Use these contract clauses to protect your business from common situations, like breach of contract, confidentiality, cancellation, non-compete, limitations on liability, and more.
Whether you use contractor agreements to protect yourself or other types of contracts, you need to ensure you’re business and work are legally protected. One of the best ways to do this is through contract clauses that provide terms for specific situations and scenarios, such as cancelation policies, disputes, and more.
In this article, you’ll learn about some of the most important contract clauses to include in your business contracts to protect your interests as an independent business owner. You’ll also learn about the process of signing a contract and how to use a clientflow platform to easily send documents to clients to sign.
- How independent business owners can use contracts
- What makes a legally enforceable contract
- Five clauses independent business owners should have in their contracts
- Confidentiality clause
- Force majeure clause
- Arbitration clause
- Breach of contract clause
- Indemnification clause
- Limitations on liability clause
- Cancellation clause
- Non-compete clause
- Damages clause
- Tools for contract drafting and signing
How independent business owners can use contracts
Businesses of all sizes regularly form relationships with other parties in the form of clients, partners, students, vendors, and any other party that may seek the services of the business. In each of these cases, there will be some form of agreement outlining the terms of the interaction.
A written contract that all parties will sign is a great way of setting the expectations of all parties in a relationship or transaction and legally protecting the parties as well.
The process for drafting and signing a contract can go as follows:
- Research: Figure out what you want to have in your contracts and make sure there are clauses covering everything you need to keep your business safe.
- Negotiation: Your clients may want certain elements included or changed in your contract. Consider their point of view and make changes you can agree with.
- Drafting: Write the contract or have your attorney write the contract. Use online templates for convenience and an easy way to get started.
- Review: Have your attorney look over the contract to make sure it is legally compliant and your company is covered. Review the contract with the client as well to make sure this is a good experience for them.
- Contract signing: Documents can be sent to the clients using an online contract service such as HoneyBook, a platform that is available on desktop or mobile devices. You will be notified when the client signs the contract and copies of all documents are saved and can be downloaded.
- Uphold the contract: Make sure to uphold your end of the bargain or you may be sued for breach of contract. Hold the client to their end as well.
Use HoneyBook’s ironclad contract templates to protect your business and clients.
What makes a legally enforceable contract?
A contract should have a few basic elements, at minimum. The contract should contain the names of all parties, the scope of the work—such as a service, dates—such as deadlines or delivery dates, the rights and obligations of all parties, and the total cost of the work—including payment terms. Every contract should have a termination clause as well, which specifies when a party can end the contract early.
For an agreement to be a legally binding and enforceable contract, there needs to be a few basic elements:
- An offer: A promise to do some action, such as provide a service for a client.
- Acceptance of the offer: The client accepts the proposal.
- Consideration: Value brought to the table. For example, the price of the service.
- Mutuality: All parties must have agreed to the terms of the contract.
- Capacity: The company providing the service is capable of providing the service.
These are the basic parts of any enforceable contract. A good contract is one that you can enforce in court and one where you will be protected in case you are sued. Each of these basic elements should appear in some form on the contract. Other important clauses that can be added to contracts are outlined in the sections below in greater detail, such as clauses that can protect your business’s confidential information and clauses that can help limit your company’s liability in certain situations.
Online templates can make great starter contracts, with most of the usual clauses already included and ready to have your business information added and ready to be sent to the client for signatures.
Nine clauses independent business owners should have in their contracts
Before you enter into a contract, you always want to make sure your business and client are protected. This is your opportunity to align on the basics, such as budget, scope of work, and timeline. Additionally, contract clauses allow you to protect yourself from other events or occurrences. The following are some common clauses you may want to use in your contracts. Additional clauses can always be added as needed or if your lawyer considers them necessary.
1. Confidentiality clause
A confidentiality clause, or non-disclosure clause (NDA) is a type of clause that protects a party’s intellectual property, trade secrets, plans, private data, financial information, or other confidential information. This NDA clause can go both ways because the business may be coming into contact with a client’s confidential information as well.
Businesses should include a confidentiality clause to protect their valuable information. When clients agree to this clause, they agree that they will not share the business’ information in any way for a set period of time. They can also include it as a way of promising to keep the client’s information private and that the business will not disclose information that could be harmful.
Some confidentiality agreements also include a non-disparagement clause, which prohibits clients from speaking negatively about a business, both verbally and in writing.
2. Force majeure clause
The term force majeure comes from a French term for “greater force.” It essentially means that a force greater than the parties involved may cause events that are outside of the parties’ control, which may interrupt a transaction or relationship. The force majeure clause specifies after which kinds of events could happen, and that neither party could hold the other liable for disruptions in the relationship or damages incurred from the event.
Examples of elements that may be specifically mentioned in a force majeure clause could include:
- Natural disasters such as earthquakes, fires, or hurricanes
- War, invasion, or other hostilities
- Pandemics and epidemics
- Civil unrest
- National emergencies
- Unforeseen acts of God
These are just a few examples of many that could be included in this clause. As with the rest of the contract, it’s best to be specific to leave no doubt.
3. Arbitration clause
An arbitration clause is a type of dispute resolution clause whereby the signatories of the contract agree to settle disputes in arbitration with a third-party arbiter rather than through the courts with judges and juries.
Arbitration is less formal than a trial, less public than a court case, and may be less expensive than attorney fees and court fees that you can expect if a dispute goes to trial.
4. Breach of contract clause
A breach of contract clause is a clause that explains what will happen if either party doesn’t uphold the terms of the contract. Remedies for a breach of contract may include various forms of damages, such as general damages, special damages, and punitive damages; attorney fees; and being ordered to perform a party’s agreed-upon terms of the agreement.
A business owner may want to include this clause that sets expectations if the client breaches the contract in any way. For example, the client may not pay for the services. Since there would be a payment clause in the contract setting payment methods and due dates, the client would be breaking the agreement they signed if they do not pay.
This clause allows the business owner to remedy that kind of situation in some way, such as by charging a late fee or terminating the contract.
5. Indemnification clause
Indemnity clauses are agreements in that one party won’t be held liable for the damages of the other party. The damages the other party may suffer could be court-ordered, jury awards, or attorney fees if they get sued and lose their case. This clause can protect a business if its client gets sued or harms a third party.
The above clauses are just a few examples of clauses that all independent business owners should consider including in their contracts. These clauses can protect business owners in the event they are sued or from unforeseen circumstances out of their control.
To provide your client with the optimum experience, review your contracts with them and be sure to ask for feedback and questions. You want your business protected, but at the same time, you don’t want to scare clients away with scary legal jargon and complex contract clauses.
6. Limitations on liability clause
A limitation on liability clause is the section of your contract that spells out the limits on the amount the other party can sue you for in case of damages arising from breach of contract, action, inaction, or performance failures such as negligence, disputes, or other types of damages. The clause limits the amount of money your clients can recover if they feel you owe them for any particular reason and is a safeguard to protect your business from expensive lawsuits and to help mitigate your overall risk.
As in the other clauses, this clause can provide specific situations that are covered by the clause or it may concern the entire business arrangement. Depending on the agreement between you and your client, the limitations on liability clause could define specific failures on your part or breaches of the contract and would cap the amount you would be liable for in these events.
For example, if you are a digital marketer, you may offer services to do website marketing for a client for $5,000. You and your client may both find it reasonable that you should not be liable for any amount over the cost of the services, whether the client is satisfied or not and whether the marketing is successful or not. In this case, you could put a limitation on the liability clause for a flat fee, insurance coverage, or the total payment of the contract paid by the client.
Your client may disagree with your initial limitations on liability clause, especially if you set it arbitrarily or unreasonably low in an attempt to get out of paying what might be reasonable damages. Always speak with an attorney in your state or province because courts may not always uphold limitations on liability clauses.
7. Cancellation clause
There may be instances where a contract can be ended early by either party. Every instance where a party can terminate the contract before the contractual end date should be put in the cancellation clause or termination clause. A cancellation clause allows either party to cancel the contract before the contract has expired or even before the work has begun, provided that certain situations have occurred or certain conditions have been met.
A cancellation clause can set the conditions required for the clause to be enforceable. These conditions may include advance written notice to cancel the contract. Advance notice of 30 days is often a requirement in cancellation clauses.
The clause should set:
- The cancellation procedure
- The conditions required
- The time frame of the cancellation
- Any limitations on liability if the contract is not canceled
There are also times when you may use the cancellation clause against a client. Examples may include non-payment for services or moral hazard. Cancellation clauses should be clear about any early cancellation penalties and any refunds owed to the client, if any. Be sure that your cancellation policy is legally enforceable.
8. Non-compete clause
A non-compete clause is a contractual provision that states a party—oftentimes, an employee or contractor—cannot enter into a profession or trade similar to the business they are working with or for. The non-compete clause can set an effective period, as well, such as two years.
An example of a non-compete clause could be when you hire an employee for your service business. Your employee could be handling your business’s confidential information, intellectual property, and trade secrets, and could be establishing personal relationships with your clients to perform the service. Your business could potentially suffer financially if the employee took your ideas and worked with your clients personally outside of your business.
To prevent these situations, you could set a non-compete clause that limits which types of business the employee could start after leaving your business. A similar issue can arise if an employee starts a similar business and hires some of your employees. A non-solicitation agreement would cover the situation where a former employee cannot poach your employees to leave your business to work for them.
It’s important to note that even though your employee may agree and sign the contract with the non-compete clause, the clause may not be legally enforceable, depending on your state. Courts may consider non-compete clauses to be too restrictive and unreasonable, preventing employees from earning a living. Courts may also scrutinize the contract on a case-by-case basis. Speak to an attorney specializing in your state’s contract law to be sure your non-compete clauses are legal and would be enforceable.
9. Damages clause
Finally, your contract can contain a damages clause. The damages clause specifies how the damages are calculated if damages are owed to either party from situations such as a breach of contract, or if any of the other specific provisions are breached, such as the clauses above.
This clause ensures the non-breaching party is paid damages arising from the breach. The clause may stipulate that the actual expenses incurred by your business could be owed by the client in case of a breach, or a flat fee could be owed if the damages are uncertain or difficult to calculate.
The predetermined amount of damages a party pays if they breach the contract is known as “liquidated damages.” A flat liquidated damages provision may be necessary if the damages from the breach are difficult to measure. This amount should be a reasonable number that isn’t disproportionate to the actual financial harm caused by the breach. Otherwise, the clause may not be enforceable and courts may rule against you in a civil suit.
Like all the other clauses in your contract, the damages clause is negotiable. Your client may not agree to a liquidated damages clause that is extremely high, non-proportional to the actual harm expected from the breach, or if they consider the clause to be a de facto penalty.
You and your client should negotiate what a fair amount of damages would be if the client breaches the contract. If the liquidated damages are considered unreasonably high, the clause is unlikely to be enforceable in court. Your relationship with your client could also be strained if your contracts are one-sided. You don’t want to risk losing the client over an unfair contract, especially if it wouldn’t be upheld in court anyway.
Tools for contract drafting and signing
Business owners can use a suite of online tools, available on HoneyBook, for drafting contracts and having their clients easily sign and save documents.
- On a platform such as HoneyBook, all parties receive a downloadable copy of signed documents.
- Contracts can be saved as templates that can be used whenever a similar contract is required in the future.
- The party’s name and other information can be automatically imported into documents.
- Any device, including iOS and Android devices, can view and sign documents.
- Initials and signatures added to platform documents are legally binding.
- Business owners can be notified after a client’s contract signing.
This article is a basic introduction to contract clauses for independent business owners. Contract law can be a complicated subject. Before drafting contracts, entering into contractual agreements, and signing documents, be sure to consult with an attorney, especially one experienced in contract law.
With the help of online contracts and client management platforms such as HoneyBook, business owners can easily draft and sign contracts.
Use HoneyBook’s ironclad contract templates to protect your business and clients.
Disclaimer: The advice featured in this guide and on the blog is for sharing general information and knowledge. For specific legal advice, please consult an authorized professional.