The Anatomy of a Customer Contract
The past year has taught us to expect the unexpected, in our personal and professional lives, as well as to appreciate the basics. The same notion goes with businesses and contracts. To protect your business, your contracts need to anticipate the unforeseen and cover potential breach, litigation, and other negative events. At the same time, covering the basics, such as length of the agreement and payment terms, is essential for creating a strong customer contract.
Contracts include protections for both the provider and customer. From a customer perspective, contracts are expected to be easily readable when it comes to font size. Generally, this means using a font size between 12 point and 14 point. Customers should also be given a copy of the signed contract. It doesn’t have to be a hard copy. Electronic copies, with electronic signatures, can serve as a record, even for contracts required to be in writing.
Terms also have to be reasonable. For example, in order for acceleration clauses, which are often written into contracts to protect a business from nonpayment or delays in work, to be enforceable, they must generally cover damages and not be deemed a penalty. If a contract has a non-litigation clause, it could be unenforceable if it results in extremely costly arbitration. Likewise, price gouging is considered unfair, and contracts that allow for unreasonable price increases might be found unenforceable.
It might seem obvious when drafting a contract, but parties often forget things as basic as using each party’s legal name instead of a trade name. When writing a customer contract, be sure to include the client’s legal name, the service provider, and a description of the product or service being sold or provided.
To protect your business, every contract should include the following clauses:
- Service-level agreement – the scope of work and expectations regarding level of services or product to be provided
- Breach of contract and remedies – remedies should the customer breach the contract, including money, restitution, and specific performance
- Pricing and payment terms – consideration for the work to be done or product provided, as well as specifics as to timing and method of payment
- Confidentiality and non-disclosure – limits sharing of proprietary information
- Noncompete – prohibits customer from starting a similar business within a specific time period and geographic region
- Intellectual property rights – protection of copyrights, patents, and trademarks
- Representation and warranties – statement of fact that induces customer to enter contract, and warranty that said fact is true
- Indemnification – allocates risk and costs should a third-party claim arise
- Limitations of liability – limits liability in the case of loss or a third-party claim
- Termination – specifies circumstances under which the contract can be terminated
- Insurance – mandates one or both parties to carry insurance
All contracts also include what are called boilerplate or generic terms. These include:
- Entire agreement – this clause states the contract represents the entire agreement between the two parties.
- Notices – this specifies how notices are to be made (in writing, for example) and when they are deemed to have been received.
- Assignment – this clause spells out which parts of the contract, if any, can be assigned to another party, such as a subcontractor.
- Third-party beneficiaries – this determines if a third party has any rights to enforce the agreement.
- Governing laws – this specifies which jurisdiction’s rules and laws govern the contract.
- Equitable relief – this is used to secure remedy for contract breach when money or legal damages are inadequate.
- Any exhibits – this incorporates any exhibits or attachments to the contract.
Your InPrime Legal Team
Let our team help you with customer contracts. To learn more about your current contracts use our Customer Contract Scorecard! Make sure your current documents include necessary provisions to protect your company in case of early termination, change orders, or successor assignment.
Disclaimer: This blog should not be used as a substitute for competent legal advice from one of our licensed attorneys.