Contracts that hold up: what makes one, and the five clauses that decide what happens when it goes wrong

What makes a contract

An offer, an acceptance, something of value exchanged on each side, parties with capacity to agree, and a lawful purpose. That is it. A contract does not need a signature block, a lawyer, or the word "contract". An email chain that says "can you do it for $8,000 by March" and "yes" is a contract. A click on "I agree" is a contract. A verbal agreement is a contract, though proving its terms is another matter.

The practical rule: assume anything you agree to in writing, including by email, text or click, binds you. Then make sure the written version says what you think it says.

Clause one: payment

How much, when, and what happens if it is late. A payment clause that says "net 30" and nothing else leaves out the parts that matter in a dispute: whether interest accrues, whether you can stop work, whether collection costs are recoverable, and who bears bank fees. Write the consequence of non-payment into the clause, because that is the only time anyone reads it.

Clause two: termination

How each side gets out. For convenience (either side can end it on notice) or for cause (a breach that is not fixed within a stated period). What notice is required, in what form, to what address. And what survives termination: payment for work done, confidentiality, indemnity, the dispute clause. A contract with no termination clause may be harder to leave than either party expected.

Clause three: limitation of liability

A cap on what one party can owe the other if things go wrong, often the fees paid under the contract, and an exclusion of indirect or consequential losses such as lost profits. Vendors put these in to protect themselves; customers push back. Courts in most states enforce them between businesses, with limits: they usually will not protect fraud or intentional wrongdoing, and some states restrict them further. If you are the customer, read the cap before you sign. If you are the vendor, make sure you have one.

Clause four: indemnity

A promise by one party to cover the other's losses from a specified cause. The most useful one for a small business is a compliance indemnity from a vendor: if the vendor's conduct (its calls, its data handling, its content) causes a claim against you, the vendor pays. Indemnities are only as good as the indemnifying party's ability to pay, and they do not stop the claim being made against you; they give you someone to recover from. Lesson 4 and Lesson 10 come back to this.

Clause five: dispute resolution

Which state's law governs, where a lawsuit must be filed, whether disputes go to arbitration instead of court, and whether the loser pays the winner's legal fees. These clauses are ignored at signing and decisive later. A venue clause that puts disputes in another state can make a small claim uneconomic to pursue or defend. A fee-shifting clause changes the arithmetic of every dispute under the contract.

Terms nobody saw

Standard terms on your website or the back of an invoice bind the other side only if they had reasonable notice and agreed. A link in a footer is weak. Terms presented before the customer clicks to accept are strong. If your business relies on standard terms, make the customer accept them, keep the record of acceptance, and keep each version with its dates.