How Do Contracts Protect Your Business?

In a perfect world, you'd have the budget to hire a lawyer any time you signed a new contract. Your lawyer would vet the agreement, looking for potential pitfalls and adding language to protect you from lawsuits. While that would be nice, we know it's not practical for most sole proprietors.

So what can you do? Here are six tips on how to use contracts more effectively.

1. Be explicit about the work you offer. Include a detailed exhibit at the end of the contract.

You should be using contracts for all projects you work on. In these contracts, make sure you list the services you will provide. A simple way to do this is to add an "exhibit" at the end of the document, which is an appendix tacked on an agreement to explain in detail what your work will entail. Remember, being specific in your language will help prevent miscommunications that could lead to lawsuits or payment disagreements.

2. Have a lawyer write a boilerplate contract you can use for many different agreements.

Another way to prevent lawsuits is to meet with a lawyer and ask them to draft a "boilerplate" agreement that you can use as a template for your contracts. Paying a lawyer once may be smarter than paying a lawyer every time to review your contract. It will cost a little bit of money, of course, but it's better to spend that now than to pay for a lawsuit later. (You can save even more time and money by starting with one of TechInsurance's free sample contracts, sponsored by ContractEdge).

3. Know what to add to a contract to protect yourself.

When you contract with a much larger business, it's often standard for them to provide the contract. While this saves you time and money, they may expect you to sign without making any changes.

As an independent contractor, you're in a difficult position here. While you may want to suggest changes to their contract, you don't want to push back against a new client. At the same time, you need to make sure the contract doesn't include language that could potentially harm your business down the road.

Again, though taking these contracts to a lawyer would be ideal, it's often not feasible. You may ask a lawyer to walk you through one, and ask them what kinds of things you should be looking for in the indemnification sections of the contract ("indemnification," like "liability," means your responsibility to pay someone for damage or injury you've caused). These sections can determine how much you'd have to pay if you lost a lawsuit. Any large, long-term contracts should be vetted by a lawyer, because the stakes are high and you accept a lot of risk when you dedicate that much time to a project.

4. Add language capping your damages.

One standard way to protect your business is to put a cap on the amount of damages you could be liable for. In the indemnification sections, many independent contractors include language to specify that they cannot be held liable for damages greater than the fee for their services. For example, if you're getting paid $10,000 for a project, your contract may stipulate that you can only be sued for $10,000 worth of damages.

5. Add language to protect you from having to pay for lost profits.

Developers and IT consultants may also want to include contract language that limits their liabilities for lost profits a client may suffer. If a client feels that your software or website caused a decrease in their sales, they could hold you responsible. In the book "Legal Guide to Web & Software Development," Stephen Fishman argues you should include language to the effect of…

"In no event shall Developer be liable to Client for lost profits of Client, or special consequential damages, even if Developer has been advised of the possibility of such damages."

Translation: you can't file a lawsuit against me claiming my work caused you to lose money.

6. Know which contracts to use when.

You may also need to use contracts for other situations. Meeting with prospective business partners or investors, you'll want them to sign a Non-Disclosure Agreement (here's a free sample NDA, sponsored by, that you can adapt for your business).

If you're a web developer, you may need to post User Agreements on your website. Here are a free sample Privacy Policy and Terms of Use Agreement.

Next: Protect Your Business from Financial Loss by Breaking Your Work into Segments

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