Five Clauses That Matter More Than the Contract Length

Leonardo de Vinci famously said that simplicity is the ultimate sophistication. This rule applies to contracts more than people realize. Many businesses—and quite a few lawyers—assume that longer contracts are inherently better. The assumption is that more pages mean more protection.

This assumption is wrong. Good contracts must cover a few important elements with specificity. The rest often falls into nice-to-have. Contracts that are too detailed can backfire: internal contradictions, messy cross-references, and applications of standards from other jurisdictions can all create headaches for everyone involved, costing significant lost time and attorneys’ fees.

This post breaks down five clauses that must be covered in almost every contract. While these aren’t the only clauses you need in every case, they answer critical questions. Here they are:

1. Governing Law and Dispute Resolution. If there is ever a dispute, this is the whole enchilada. As we covered in another post, this clause determines both what substantive laws apply to a contract and where a dispute over that contract gets resolved. While distinct concepts, the two are often paired—and can blur. Address this clause clearly and carefully.
2. Term & Termination. Many companies go into contracts assuming a fixed set of deliverables. They also see the partner as dependable—otherwise why would we choose them, right? Wrong. Circumstances change. Deliverables don’t meet our requirements. The company needs clarity on how many vendors or customers it has. This is where a well-drafted good term and termination clause comes in. Two major risk factors must be addressed: (1) your side should be able to terminate early; and (2) if you owe fees, they should only be for the time up to termination.
3. Payment and Remedies. Unless signing an NDA or working for free, someone needs to get paid. But many payment clauses are not up to snuff. Price alone is not sufficient. A good payment clause should include: (i) amount payable; (ii) payment timeline (including when the clock starts); (iii) payment method; (iv) whether interest applies to late payment; and (v) what happens if a bill remains unpaid. The last one is crucial, as non-payment can have downstream implications.
4. IP Ownership/License Scope. Everyone brings their ideas to a partnership. The question is who owns those ideas. Many agreements are silent on intellectual property (IP) ownership, assuming that this is a lawyerly clause independent of deliverables and payments. Ideas—and the ability to use them—have independent economic value. A good contract should clearly state who owns those ideas, who can use them and in what context. Good contracts should also clearly break down background IP (what each party brings to a partnership) and foreground IP (what is created during a partnership).
5. Liability Caps and Exclusions. When something goes wrong, the parties need to decide how much is at stake. Rarely, if ever, is it worth it to bet the company—or even a big chunk of it—on a single partnership. This is where the liability cap comes in. A good liability cap clearly states the maximum amount that either (or one) party can owe under the contract. It also excludes damages not directly related to the contract’s activities.

Well-drafted agreements also carve out certain categories— IP infringement, data or confidentiality breaches, or indemnity obligations—from the general cap. These carve-outs reflect the heightened risk those categories present and that potential exposure may exceed the contract’s economic value.

Depending on your situation, other clauses may be essential. If you are paying a celebrity to endorse your energy drink, you don’t want to let them endorse your competitor’s drink. If your warehouse is in a high-theft area, you don’t want your supplier leaving merchandise outside overnight. You also need clear warranties from your partner.

Getting the above five clauses right puts contract risk into manageable territory. It also allows you to avoid the trap of bloated, Frankenstein contracts that are difficult to discern. Managing risk clearly can indeed be sophisticated.

Disclaimer: This blog is for informational purposes only and does not constitute legal advice. Reading or interacting with this content does not create an attorney–client relationship. You should consult a qualified attorney for advice regarding your specific situation. Mehaffy, PLLC disclaims all liability for actions taken or not taken based on this blog.