Read the fine print: common contract pitfalls
Updated: Aug 11, 2022
If you recognize the importance of contracts, congrats—you’re well on the path towards running a business with a sound legal foundation. But it’s not enough to simply have contracts; just as working with faulty equipment or poor employees are nearly as bad as having none of either, poorly conceived or constructed contracts can leave you in nearly as difficult a spot as not having contracts altogether.
Your push to have contracts should be paired with an understanding of what mistakes to avoid with those contracts. Below are some of the most common contract missteps that can land small businesses in trouble.
1 – Not doing due diligence. Any business relationship that promises to be long and/or expensive demands a certain level of knowledge of who you’re partnering with. Before even getting to the contract part of the arrangement, examine the pertinent records and operations of the other company. By doing your homework, including talking to other vendors or customers, you can gain assurance that prospective partners have the capability to perform to the terms of a contract.
2 – Failing to define rights and responsibilities. One thing a contract should do is remove uncertainty, particularly when it comes to the rights and responsibilities. Both sides should be absolutely clear as to what is expected and what they are entitled to ask for, and any ambiguity should be removed as a possibility. It’s not enough to assume both sides can come to an agreement on the performance details; get it in down on paper.
3 – Ignoring dispute resolution. Ideally any contract should be crafted and understood in a way that precludes conflict, but you can never count out the possibility of dispute. Whether it’s a breach of contract or a disagreement on interpretation, contracts should include dispute resolution clauses that include alternatives to lawsuits such as negotiation or mediation, all to avoid unnecessary and costly litigation.
4 – Omitting termination or default clauses. A contract may be entered with the best of intentions, but as with most things in life, it’s best to at least prepare for the worst. Your contracts should have clauses that state how and when one or both parties may terminate the contract. The clause should also stipulate what happens in the event of default, so that both sides are duly motivated and neither is left without clear recourse in the event that obligations aren’t met.
5 – Working off of handshakes, not written agreements. A handshake may be the origin of the agreement, but it’s far from the last step if you want to have a binding contract. People are fallible; they go back on their word, misunderstand, or misremember a meeting or conversation. The written (or typed) word is immutable, and all agreements that you reach should be put into a contract that is then reviewed and signed, otherwise your arrangements are subject to the shortcomings of human nature.
6 – Using contracts from the internet. Contract templates are prolific on the internet, but they shouldn’t be taken as a finished product, ready for use. Any contract needs to be tailored for its purpose, location, and the specific needs of the signatories. Thus, working from downloaded templates runs the tremendous risk of mistakes that leave one or both parties exposed. If you are planning to start with a template, take that template to a business lawyer for review to ensure it meets your needs and is up to standards.
7 – Signing without reading (or understanding) the contract. Perhaps we feel unable to make our way through the tangle of jargon that seems to make up a contract, or perhaps we are placing blind faith in the professional we’re working with. Whatever the reason, many people sign contracts without a full understanding or a complete reading of them. Walking through the document, clause by clause, with your business lawyer is the only way to comprehend what you are binding yourself to, and is the smart way to do business.