For business owners, contracts are the backbone of any business relationship.
Whether you’re dealing with vendors, customers, employees, or business partners, having a binding and legally enforceable document ensures that there is a record of commitment and accountability between parties.
However, contracts can be complex in nature and even minor mistakes can lead to severe consequences, especially if a dispute arises.
In this post we cover the most common mistakes that small businesses should learn to avoid when drafting contracts.
1. Not Having a Contract in Writing
This is by far one of the biggest mistakes small businesses can make.
Handshakes or verbal agreements just won’t cut it, especially if the transaction involves significant dollar value.
We understand that in the digital age, it’s easy to fall into the trap of using emails, text messages, zoom video calls, etc. as a form of paper trail.
You need to write it down. You need to sign it.
When an issue arises, you have a legal document that provides concrete terms and provisions that will protect you and your business.
Some important agreements to get in writing are:
2. Contracting with the Wrong Entity
Before entering into a contract, you need to verify “who” you’re entering the agreement with to ensure that you are working with the right entity.
For example, Individual A signs a contract with Individual B, believing that they’re dealing with Individual B as the company rather than a sole member of that company.
When in fact, Individual B may only be an employee of the company and does not have any authority to sign the contract, which may end up nullifying the contract.
This type of scenario may also apply to subsidiaries and related companies, joint ventures, and affiliates, etc.
3. Not Tying Provisions Together
A contract is essentially an allocation of risk and none of your provisions act as stand-alone components.
Make sure risk is spread out correctly in all of your provisions - especially your warranty, limit of liability, indemnity, and insurance.
All these provisions need to work in unison.
4. Cutting Corners with DIY Legal Contracts
On a related note, don’t use online legal contract templates with standard provisions because there is no guarantee that these provisions will work together, and they may in fact conflict with each other. This often leaves loopholes in the contract itself and increases your risk of liability.
In an attempt to save money, some business owners may assume that online contracts will offer adequate protection for their business. In most cases, generic legal documents are too rigid and lack flexibility for amendments.
There is simply no substitute for a well-written contract designed to address your unique business situation.
5. Not Considering What Law Governs the Contract
Prior to using boilerplate choice of law clauses, parties must consider the purpose and suitability of the clause.
For example, will a particular problem be dealt with more effectively in one jurisdiction over another? A choice of law clause indicates the law under which the parties will use to resolve any disputes.
The choice of law clause helps reduce uncertainty and unpredictability in interpreting the contract in the future.
6. Not Writing Clear or Complete Scopes of Work
You need to write down in explicit detail of what exactly you and the 3rd party are agreeing to do.
All the duties and obligations, provisions, and dispute mechanisms need to be written in a clearly defined and concise manner. Avoid using generic words and ambiguous language that may lead to misinterpretation of terms.
The result is a contract that is much easier to enforce as well as reduce potential disputes or litigation down the road.
7. Allowing the Other Side to Draft the Contract
Having one party draft the entire contract allows that party to act on their own interest, and dictate the terms and conditions in their favour. This leaves you with little to no leverage.
Do not put yourself at a disadvantage by giving someone else a blank check to sign.
You must be involved in the negotiation process in order to draft a fair and balanced contract that works for all parties involved.
8. Failure to Work With a Business Lawyer
As a small business, the last thing you want is to put your business in jeopardy because of a faulty contract, or worse, not having a contract at all.
Having a business lawyer involved in the contract process would help transactions operate more smoothly. An experienced business lawyer can scrutinize and pinpoint any red flags or inconsistencies within a contract, as well as negotiate terms on your behalf in the drafting process.
Ask Us to Review Your Contract
Well-prepared contracts are essential instruments for small business owners and vital to growing sustainable and successful business relationships.
If you don’t fully understand everything written in a contract, we make sure you do.
Speak to one of our experienced business lawyers to assist you in drafting or reviewing a contract. Please call us directly at (778) 565-4700 or simply fill out our contact form to schedule a free consultation.
The preceding content is for informational purposes only and does not constitute legal or professional advice. To obtain such advice, please contact our offices directly.