Contract Terminology – What You Need To Know

Introduction:

As a startup founder or senior leader, you’re likely to wear a lot of hats, from chief strategist to head of sales and everything in between. But when it comes to legal matters, particularly contracts, the contract terminology can be overwhelming or can be something that gets you in trouble later down the road. Understanding contract terminology is crucial to ensure you’re making informed decisions and protecting your business interests. Here’s a rundown of key terms that every non-legal expert startup founder should know.

Parties

The term “parties” refers to the individuals or entities entering into the contract. In most cases, this will be your startup and another party, such as a supplier, customer, or employee. It’s important to clearly identify all parties involved to avoid any confusion about who is responsible for fulfilling the contract’s obligations. The parties in a contract are usually set out with both their names and addresses to start and then referred to by the terms assigned to them after that, such as “Seller” or “Buyer”.

Offer, Acceptance, and Consideration

These three elements are the building blocks of any contract. An “offer” is a proposal by one party to another to enter into a contract. “Acceptance” is the agreement by the other party to the terms of the offer. “Consideration” refers to something of value that is exchanged between the parties, which can be money, services, or goods. Without these elements, a contract may not be legally enforceable.

Term and Termination

The “term” of a contract specifies the duration that the agreement is in effect. It could be a set period, such as one year, or contingent upon certain events. What ever it is, if you’re running a software as a service business this is important for the timing of your revenue recognition. “Termination” clauses outline how parties can end the contract before the term expires. This might include breach of contract, mutual agreement, or other specific conditions.

Breach of Contract

A “breach” occurs when one party fails to fulfill their obligations under the contract. This could be a failure to deliver goods, pay on time, or perform services as agreed. Understanding what constitutes a breach and the remedies available is essential for protecting your startup.

Confidentiality

Often, you’ll want certain information to remain confidential, especially when dealing with sensitive business data. A “confidentiality” clause ensures that the parties involved do not disclose information covered by the agreement to outsiders.

Non-Compete and Non-Solicit

A “non-compete” clause prevents a party, usually an employee or business partner, from entering into or starting a similar profession or trade in competition against the other party. Similarly, a “non-solicit” clause prohibits a party from enticing away the other party’s clients or employees. These clauses must be reasonable in scope and duration to be enforceable.

Indemnification

An “indemnification” clause can protect your startup from losses and damages caused by the other party’s actions. It means that if your company is sued for something that the other party did (or didn’t do), they will have to cover the costs and any potential damages awarded.

Limitation of Liability

This clause limits the amount one party has to pay the other if they breach the contract. It’s a way to manage risk, but be cautious: some limitations of liability can leave your startup vulnerable if they’re too restrictive.

Force Majeure

“Force majeure” refers to unforeseeable circumstances that prevent someone from fulfilling a contract, such as natural disasters or war. This clause can excuse a party from liability if such events occur.

Assignment

An “assignment” clause controls whether a party can transfer their rights or obligations under the contract to someone else. This is important if you want to ensure that the original party you contracted with is the one performing the work.

Governing Law and Jurisdiction

These clauses determine which state’s laws will govern the contract and where any disputes will be resolved. As a startup, you’ll typically want to choose the law of the state where you’re based and specify that any legal actions must be brought in your local courts.

Entire Agreement

The “entire agreement” clause states that the written contract represents the full understanding between the parties and supersedes any prior discussions or agreements. This can prevent one party from claiming that there were other, unwritten agreements made.

Amendment

Contracts often need to be updated or changed. An “amendment” clause sets out how the parties can modify the contract. Usually, amendments require a written document signed by both parties. Generally an amendment will refer back to the original contract and use the same contract terminology as to not confuse things.

Waiver

A “waiver” occurs when one party voluntarily gives up a right under the contract, such as the right to enforce a late payment penalty. A waiver clause outlines how and when rights under the contract may be waived.

Contract Terminology: Severability

If a court finds part of a contract invalid or unenforceable, a “severability” clause allows the rest of the agreement to remain in effect. This can prevent the entire contract from being voided because of one problematic provision.

Dispute Resolution

This term covers how parties will resolve any disagreements that arise. Options include negotiation, mediation, arbitration, or litigation. Each has its pros and cons, so consider what’s best for your startup when drafting this clause.

Boilerplate

“Boilerplate” refers to the standard clauses found at the end of many contracts. While they may seem like legal fluff, they’re important for defining the contract’s framework and how it operates. Boilerplate can also refer to your contract template before any changes are made to it.

Execution

Finally, “execution” is the act of signing the contract, which makes it official and legally binding. Ensure that the parties signing have the authority to do so, or the contract may not be enforceable.

Contract Terminology in Contract Negotiations

Understanding these terms will help you navigate contract negotiations and protect your startup’s interests. Both by winning more deals and by not agreeing to things that will harm you later. However, this is just a starting point. It’s always wise to consult with a legal professional when drafting or signing contracts to ensure that your specific needs and concerns are addressed. Remember, a well-crafted contract can be the foundation of a successful business relationship, so it’s worth getting it right.