Top 10 Contract Clauses Every Business Owner Should Know

By: Eric Benjamin D. Lavadia / May 2, 2025

Contracts are at the heart of every business transaction—from client agreements and supplier deals to employment terms and service engagements. Yet many business owners sign contracts without fully understanding the key provisions that can either protect or expose their business. A well-drafted contract—and a clear understanding of its terms—is essential. It not only defines the rights and obligations of each party, but also helps prevent misunderstandings, minimize risk, and provide a clear basis for enforcement in the event of a dispute. Here are the top 10 essential contract clauses every entrepreneur should know:

1. Parties

This clause identifies who is legally bound by the contract. It is essential to specify the full legal names, addresses, and legal capacity of the parties involved (e.g., sole proprietor, corporation, or authorized representative). Any inaccuracy in this section may affect the enforceability of the contract or unintentionally create personal liability. As a general rule, contracts take effect only between the parties, their assigns, and heirs. Therefore, if there is an intention to bind another person or entity, that party must be expressly included in the agreement.

2. Obligations/Scope of Work

This clause specifies what is being provided or performed under the contract. It should clearly define the goods or services, along with any relevant timelines, milestones, specifications, and the respective responsibilities of each party. Precision is key—vague or overly broad language often leads to misunderstandings and disputes.

3. Consideration

This clause outlines the amount to be paid, the schedule of payment, and the manner of payment. It may also include provisions for deposits, installment arrangements, penalties for late payment, and conditions under which payment may be withheld. Clearly defining payment terms helps prevent ambiguity, ensures smoother transactions, and supports effective cash flow management.

4. Term

This clause defines the duration of the contract—when it begins and when it ends. It may specify a fixed period (e.g., one year), a renewable term (e.g., subject to automatic renewal), or an open-ended duration tied to a project’s completion or a continuing obligation.

5. Confidentiality

To protect sensitive business information, a confidentiality clause should be included to restrict the use, disclosure, or dissemination of proprietary or client data. This provision is particularly critical in industries such as consulting, technology, legal services, and business process outsourcing, where access to confidential information is frequent and often essential to the engagement. When properly drafted, a confidentiality clause helps preserve business integrity and safeguard competitive advantage. In certain cases, parties may also execute a separate Non-Disclosure Agreement (NDA) to outline confidentiality obligations in greater detail.

6. Intellectual Property Rights

This clause determines who owns the work or content created under the contract—a critical consideration when engaging creatives, software developers, designers, or consultants. It should clearly define the ownership of deliverables, the scope of licenses or usage rights granted, if any, and the parties' obligations after the contract ends. Clarifying intellectual property rights helps prevent future disputes and ensures that each party understands how the output may be used, reproduced, or protected.

7. Indemnity and Liability

This clause allocates risk and responsibility for any damages, losses, or third-party claims arising from the performance of the contract. One party may agree to indemnify the other for liabilities resulting from negligence, misconduct, or breach of contract. Additionally, a limitation of liability provision can cap the maximum amount a party may be held liable for, providing predictability and protecting against excessive exposure. This clause is vital in managing legal and financial risk.

8. Force Majeure

This clause protects parties from liability in the event of unforeseen circumstances—such as natural disasters, pandemics, government actions, or acts of war—that render contractual performance impossible or impracticable. It should enumerate the specific events covered and clarify the consequences, including whether obligations are suspended, extended, or terminated due to such events. A well-drafted force majeure clause ensures fairness and provides legal clarity during extraordinary situations beyond the parties' control.

9. Default and Termination

This clause outlines what constitutes a default or breach of the contract and provides the mechanism for terminating the agreement when such breach occurs. A default typically includes failure to perform essential obligations, such as non-payment, delayed delivery, or violation of material terms. The clause may also provide for a notice and cure period, allowing the breaching party an opportunity to remedy the violation before further action is taken.

If the default remains uncured, the termination provision allows the aggrieved party to formally end the contract. Termination may also be permitted under other conditions, such as insolvency, force majeure, or mutual agreement, and may include termination for convenience with advance written notice. The clause should also address any penalties, final payments, and whether certain obligations—such as confidentiality or indemnity—will survive termination.

10. Governing Law and Venue

This clause specifies the governing law that will apply to the interpretation and enforcement of the contract, as well as the venue or jurisdiction where any legal proceedings must be brought. This is particularly important in agreements involving parties from different cities, regions, or countries. Designating the governing law helps avoid uncertainty, as different jurisdictions may have varying rules on contract interpretation, liability, or enforceability. Likewise, selecting a preferred venue provides clarity on where disputes will be resolved, helping parties avoid the inconvenience and cost of litigating in unfamiliar or distant locations.

In closing, contracts should never be taken lightly, no matter how simple the transaction seems. Even templated agreements can contain hidden risks or omissions. At Lavadia Law Firm, we assist businesses in drafting, reviewing, and negotiating contracts to ensure their terms are fair, enforceable, and aligned with your goals.

Disclaimer: This advisory is for general informational purposes only and does not constitute legal advice. For contractual provisions involving substantial obligations, intellectual property, or complex transactions, please consult our Firm directly for personalized legal guidance.