In our personal lives, we all understand how serious contracts are. Whether that’s an employment contract, a purchase agreement for a property we are buying, or a service contract we sign with a vendor.
This holds true, perhaps more so, for business contracts that we sign with our clients, customers, or partners. Unfortunately, many smaller businesses or sole proprietors might not have access to a lawyer or trained professional who can help look through contracts and legal agreements .
While this guide is not a substitute for professional advice, knowing how to spot possible red flags can be helpful in alerting you that you might want to hold off and get a second opinion before signing anything – and hopefully avert a costly disaster.
#1 Unclear Payment Timelines Or Conditions
The amount and timeline for payments are crucial details that have to be clearly stated in any business contract.
For any contract, pay particular attention to the timelines of payments. Deadlines can be specific dates of the month, or after specific milestones have been attained. For the latter, ensure that there is clear (and indisputable) criteria for determining if milestones are met.
Ideally, all dates should be checked against the final term sheet of whatever business arrangement you might be entering, mutually verified with a calendar and confirmed with all parties involved in the agreement before anyone signs the contract.
#2 Unreasonable Non-Compete Clauses
Some business contracts include a non-compete clause that stipulates that once a particular company is engaged in business with another, they cannot do the same for a competitor for a set period of time.
Although such a non-compete clause is reasonable in many situations, having unreasonable non-compete clauses, such as not being able to work with a direct competitor for an unspecified (or unreasonable) duration of time.
Such clauses will unfairly limit your options for business opportunities for growth and might result in lost revenue.
Another way non-competes can be unfair are when they are not scoped to a geographic location or sector. Look out for these clauses and make sure that they are as clearly-defined as possible.
#3 Unclear Contracted Parties
Having clear contracted parties is instrumental to trace where money is coming from, who it will be paid to, and who is liable for fulfilling the terms of the contract.
Should things go awry between your company and your client, unclear contracted parties might lead to an unenforceable contract and cause legal headaches.
Such terms of reference are usually at the beginning of the contract, so take a close read to ensure the agreement is between the correct and mutually agreed upon entities.
#4 Unfair Liability And Indemnity Terms
A liability clause defines how much money should be owed and paid should something go wrong. An indemnity term stipulates the financially responsible party for the damage.
Be on the alert for these clauses in business contracts, because a few carefully-worded terms could make the difference.
Anything could go wrong at any point of a business relationship, with external factors beyond one’s control that prevent a party from fulfilling their contractual duties. In such situations, responsibility should be fairly distributed among the relevant parties involved.
Besides, negotiating for fair liability and indemnity terms, it makes sense to include a grace period to allow for matters to be rectified satisfactorily before the aggrieved party files lawsuit and burn a huge hole in each other’s budgets.
#5 Undue Pressure To Sign By The Other Party
If you encounter a strange urgency to sign a contract as soon as possible without having ample time to read through, that might be a red flag as well.
Instead of succumbing to this pressure, it should be a sign to exercise even greater caution when reading the contract.
Ensure you are satisfied that you have performed your necessary due diligence before picking up the pen to sign.
Save Yourself And Your Business By Reading Contracts Carefully
As a business owner who has probably spent weeks and months in building up your business, it is wise to look at any business contract to ensure it protects you. You have that responsibility to yourself, your shareholders, and your team.
When in doubt, always seek clarification from a professional, even if it means paying for that advice or delaying the contract-signing for a while. Ultimately, rushing into things could open you up to make an expensive mistake.
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