Avoiding Red Flags in Business Law Contracts

Any type of business law contract or arrangement can have red flags and points that should be properly addressed in the contract. In many instances, an experienced business law attorney would advise their client not to sign a contract unless important provisions are carefully worded. It is too easy for a layperson to fall victim to vague or inequitable contract language.Red Flag in Business

Freedom of Operation

Most companies have at least a non-disclosure section within their contracts, which is okay. However, some companies or individuals also attempt put restrictions on the party’s freedom to operate or earn a living. This can include a clause that prohibits the assignment or transfer of the contract, a non-solicitation clause, and non-compete clauses. While these and other types of operational limitation clauses can be acceptable depending on the circumstances, they should be reviewed and tailored with extreme care to avoid becoming overly restrictive. One’s exit strategy from a business relationship can be impeded or even crippled by contractual clauses such as these.

Scope of Liability

There should always be a limit to the liability a party can be held accountable for. If one party breaks a contract, the other may claim direct, consequential and sometimes other damages. Without effectively worded language limiting liability for a breach, a party’s exposure might be unlimited in scope, even if there was a different intent. This could mean the difference between possible bankruptcy for one party and a reasonable resolution where both parties are able to continue on with their respective businesses.

Intellectual Property Transfer

Including a clause in a contract that allows a developing party’s personnel to utilize knowledge gained from a particular engagement or operation is often standard. In turn, this allows a developer to continue providing custom work to other clients without harming a customer’s proprietary information or code or information developed specifically for them. Failing to include appropriate language regarding ownership of developed intellectual property can lead to treacherous legal waters down the road.

Another problem can occur when one party signs an exclusive license for the benefit of another party, which prohibits developing similar proprietary products for other customers. When an artist or creative professional contractually agrees that theirs is work for hire or they sign away all of their intellectual property rights, even an unrelated problem with the company they sold their rights to could create significant financial hardship. Including a residual rights clause is fundamental when it comes to drafting effective intellectual property agreements.

For more questions regarding business law contracts, scope of liability, intellectual property and freedom of operation, contact the business law offices of Brownstein & Nguyen. Attorney Jay Brownstein has years of experience assisting with the drafting of various business agreements and handling a wide range of business disputes.