When drafting your first business contract, there is a lot to consider. You want to maintain a positive relationship with your prospective partners and protect your company from potential conflict.
While there are many templates, only you know what suits your circumstance. Here are the top nine mistakes business owners make when creating a contract.
1. Using a Lot of Legalese
A contract is a legally binding document, so you might think adding superfluous language and legal terminology helps it seem more “official.” However, adding unnecessary filler or overly complicated vocabulary makes misinterpretation more likely.
While you may think the extra words don’t complicate the contract, it’s best not to take the chance. It’s still a legal document whether you write fancily or not. Using clear and concise language makes it easier to avoid a legal fight if things go wrong. You can’t dispute sentences that anyone could understand.
You should always ask the other party if they have any questions before they sign it. However, there is no guarantee they will read it all beforehand. In this case, you can have someone else review it and see if they can explain it. If it’s confidential, have a lawyer evaluate it before presenting it to the other party.
2. Not Creating Balance
When you create a contract, it is easy to list what you expect from the other party, but are you also including what the other party should expect from you?
It’s essential to balance the amount of responsibility both parties have in a business relationship. When you don’t, the contract can seem vague, which makes it harder to enforce.
You always want to make sure your statement is clear. When you say, “[Business A] will supply 30 units each month,” it doesn’t specify how you’re involved. In a legal argument, the questions of “to where” and “to whom” could get used against you. However, stating “[Business A] will supply 30 units each month to [Business B] at the main office” shows both parties’ involvement in the deal.
3. Assuming There Won’t Be Litigation
You never want it to get there, but regardless of your relationship with the other party, know that litigation isn’t impossible. Add a section to cover what could happen in a dispute, including arbitration, buy-outs or trial potential. List the laws protecting business deals and who is liable for fees if a legal conflict occurs.
Help avoid litigation by adding a ligation procedure as part of a more extensive section that includes resolving disputes before legal action. Begin with the personal conversations and activities you’re willing to take, the mediation process and then the litigation proceedings.
4. Not Being Specific About Breach of Contract
In the excitement of forming a new contract, it can be hard to remember that things may not end well. It’s important to avoid vague language, especially regarding a breach of contract. By specifying exactly what you expect from each party, you avoid any back and forth when someone doesn’t meet their commitment.
Consider what steps you and the other person need to take to achieve the common goal. Get specific with the products used, project timeline, cost and what could change that number. What happens if someone can’t complete their deal? A clear breach of contract terms can help you avoid a lengthy legal battle if things go wrong.
5. Not Thinking About Early Termination
Many business owners create a contract for a defined period, such as one year, but you need to consider what could cause it to end early.
Depending on the contract, list the scenarios that allow you or the other party to terminate the working relationship. It could involve incompatibility or finding another opportunity. Giving yourself an out can help avoid making a breach of contract if you want to get out.
6. Getting a Contract Off the Internet
The idea of a “standard” contract doesn’t exist. You must customize it for your situation.
While it’s easy to grab a template, change the names and send it to the other party, you shouldn’t accept what another businessperson wrote. Consider your desires, the location, the future of your business and other individualized terms. The contract will probably end up looking much different than any template when you realize what your business needs.
You can use a template to make formatting more straightforward, but take the time to carefully rewrite it for you and the other party to avoid leaving anything out or opening the door to future legal conflict.
7. Not Using Virtual Tools
There’s no need to wait for days, weeks or months to sign a secure contract. You can safely send online agreements through specific platforms for the other party to sign virtually. E-contracts eliminate the need for both parties to meet to solidify the deal. They also provide fast access to the contract for reference and updating.
The first contract presented is unlikely to be the last version. Negotiation meetings can delay your project. However, you can expedite the process through virtual communication. When solidifying the contract quickly, you can move forward with whatever agreement or project it supports.
8. Being a Personal Party
Whether you’re the only one in your business or not, don’t put yourself down as a party. When you put yourself as a personal party, it puts your assets in jeopardy. Even if you have a limited liability company or corporation, placing your name as the representative of your business could put you at risk.
The other party could go after your business and personal interests if a dispute arises. Regardless of the contract, the name of your business should always represent you and your company.
9. Not Getting a Written Contract
A recent survey from Adobe found that more than one-quarter of small business owners struggle to get clients to sign a written contract. If that happens, sticking with an oral agreement might be tempting. However, doing so would be a mistake.
If there is a falling out, it becomes your word against theirs in court. You could record the conversation, but it is easier to say a recording is edited or presented out-of-context than to try and dispute the validity of a printed document.
When you have a written contract, you can easily point out where portions of the agreement are and what both parties agreed to by signing it.
Creating a Solid Business Contract
The contracts you form with partners, employees and suppliers can greatly impact your business success. Whether it’s your first time drafting a contract or you want to improve your skills, avoiding these mistakes can help you create a clear, mutually beneficial agreement.