What Should a Corporation Know about a Business Management Contract?

The contract must enumerate which decisions the manager can make unilaterally, which require board approval, and which fall outside the manager's authority entirely. For example, a contract might grant a manager power to hire and terminate staff up to a salary threshold, approve vendor contracts under a dollar limit, or execute routine operational decisions, but reserve all capital expenditures, debt issuance, and equity transactions for the board or shareholders. When a corporation later challenges the manager's action as beyond scope, the court examines the written contract language first. Drafting specificity eliminates uncertainty and allows the corporation to enforce compliance or seek damages for unauthorized acts.

Omitting clear compensation terms or termination triggers creates enforceability problems and exposes the corporation to breach claims and injunction attempts by the manager. New York courts have held that indefinite compensation clauses may be unenforceable if they fail to provide a reasonably certain measure of damages. Termination clauses that lack specificity, such as at-will termination for cause without defining cause, invite litigation over whether the corporation had a lawful ground to remove the manager. A well-drafted contract specifies the base fee or percentage, any performance bonuses tied to objective metrics, expense reimbursement rules, and the exact events that trigger termination. Building in cure periods and notice requirements reduces the manager's legal arguments and strengthens the corporation's exit posture if the relationship deteriorates.

An indemnification clause obligates the manager to defend and reimburse the corporation for losses arising from the manager's breach, negligence, or violation of law, provided the corporation did not cause or contribute to the loss. The contract should specify that the manager maintains errors and omissions insurance, directors and officers coverage if applicable, or fidelity bonding in amounts the corporation deems adequate, and that the corporation is named as an additional insured or certificate holder. A corporation should also require the manager to maintain confidentiality of proprietary information and trade secrets, with liquidated damages or injunctive relief provisions that quantify the harm from breach or allow the corporation to seek court orders preventing disclosure.

Dispute resolution clauses, such as arbitration or mediation provisions, allow the corporation to resolve conflicts with the manager outside court, reducing legal costs and preserving confidentiality. Arbitration clauses require both parties to submit disputes to a neutral arbitrator instead of litigation, and the arbitration award is binding and largely unappealable, which gives the corporation speed and finality. Mediation clauses are non-binding and often serve as a prerequisite to arbitration or litigation. A well-drafted clause specifies the arbitrator selection process, the governing law, the forum location, and cost allocation, so neither party can later argue about procedural fairness or surprise expenses. Many corporations include a carve-out allowing either party to seek injunctive relief in court for breaches involving confidentiality, intellectual property, or unauthorized competition.

Creating a contemporaneous written record of the manager's performance, breaches, and the corporation's response is essential for both defense and enforcement. A corporation should maintain a file containing copies of the signed contract, any amendments, performance evaluations, emails regarding performance issues, financial statements, and any written warnings or cure notices sent to the manager. If the manager fails to cure a breach within the contractual cure period, the corporation should send a formal termination notice that cites the specific breach, references the contract section permitting termination, and specifies an effective date. Courts and arbitrators rely heavily on written records to determine whether a breach occurred and whether the corporation followed contractual procedures.

If a corporation and manager dispute whether the manager breached the contract, the corporation can pursue breach of contract damages in New York state court or in federal court if diversity jurisdiction exists. The corporation bears the burden of proving by a preponderance of the evidence that the contract existed, the manager failed to perform, the corporation suffered damages, and the damages are quantifiable. In New York, damages for breach of contract are limited to those that are foreseeable and not too remote. If the contract includes an arbitration clause, the corporation and manager must arbitrate instead of litigating, and arbitration awards are final and binding, with very limited grounds for appeal. For business contract advisory support, a corporation should engage counsel early to map out the manager's likely defenses and craft contract language that forecloses those arguments.

Scheduling quarterly or annual performance meetings allows the corporation and manager to discuss progress against agreed metrics, address concerns before they escalate, and adjust the contract if business conditions change. During these meetings, the corporation should provide written feedback documenting what the manager is doing well and where improvement is needed. If performance is deteriorating, the corporation should send a written performance improvement notice specifying the deficiency, the standard expected, and a timeline for improvement. This approach demonstrates to a court or arbitrator that the corporation acted reasonably and gave the manager a fair opportunity to perform.

A corporation should include provisions addressing succession planning, key person insurance, and transition obligations to ensure continuity if the manager leaves or becomes incapacitated. The contract might specify that the manager will train a successor, provide detailed documentation of ongoing projects and relationships, and cooperate with a transition period during which the manager assists the replacement. A corporation should also require the manager to maintain confidentiality and non-compete obligations that survive termination. For exclusive management contract arrangements, the corporation should require the manager to disclose all material information about the managed assets or operations, maintain detailed records, and provide the corporation with regular written reports so the corporation retains visibility and can detect problems early.

A corporation that invests time in drafting a comprehensive business management contract, communicating expectations clearly, and documenting performance creates a foundation for a productive relationship and a strong legal posture if disputes arise. By combining clear contractual terms with proactive management and early legal guidance when concerns surface, a corporation can protect its interests, minimize litigation risk, and focus on the core mission of the business.