5 Essential Elements Every Contract Should Include

As a business owner, contracts are essential for protecting your business. Whether you’re looking to hire a contractor or are entering into an agreement with another business, it’s important to have a contract in place that covers all the bases and can be enforced in court, if necessary. But what should be included in a contract? To ensure that you have a solid agreement in place, here are five core elements every contract should include.

Definitions for Key Terms

When you enter into a contract, it should include definitions for keywords that will be used throughout the document. If the parties (or a court) need to interpret the agreement in the future, it’s helpful to have definitions for key terms so everyone is on the same page as to what each term means under the agreement. This will help avoid confusion and disputes down the line. 

Termination Rights

Establishing how and when the contract can be terminated makes sure both parties understand their rights if they decide they no longer want to work together. The termination clause should specify whether either party can terminate at any time with notice or if there are specific conditions that must be met before it can be terminated (such as breaching terms of payment). It should also outline any specific actions that must take place after termination, such as returning confidential documents or transferring intellectual property rights. 

Indemnification

It is also important to use indemnity language in your contracts. This helps limit your legal liability if you get sued for something related to your agreement with another party by requiring a party (usually the party responsible for causing an issue) to take responsibility and pay any damages resulting from a lawsuit. In other words, indemnification protects you from being held responsible for any losses due to something that happened related to the contractual obligation(s).  

Process for Resolving Contract Disputes

A dispute resolution clause determines how disputes between two parties will be solved if they arise and can provide an alternative solution other than filing a lawsuit in court. It should establish which court a lawsuit has to be filed in if necessary, what state’s laws apply, and address whether mediation or arbitration is required before filing a lawsuit.

Addresses Whether a Losing Party Should Pay a Winning Party’s Attorney Fees

This clause should determine who pays attorney fees in case one party sues another over breach of contract or other issues related to the agreement. Without this clause, each party may be responsible for paying its own legal fees – even if one wins in court. This is something many small businesses cannot afford, which causes them to let other parties get away with breaching the agreement between them. Establishing who pays attorney fees ahead of time gives the party looking to enforce the agreement bargaining power to resolve the issue without filing a lawsuit and helps both parties budget more accurately for potential legal costs associated with a breach of contract claims. 

Conclusion

Contracts play an important role in protecting both sides when two parties enter into an agreement—but not all contracts are created equal! While contracts vary depending on purpose and industry, there are certain core elements every contract should include such as definitions for key terms, termination rights, indemnification language, dispute resolution process details, and information regarding payment of attorney fees if litigation arises out of the agreement. With these five essential elements included in your next contract negotiation, you’ll be well on your way toward legally protecting yourself and your business!