legal fights.
Whether you’re drafting a new agreement or reviewing an existing one, working with a skilled legal team can help ensure your contracts are clear, enforceable and aligned with your goals. Paying close attention to these clauses can make the difference between a smooth business relationship and a deal gone wrong.
Fortunately, at Arnett Law Group, LLC, our team can offer guidance when drafting, reviewing, and enforcing agreements between parties. For more information, contact us at (312) 561-5660, or visit our website at www.arnettlawgroup.com.
