When running a business or entering into any kind of agreement with clients, it’s important to have a template contract that can be used as the basis for all negotiations, and that means including essential items for a template contract. This will help protect both parties involved. ensure that everyone is clear on the expectations and responsibilities associated with the agreement, and most importantly help maximize collections and minimize lawsuits and complaints by your clients.
So, what should your template contract include? Let’s take a look at the top 10 essential items for a template contract you must include for most types of business relationships.
Essential Items for a Template Contract
- Definitions – Include definitions of key terms in your contract so that there is no confusion over what they mean in context. This helps to prevent misunderstandings down the line, which is especially important because in most states, ambiguities are interpreted against the drafter. This means such ambiguities would be interpreted against your company, since it was the
- Scope of Work – Clearly spell out the scope of work that is to be performed by each party, including details like deadlines, deliverables and payment schedules. This helps ensure that everyone involved knows exactly what is expected of them. One method to use, to help you define scope, is to define S.M.A.R.T. Goals.
- Payment Terms – Make sure to specify how and when payments are expected to be made, as well as any consequences for late payments or lack of payment altogether. Include details about taxes, interest charges, penalties and dispute resolution procedures if necessary. Remember that unless you’re a bank, you want to avoid generous credit terms to clients, unless you (i) know what their capacity and ability to pay is, and (ii) you have a reasonably certain ability to enforce payment without expending a lot of effort (i.e. a lien on equipment or an automatic mechanics lien on property would be an example).
- Termination Clause – It’s important to include a clause which outlines under what circumstances either party has the right to terminate the agreement before it reaches completion or before all obligations have been fulfilled by both sides. Depending on the type of business you have, an evergreen clause may be a great device to help lengthen contract terms. Also, a termination clause would indicate how to unwind or end the relationship, including full payment, return of any materials, destruction of confidential information, and so on.
- Confidentiality Agreement – If either party is revealing confidential information during negotiations or while performing work outlined in the agreement, make sure to include an appropriate confidentiality clause that prevents either party from disclosing this information without permission from each other first. If you have unique processes, procedures, ingredients, recipes, or similar, you may want to go further and define what is “trade secret information” and make clear your business owns such trade secret information.
- Intellectual Property Rights – If either party has rights over intellectual property such as patents, copyrights or trademarks related to their work, make sure these rights are specified in the agreement so that any disputes can be addressed quickly and efficiently down the line if needed. Consider adding a “license to use” during the term of the agreement, and spell out what happens upon termination of the agreement.
- Indemnification Clause – An indemnification clause ensures that each party agrees not to hold each other responsible for any damages or losses resulting from their actions while performing work outlined in the agreement or related activities during negotiations (if applicable). Also consider “limited warranty” and “limitation of liability” clauses, to help limit potential exposure to your clients.
- Dispute Resolution Procedure – Create a dispute resolution procedure which specifies how disagreements between parties will be handled in an efficient manner so as not to drag out negotiations unnecessarily or end up in court (if possible). Don’t forget about adding an “attorneys fees clause“, because it helps provide an incentive for the other party to act reasonably and settle without fighting needlessly (otherwise, they risk losing and having to pay your legal fees).
- Jurisdiction Clause – Specify which courts have jurisdiction over potential disputes arising out of this contract (if applicable). You want disputes in your county and state, which helps reduce costs associated with such disputes and acts as a deterrent for folks located outside your county and/or state.
- Signature Block – Lastly, make sure you have included a signature block where both parties can sign off on their acceptance of all terms outlined above before proceeding with negotiations or signing off on any related agreements. This is important, and you want to make sure you have the right party identified and signing the agreement. For example, is your client a company? Who is the individual signing on behalf of the company? Is your client a minor? Do you have a legitimate parent or guardian signing your agreement? Are you able to prove a complaining party did or didn’t do business with you?
Reduce Disputes and Increase Revenues
A good template contract should cover all bases and ensure that both parties know exactly what’s expected from them throughout their relationship with one another—from start to finish! By including these essential items listed above into your template contracts, you can reduce the chances of a costly dispute and reduce the need for debt collection efforts.
While every business is different, and every business arrangement is different, most contracts require at least the items identified above. Some businesses need more, potentially much more, language to cover all the potential issues. A good template agreement will serve all your needs, without requiring you hiring an attorney every time you have a new client. But, you do owe it to yourself and your business to hire a good business attorney to help you flesh out and finalize your template agreement.