5 Clauses Every Entrepreneur Should Not Overlook in their Contract Agreements
The first rule of doing business is to have a legally binding contract, period. A lot of people don’t like them but when they’re well drafted, they’re designed to keep both parties safe from a hotbed of disputes because they ensure that everybody understands the project terms and details and define the working relationship. It’s important not to overlook the fine print, which entrepreneurs can do in the excitement of getting paid. Contracts can vary depending on what industry you’re in, but there are clauses in those contracts that are commonly shared. Every legal provision and clause is worth its weight but here are 5 that should not be overlooked under any circumstances.
One way to avoid conflict is to make sure it’s clear what you are getting paid and when. Have a discussion with your client – whether it be in person, by email, or video chat – and communicate your expectations and the value of your product or service. Agree to a payment amount before writing, sending or signing a contract. The fee should be stated clearly on the contract but if at anytime you receive one with the amount left blank, do not sign it. A contract without a payment amount is an invalid contract. Contact your client and nail down a fee and have it filled in before you sign anything.
The terms should outline when payments occur. Neil Tortorella, author of Starting Your Career As A Freelance Web Designer and The Freelance Writer's Business Book, mentions on a Freelance Writers Den podcast that if you’re doing business with a big client that’s worth lots of money, you will want to ask for a 40-50% deposit upfront. Setting up paid milestones when submitting staged work will protect you further toward the end of the project. Or better yet, Tortorella adds that as much as possible, separate the payment terms from the project deliverables so that if your client runs into any delays, you won’t be waiting for months on end for a payment.
The final payment upon project completion is where things go awry because acceptance of the finalized product is usually unclear. Unless you have verbiage in your contract stating a cut off period for getting paid, a client may try to stiff you when it comes time to paying up. Be sure to state when the last payment is due, whether it’s on acceptance of the final deliverable or 14 days of turning it in, or on a firm stop date, whichever is sooner.
As an entrepreneur, you want to make sure to read over clauses regarding ownership of intellectual property. At what point does ownership of the product or service change hands? How is the intellectual property managed once it reaches the market? These are questions the contract should have answers to. If you are a software developer, the contract should indicate how your program will be licensed to distributors and used by the public. If you’re a graphic designer who has been paid to create a logo for a company, it’s expected that you will grant them an exclusive license to exercise all intellectual property rights of the logo on an international basis in every perceivable form. But it must say so in the contract so that both parties have the same understanding. A prime example of an intellectual property dispute is the legal case between American inventor, Alan Amron, and 3M Company for the invention of the post-it note. Amron has always claimed that 3M stole his invention and had sued the company in 2016 for $400 million in damages. Don’t fall into that predicament.
Relationship of Parties
Relationship of parties defines the type of relationship you have with your client. If you’re self-employed or are a freelancer, you are not an employee. If you were their employee, you would be working on site around a 9 to 5 schedule, and subject to employee benefits and withheld income taxes at the source. You want to make sure the contract says that you are an independent contractor. This clause protects you and your client. As an independent contractor, there is no salary cap and you have the legal claim to write off a percentage of expenses accrued that have aided your business entity.
One last clause that an entrepreneur should not overlook is governing law. A clause of jurisdiction may look minor on paper but it’s just as integral as all the others. It indicates which province or state has the legal authority to interpret and enforce your contract agreement. This is especially of value when you’re dealing with clients not within your jurisdiction. It could save you a lot of time and money should a client try to sue you and take you to court. If a lawsuit is filed in a jurisdiction not stated in the contract, the case could easily be thrown out.
When drafting or reviewing a contract agreement, don’t overlook the details. Protect your business by understanding what you’re agreeing to before you sign. If the above-mentioned clauses – or any other part of the contract is unclear – ask your client for clarification or consult a lawyer.