Contracts are everywhere in business. From online click-through agreements to the service contracts you use with your clients and customers, contracts are part of doing business in the modern world.
Contracts are like the rules to a game. Uno’s game will end in a fight if half the players aren’t aware of the unwritten house rules, if sections of the rule book are missing, or if the rules say one thing, but the drafter meant something different. The rules need to be clear and unambiguous from the start, and they need to address as many what-ifs as possible.
5 red flags to watch for before signing any business contract.
- Misunderstandings
Do you understand everything in the contract? Don’t just rely on what the other side says about the contract. If something doesn’t work out, the courts do not care about what you thought you were signing or what the document should have said. The only thing that matters is what’s in the document.
- Not Planning for Possible Disputes
Business disputes happen. Both sides will be more reasonable when answering these questions before the contract is signed than they will when things have gone awry.
There is a common misconception that in the event of a dispute, you’ll be able to recover your legal fees if the other side loses the case. This is rarely true unless the contract says that the loser will pay the ‘winner’s legal fees.
- Extremely One-Sided Terms
We see many small businesses that are willing to sign whatever contract is put in front of them for the chance to work with a big client. But if it feels like you’re selling your company’s soul for the opportunity, you need to take a step back. Be careful with contracts that allow the other side to reject your work in their sole and absolute discretion. We’ve seen agreements where the other side can reject your work, not pay you for the effort, and still claim ownership over the work product.
- Naming the Wrong Parties
You are not your business. If you are entering into a business contract, the contract’s party should be the business, not you. There’s never a good reason to name yourself, individually, as a party to the agreement. Suppose your customer or client is unhappy with your services and you’ve named yourself as a party to the contract. In that case, that disgruntled customer or client has every reason to sue you personally and come after your personal assets.
- Ambiguity
Finally, if you hand your business contract to a neutral third party, will they understand who is supposed to do what, by when, and for how much money without any other background information or explanation? If the document can’t stand on its own when reviewed by a business colleague, it almost certainly won’t make any sense to a judge later if something goes wrong.
The next time you are about to enter into a contract review it for these red flags.
