When you’re starting a new business venture or entering into a new relationship with a vendor or contractor, the formalities can feel like such a drag on progress. Everything seems so promising at the beginning, after all. You can’t imagine that anything could go wrong.
But that’s just it: Anything could go wrong and something always does.
Contracts with unnecessary risk usually arise from a failure to hammer out all the details up front. To safeguard your business, it’s crucial to have thorough and unambiguous contracts in place. The investment you’ll make in solid agreements will seem small when you compare it with the potential consequences of finding out too late that your contract doesn’t protect your interests.
You might even consider using an informal contract or something you find online. Entrepreneurs do it all the time, but unfortunately, these contracts can leave you exposed. They are written very generally to work for a variety of businesses and situations. Even if the website allows you to make state-based or other customizations, it’s so easy to make mistakes that can invalidate whole contracts or make them applicable in a way you didn’t intend.
So with that in mind, let’s look at the most common ways bad contracts leave you at risk:
They leave things out.
If something is omitted from a contract, either because of a simple oversight or because you think it’s obvious and indisputable, then it’s generally not enforceable in court.
It’s very easy to get caught up at the beginning of a new business relationship and assume that you will continue to agree on the fundamentals in the future. Don’t allow that to happen. If a condition is important to you, your attorney will make sure it gets spelled out in the contract.
They use vague terms.
Contracts are often full of terms such as “reasonable” and “undue,” and that might be OK for some things. But again, that assumes you will agree with the other party later on what is reasonable or undue. When it comes to things like timelines, number of modifications or revisions, and what constitutes a breach, it’s always better for both parties to have clarity. And note that if it is that hard to define these guidelines from the beginning, you or the other party might need more information up front to ensure nothing is being left out.
They make you a personal party.
This one is simple but important. If you are signing a contract on behalf of your business, make absolutely certain that it is clear that it is your company that is party to the contract. Even if your business is a corporation or LLC, you could be putting yourself at personal risk if the contract is unclear.
They don’t give you an out.
There’s a time and place for even the best business relationships. You may have a wonderful experience with a vendor, but what if your business goals change? What if you make a new hire or implement new technology that makes a vendor’s services or products unnecessary? You’ll want the right to withdraw from the contract after a required notice simply because it’s the right thing for your business.
They have conflicting terms.
This happens more often than you might think, and it’s often because the terms are only in conflict in certain scenarios. If it’s impossible to eliminate the conflicting terms, your contract can address what happens in the narrow circumstances when the terms are in conflict. For example, a service agreement might specify both that the contract term is one year AND that the agreement may be terminated at any time with written notice. If something happens and you wind up in court, the judge typically has discretion in determining which term takes precedence or what other term might be reasonable.
They put all the risk in your lap.
It’s common for companies to use “hold harmless” clauses to ensure that they are not responsible for losses, even those within their control. This can set you up for a situation in which you experience a loss but have no available remedies for recouping the loss.
They don’t address conflict resolution.
Not every dispute has to go to court. There are easier, more cost-effective ways to resolve conflicts when they arise, but you don’t wait till everyone is mad to talk about how best to sort things out. Agree in advance to use mediation or arbitration to settle disputes and include that in your contract.
Joyce & Bary Law can help you protect yourself and your business.
Our business attorneys are experienced in contract law and can help ensure that your contracts are enforceable and contain the protection your business needs. We have helped many of our clients draft a library of documents for use with vendors, clients, employees and others and identify areas where contracts should be implemented. If you have contracts you’re already using, we are happy to review them and help you update or improve them to provide more protection. Give us a call or drop us a line through our contact form to get started!
