Contracts are essential for protecting your business, but even small mistakes can lead to disputes, financial losses, or legal troubles. Here are the top 10 contract mistakes to avoid:
- Skipping Written Agreements: Verbal deals can lead to misunderstandings. Always document agreements in writing.
- Using Unmodified Templates: Generic templates may miss key clauses like payment terms or governing laws. Customize contracts for your needs.
- Using Unclear Terms: Vague language like "reasonable time frame" creates confusion. Define terms clearly.
- Leaving Out Key Clauses: Missing clauses like confidentiality or dispute resolution can leave you exposed.
- Not Updating Contracts: Outdated contracts can cause problems. Regularly review and revise them.
- Skipping Legal Review: A lawyer can catch risks you might miss. Always seek professional advice.
- Missing Jurisdiction Details: Specify which state’s laws apply to avoid legal confusion.
- Forgetting Dispute Procedures: Without a clear resolution process, minor conflicts can escalate.
- Not Reading Before Signing: Skimming contracts can lead to costly surprises. Read every detail.
- Poor Change Documentation: Always track and document changes to ensure enforceability.
Quick Overview
| Mistake | Why It’s a Problem | Solution |
|---|---|---|
| Skipping Written Agreements | Leads to disputes over terms | Always use written contracts |
| Using Unmodified Templates | Misses key clauses or legal specifics | Customize contracts for your business |
| Using Unclear Terms | Causes confusion and disputes | Use precise, clear language |
| Leaving Out Key Clauses | Exposes you to risks | Include clauses like confidentiality |
| Not Updating Contracts | Makes contracts outdated | Regularly review and revise |
| Skipping Legal Review | Overlooks hidden risks | Consult a qualified lawyer |
| Missing Jurisdiction Details | Creates legal confusion | Specify governing laws and venues |
| Forgetting Dispute Procedures | Escalates minor conflicts | Include mediation or arbitration steps |
| Not Reading Before Signing | Leads to surprise risks | Read thoroughly before signing |
| Poor Change Documentation | Makes changes unenforceable | Track and document all modifications |
Avoiding these mistakes can save you time, money, and stress. Take proactive steps to create contracts that are clear, thorough, and legally sound.
Top Legal Mistakes Small Businesses Make & How to Avoid …
1. Skipping Written Agreements
Relying on verbal agreements can lead to serious problems for small business owners. While a handshake deal might feel sufficient at the moment, it opens the door to disputes and legal troubles. Real-world examples show how verbal agreements often fall apart, costing time and money.
Take this scenario: Business partners verbally agreed on profit-sharing terms but later disagreed on the specifics. The lack of a written contract led to expensive litigation – something easily avoidable with proper documentation.
Written agreements serve two key purposes:
- Clear Documentation of Terms
They spell out payment schedules, project scope, deadlines, and the responsibilities of each party. - Legal Enforceability
A written contract provides a solid foundation for resolving disputes, strengthening your position if issues arise.
"It is important to put all your business agreements in writing and to be sure that those written agreements clearly define the roles/obligations/duties of each party as well as the remedies available if either party violates any of the terms of the agreement." – Morrissey Law
To safeguard your business, ensure your contracts include these critical components:
| Contract Component | Importance |
|---|---|
| Capital Contributions | Defines what each party is contributing financially |
| Time/Effort Requirements | Sets expectations for involvement |
| Exit Procedures | Outlines steps for leaving the agreement |
| Dispute Resolution | Details how conflicts will be addressed |
| Ownership Rights | Clarifies stock or interest arrangements |
Although verbal agreements are legally valid in some cases, they leave your business exposed to unnecessary risks. Taking the time to draft a written contract can save you from costly disputes down the line.
Switching from verbal to written agreements is a smart business decision. Work with legal experts to create contracts that are clear and thorough.
2. Using Unmodified Templates
Relying on unmodified templates can lead to serious legal and financial problems. While templates can provide a basic framework, failing to tailor them to your business needs can expose you to unnecessary risks.
Take this example: A convenience store owner used a standard internet template to sell their business. The template lacked critical details like governing law, arbitration, and payment terms. When the buyer defaulted on payments, the seller faced expensive litigation.
Here’s what generic templates often miss:
| Key Clause | Common Template Issues | Business Impact |
|---|---|---|
| Industry Specifics | Generic terms that overlook niche needs | Insufficient protection for specialized operations |
| State Laws | Lack of jurisdiction-specific language | Contracts may not be enforceable |
| Payment Terms | Vague or incomplete payment schedules | Leads to disputes and collection challenges |
| Dispute Resolution | Missing or limited arbitration options | Higher litigation costs |
| Tax Considerations | Weak or absent tax-related provisions | Potential for unexpected tax issues |
Legal disputes can be costly, ranging anywhere from $3,000 to $150,000 – far more than the cost of having a contract reviewed by a lawyer.
"The importance of comprehensive, lawyer-drafted contracts cannot be overstated. The perils of using ‘one-size-fits-all’ contracts or self-drafting a contract are enormous and costly, and examples of the devastating effects are many." – The Jacobs Law, LLC
Here’s another example: A musician signed barebones entertainment and management contracts. The inconsistent language made it unclear what each party’s rights and responsibilities were, creating significant confusion.
To avoid these pitfalls, follow these steps:
- Understand Local Laws: Research your state’s legal requirements.
- Clarify Key Terms: Use a glossary to define important terms clearly.
- Customize Critical Sections: Adjust payment terms, scope of work, and dispute resolution clauses to suit your situation.
- Consult a Lawyer: Have an experienced attorney review your contract before signing.
Templates are a good starting point, but they need to be tailored to protect your business effectively.
3. Using Unclear Terms
Vague language in contracts – like "reasonable time frame" or "industry standard" – can create confusion and lead to disputes. Clarity is crucial to ensure everyone understands their responsibilities. For example, the difference between "shall" and "may" is key: "shall" means something is required, while "may" implies permission or possibility.
To make contracts clearer, focus on specific areas like timelines, performance expectations, party roles, and breach conditions. Here are some tips:
- Use straightforward language and define key terms (you can even create a dedicated section for definitions).
- Provide exact measurements and deadlines instead of approximations.
- Include examples when they help clarify complex points.
- Stick to consistent terminology throughout the document.
"Many experienced transactional attorneys I’ve spoken with recommend that your contract be clear enough that a layperson will understand the terms of the deal. In this case, it’s good to think like an attorney but not sound like one."
"One of the biggest mistakes is not defining terms and conditions in clear, understandable language. Standardizing your startup’s contract language from the start is very important. This doesn’t just apply to your contracts but also to how your sales team and legal team speak to customers about your contracting process."
Clear, precise language is the starting point for avoiding many common contract issues.
4. Leaving Out Key Clauses
Skipping important clauses in a contract can lead to expensive disputes. Even a well-drafted agreement can leave your business exposed if it lacks critical provisions. Below are some essential clauses you should always include to protect your interests.
"One of the biggest mistakes is not defining terms and conditions in clear, understandable language… Ambiguity can lead to misunderstandings, disputes, and potential lawsuits. It’s vital that every provision, including payment terms, scope of services, termination clauses, data protection, and intellectual property rights, are clear and well-articulated."
| Clause | Purpose | Key Elements to Include |
|---|---|---|
| Confidentiality | Protects sensitive data | Trade secrets, client information, proprietary methods |
| Termination | Outlines exit conditions | Notice periods, early termination fees, renewal terms |
| Payment Terms | Ensures timely payment | Payment schedules, late fees, early payment discounts |
| Scope of Work | Prevents scope creep | Deliverables, timelines, specific exclusions |
| Dispute Resolution | Avoids costly litigation | Mediation steps, jurisdiction, arbitration terms |
| Data Protection | Safeguards private data | Data handling rules, breach notification processes |
| Intellectual Property | Clarifies ownership rights | Copyright terms, usage rights, transfer conditions |
Using clear language and conducting thorough reviews ensures your contracts cover all bases. Including these clauses strengthens your agreements, minimizes confusion, and protects your business.
"The best advice is to find a good commercial lawyer, and use them for all your contractual requirements. It’s much more expensive, but when things go wrong, and they will at some point, you’ll realise the benefit of this advice. I’ve known clients to lose £10,000’s from making this mistake."
Complete and standardized contract language reduces misunderstandings and helps prevent disputes. Tailor each clause to fit your business needs while keeping the terms clear and enforceable.
5. Not Updating Contracts
Ignoring the need to update contracts can lead to legal and financial trouble. Many small business owners treat contracts as "set-it-and-forget-it" documents, missing the signs that updates are overdue.
Keeping contracts up to date is crucial in a changing market. Robert Lynch, a P2P Analyst at SoftCo.com, highlights the risks:
"Reacting to changes in the supply chain and the market is even more critical given the current economic realities. The more time that is spent looking for contracts, the costlier it is for a company, as reactions to changes are naturally slower. While some companies are still searching for older contracts, organizations that use an automated Contract Management solution have already viewed, assessed, and amended contracts to reflect changes in the market. Companies are therefore paying a high price due to the inaccessibility of their contracts."
What Needs Regular Updates?
Certain parts of contracts require close attention, including:
- Payment terms and pricing: Ensure they reflect current market conditions.
- Service level agreements: Update to match evolving expectations.
- Scope of work: Adjust for any changes in deliverables or responsibilities.
- Compliance rules: Stay aligned with new industry regulations.
- Technology and security standards: Adapt to advancements or new risks.
When Should You Update?
Watch for these warning signs that it’s time to revisit your contracts:
- Renewal dates are coming up, but no review has been done.
- Your business model or services have changed.
- New laws or regulations affect your industry.
- Market prices or supply chain conditions have shifted.
- Operational processes have been updated.
Failing to update contracts can lead to unnecessary costs and lock you into terms that no longer work for your business. Regular reviews ensure your agreements stay relevant, protect your interests, and help avoid costly mistakes.
sbb-itb-a688917
6. Skipping Legal Review
After updating contracts, it’s crucial to have them reviewed by a legal professional to identify any hidden risks. Skipping this step can lead to problems that far outweigh the cost of hiring an attorney.
Risks of Skipping Legal Review
Many small business owners have learned the hard way that skipping legal review can expose their businesses to serious risks. These include:
- Intellectual property disputes
- Issues with procurement agreements
- Increased chances of litigation
- Exposure of trade secrets
- Automatic contract renewals you didn’t intend
"Invest in professional legal counsel, there’s no such thing as a handshake agreement."
How to Choose the Right Legal Professional
Here are some tips for finding the right attorney to review your contracts:
-
Check Credentials
Use resources like state bar association websites, www.martindale.com, and references from other business owners to verify their qualifications. -
Look for Relevant Experience
Select an attorney who understands your industry, specializes in small businesses, and has experience with the type of contracts you need reviewed. -
Prioritize Communication
Choose someone who is responsive, collaborative, and easy to work with. They should also explain legal concepts in a way that’s clear and actionable.
By following these steps, you can ensure your legal counsel is well-equipped to protect your business interests.
"Because so much is at stake for your small business, the safest course of action is to have an attorney experienced in contract law give you legal advice. Let them review and approve all agreements before signing."
Tips for a Better Legal Review Process
To get the most out of your legal review:
- Speak with at least three attorneys before making a decision.
- Ask for references from other small businesses and verify them.
- Make sure the attorney is licensed to practice in your state.
- Check out local small business development centers, which may offer free or low-cost legal advice.
- Use contract review software to identify potential issues before handing the document to your attorney.
7. Missing Jurisdiction Details
Leaving out jurisdiction details can lead to legal confusion and expensive disputes over which state’s laws apply. This is especially risky when your business dealings span across state or national borders.
Some common errors include assuming local laws will automatically apply, failing to identify a specific venue for disputes, or neglecting to name the governing state’s laws. These gaps can be avoided by clearly outlining jurisdiction details in your agreements.
Here’s how to safeguard your business:
- Governing Law: Clearly state which state’s laws will apply to and interpret the agreement.
- Venue Selection: Specify the location where any legal proceedings will take place.
8. Forgetting Dispute Procedures
Leaving out a clear dispute resolution process in a contract can turn minor disagreements into lengthy and expensive legal battles. Including a well-thought-out clause can help address conflicts early and keep them from escalating.
Here’s a quick comparison of common dispute resolution methods:
| Resolution Method | Key Characteristics |
|---|---|
| Negotiation | Informal and typically less expensive; works well for minor issues and maintaining business relationships |
| Mediation | A structured but flexible process; helps resolve complex disputes while preserving relationships |
| Arbitration | A neutral third party provides a binding decision, often faster and more private than court proceedings; suitable for technical or sensitive matters |
| Litigation | Formal court process that can be costly and time-consuming; generally used for significant contract breaches |
Use this table to decide which approach fits your needs when drafting your dispute resolution clause.
Key Elements to Include in Your Clause:
- Direct Negotiation: Start with a step requiring both parties to negotiate directly before escalating the issue.
- Mediation Guidelines: Specify when and how mediation should occur.
- Arbitration Details: Clarify if arbitration is binding and outline the process for selecting an arbitrator.
- Time Limits: Set clear deadlines for each stage of the resolution process.
These components simplify the process and encourage quicker resolutions. Mediation and arbitration, in particular, can save money and avoid the adversarial nature of litigation.
Tailor your clause to your business. For example, a software company might prefer arbitration for resolving technical disputes, while a retail business may lean toward mediation for customer-related issues. Choose the method that aligns with your operations and risk tolerance.
9. Not Reading Before Signing
Signing contracts without thoroughly reading them can lead to serious financial and legal troubles. Taking the time to review every clause is crucial to avoid unexpected risks and ensure the contract is fair and enforceable.
Here are some key areas to focus on during your review:
- Payment Terms: Watch out for hidden fees or unclear schedules that could disrupt your cash flow.
- Termination Clauses: Be cautious of automatic renewals or steep penalties that make it hard to exit the agreement.
- Scope of Work: Vague deliverables or unclear expectations can lead to disputes and delays.
The table below highlights common contract pitfalls:
| Contract Element | Common Issues | Risk |
|---|---|---|
| Payment Terms | Hidden fees, unclear schedules | Unexpected costs, cash flow problems |
| Termination Rights | Auto-renewal, high exit fees | Locked into bad agreements |
| Confidentiality | Weak data protection terms | Exposure of sensitive information |
| Scope Definition | Vague deliverables, unclear goals | Cost overruns, missed deadlines |
"One of the biggest mistakes is not defining terms and conditions in clear, understandable language… Ambiguity can lead to misunderstandings, disputes, and potential lawsuits. It’s vital that every provision, including payment terms, scope of services, termination clauses, data protection, and intellectual property rights, are clear and well-articulated." – Scott Whitaker, CEO of contractsent.com
To protect yourself before signing, consider these steps:
- Take time to review each section of the contract carefully.
- Highlight any unclear terms or concerning clauses for discussion.
- Use contract review tools to identify potential red flags.
- Put all verbal agreements or promises into writing.
- Ask for clarification on any confusing legal language.
Reading contracts thoroughly and addressing ambiguities upfront can help safeguard your business from unfavorable terms and potential disputes.
10. Poor Change Documentation
Properly documenting changes in contracts is essential to avoid misunderstandings, disputes, and potential legal troubles. Neglecting this step can leave your business vulnerable, both financially and legally. Tracking changes accurately ensures everyone is on the same page and that agreements remain enforceable.
When change documentation is lacking, it can lead to:
- Terms being unenforceable
- Uncertainty about obligations
- Challenges in tracking version history
- Issues proving consent to adjustments
Here’s a breakdown of common documentation errors and their potential consequences:
| Documentation Issue | Business Impact | Risk Level |
|---|---|---|
| Verbal modifications | Disputed terms, no proof of agreement | High |
| Missing signatures | Questionable enforceability | High |
| Poor version control | Confusion over current terms | Medium |
| Incomplete audit trail | Difficulty resolving disputes | Medium |
"If changes to the contract are not properly documented, the enforceability of the agreement could be at risk. This may lead to confusion, contract disputes, and potential legal action." – Scott Whitaker, CEO of Contract Sent
To avoid these risks, follow these steps for better change documentation:
-
Build a Clear Audit Trail
Use contract management software to track all changes. This ensures version control and keeps a record of every modification, along with proper authorization. -
Record the Reason for Changes
Always document why a change was made. This provides context and helps resolve any future disputes. -
Ensure Proper Authorization
Confirm that all changes are approved by the right individuals. Keep detailed records of who authorized each change, their role, and the date of approval.
"Oral agreements are susceptible to misunderstandings and memory lapses… Without proper documentation, even simple changes can become contentious, increasing the risk of disputes." – Scott Whitaker, CEO of Contract Sent
Best practices include using redlining tools for tracking edits, saving dated versions of all drafts, and assigning a dedicated person to oversee modifications. Regularly reviewing changes with all parties involved can ensure clarity and agreement on updated terms.
Steps to Create Better Contracts
Legal contracts are essential for safeguarding your business and ensuring all parties are on the same page. Building on earlier discussions about clear language and thorough reviews, here’s how you can create contracts that work effectively.
Key Elements of a Strong Contract
A solid contract should cover these critical areas:
- Define Key Terms: Clearly outline payment terms, project scope, timelines, performance expectations, and termination conditions. This clarity avoids confusion and sets clear expectations for everyone involved.
- Add Protective Clauses: Strengthen your agreements with provisions for confidentiality, intellectual property rights, dispute resolution, and payment structures (including incentives and penalties).
| Contract Component | Why It Matters | Risk Without It |
|---|---|---|
| Payment Terms | Ensures steady cash flow | Payment delays |
| Scope Definition | Avoids unexpected changes | Cost overruns |
| Confidentiality | Safeguards sensitive data | Risk of data breaches |
| Dispute Resolution | Reduces legal expenses | Prolonged litigation |
Establish a Review Process
"When a business owner is looking to sign a contract, it is critical that they take the time to review and understand it completely." – Dan Kline, Partner COO at greatlakesadvisory.com
To ensure nothing is overlooked, follow a structured review process:
- Have internal stakeholders assess the terms.
- Let legal counsel evaluate the document.
- Track all changes made during negotiations.
- Secure final approval before signing.
Get Expert Legal Advice
"The best advice is to find a good commercial lawyer, and use them for all your contractual requirements. It’s much more expensive, but when things go wrong, and they will at some point, you’ll realise the benefit of this advice."
Hiring a skilled commercial lawyer can save you from costly mistakes. They’ll help safeguard your intellectual property, manage procurement agreements, and minimize litigation risks. While their fees may seem high upfront, they’re a worthwhile investment compared to the financial impact of legal disputes.
Conclusion
The points outlined above highlight how essential well-structured contracts are for protecting your business. Mistakes in contracts can lead to severe financial consequences, with litigation costs ranging anywhere from $3,000 to $150,000.
Strong contracts with clear terms are the backbone of business protection. As Scott Whitaker, CEO of contractsent.com, explains:
"One of the biggest mistakes is not defining terms and conditions in clear, understandable language. Standardizing your startup’s contract language from the start is very important. This doesn’t just apply to your contracts but also to how your sales team and legal team speak to customers about your contracting process. Ambiguity can lead to misunderstandings, disputes, and potential lawsuits. It’s vital that every provision, including payment terms, scope of services, termination clauses, data protection, and intellectual property rights, are clear and well-articulated."
Some key elements to focus on include:
| Contract Component | Impact on Business | Preventive Action |
|---|---|---|
| Written Agreements | Helps avoid disputes | Ensure all arrangements are formal |
| Clear Language | Lowers litigation risk | Use standardized, clear terms |
| Legal Review | Identifies potential issues | Hire qualified legal counsel |
| Documentation | Keeps a reliable record | Track and document changes |
By addressing these areas, you can build a solid foundation for managing contracts effectively.
Adrian Lawrence FCA from FD Capital Recruitment also warns:
"Clients using off the shelf contracts, these might seem to offer a quick solution, but more often than not they don’t stand up well to legal challenges. The best advice is to find a good commercial lawyer, and use them for all your contractual requirements. It’s much more expensive, but when things go wrong, and they will at some point, you’ll realise the benefit of this advice. I’ve known clients to lose £10,000’s from making this mistake."