What to Include in Business Contracts’ Terms and Conditions – and What Mistakes to Avoid
While startup founders typically perform a variety of business tasks as their early-stage business gets off the ground, many vendors will be leveraged throughout the life of the business.
Eventually, leadership must outsource a plethora of tasks, everything from cloud infrastructure, payments processing, human resources, accounting, project management, marketing, customer relationship management, and more. Each of these services can be provided by expert vendors, and those vendors will likely begin with some type of contract.
Contracts can be either concise or extravagant. Some simply outline project scope and specifications; others include a huge amount of nuances for various potential situations. Either way, understanding all details outlined in contracts or terms and conditions documents is paramount, as is ensuring your contracts are thorough and clear. Let’s dive into some common pitfalls and often overlooked information in vendor contracts.
What Items Are Outlined In Vendor Contracts?
Generally, contracts between startups and their vendors outline similar provisions. At a minimum, Terms and Conditions should outline the following:
Scope of Work
This section defines the specifics of the project, from what type of work is expected, when deliverables are due, and how products and information are to be shared.
Pricing and Payment Structures
Once the scope of work is defined, it’s imperative each party is aligned on when payment will be due, how it will be provided, and what is expected if either deliverables or payments are submitted beyond their due dates.
Terms and Timelines
Beyond payment and deliverable expectations, this section should outline what project milestones should be noted, when projects should pause or be reevaluated, and at what point a project is deemed complete.
Warranties
Quality vendors often guarantee their work. If any guarantee of quality, functionality, or reliability is included, those specifics should be outlined here.
Service Level Agreements
Vendor contracts are not always as positive or productive as planned. Consequences for underperforming KPIs, missing deliverables, poor quality, or failed obligations should be addressed here. In case of a disagreement, both parties will know how to proceed.
Liability Limitations
In addition to understanding how disputes will be handled, limits of liability outline a specific cap on potential damages caused by either party.
Insurance Requirements
Specialized insurance may be required for some types of vendor-startup contracts. Specific liabilities or workers compensation protection could be beneficial in some cases.
Confidentiality
Similar to a non-disclosure agreement, this section can specify what types of information shall remain confidential. If applicable, it outlines with whom or what parties the information may be shared.
Indemnification
If damages or financial losses do occur, this section outlines which party is responsible for paying what percentage of the damages and/or legal costs of the other party.
Dispute Resolution
Furthering service level agreements and indemnification sections, this section offers structure to procedures to resolve disputes. Steps could include a cure period, negotiation, mediation, or arbitration before bringing a case to court.
Termination Clause
Should either party want or need to cancel the contract ahead of an agreed-upon time, this section specifies the time period and required conditions when giving notice of early contract termination.
Founders should be wary of contracts missing these sections. If signing is necessary, formal amendments may be considered. An attorney can help decide the best approach to ensure your protection.
Contract Details Not To Be Missed
Hidden clauses can be buried deep in vendor contracts’ fine print. In cases where readers skim quickly or skip the text altogether, these are unlikely to be discovered. However, startups should carefully review all the details, even in the fine print, to ensure no odd or unfair clauses — and no important typos — exist.
Mandatory arbitration clauses can prevent startups from filing a lawsuit against a vendor. Some companies may require data sharing that falls outside of a business’s ethics policy. Vague phrases like “at the company’s discretion” could be dangerous if the company changes important terms. Clauses like this allow them to do so without the necessity of the contract signer’s approval.
Startups should flag cancellation windows, annual auto-renewals, data ownership policies, and any statement that includes phrases like, “continued use implies consent.” Simply put: you use, you pay.
Common Terms & Condition Pitfalls
Poorly-structured contracts can, at best, present a company as unprofessional. At worst, missing information or unclear wording could render a contract invalid.
For starters, every contract should contain a clear acceptance mechanism, something that ensures readers confirm they “have read and understand” the contract. Without this simple step, users could claim contract terms were inconspicuous, as noted in Berman v. Freedom Financial Network, making the contract unenforceable.
Any and all contracts should be written and reviewed by a human to ensure proper and accurate grammar, industry- and company-specific terminology, and correct spelling and punctuation. Excessive legal jargon, or the opposite — excessive vagueness — can make terms and conditions contracts confusing. Clear, understandable, and reasonable contracts are not only more likely to be upheld; they also offer transparency and build brand trust.
Ensure Your Contracts Are Buttoned Up Tight!
Throughout the life of your startup, founders will be on both the writing and the signing side of many contracts. It’s imperative to do your research, read the entirety of everything your team signs, and ensure all terms and conditions are in compliance with state and federal statutes.
While many deals can be agreed upon during a round of golf or over a drink, remember, a handshake does not make a contract. Even these kinds of agreements should be followed by a properly-documented contract outlining terms and conditions.
Most importantly, it’s important to have an attorney review each contract. We’ll ensure specificity and compliance, identify potential gaps, and keep your startup protected throughout the life of your business.
At HJF Law, our goal is to protect your startup and help set you up for success. Our team of expert attorneys specialize in startup business law, and can help ensure your contracts are buttoned up tight.
Reach out to us at (917) 267-8184 or visit hjflaw.com/contact to schedule your free consultation today.