All too often, business owners sign a contract only to find out later that the contract had a serious flaw that is costing them time, money, and frustration. If such a situation sounds familiar, you know how important it is to scrutinize every detail of a contract. If you're new to business, you have the opportunity to steer clear of common costly missteps. Here are some common mistakes in business contracts and how to avoid them.
Skipping the Contract Altogether
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If you're going into business with someone whom you've known for a while and you trust that person, you might be tempted to cobble together a simple verbal agreement to make your business deal. That is a bad idea. If disagreements arise later, you'll have nothing to fall back on. Furthermore, human memory is often faulty, and either you or the other party involved may eventually forget what the original agreement entailed.
Another reason contracts are important is that if you leave the company, you want whoever takes over to have a written record of the agreements you made.
Are you thinking about enacting a business arrangement and creating a contract after the arrangement goes into effect? While creating a contract late is better than having no contract at all, it is still best if the contract is in place before you and your business partner get started on whatever venture you have in mind.
Forgetting an Assignation Clause
Even if your small business finds success, there is always the possibility that it will be bought out by another, larger company. This could be a good thing, giving you access to greater resources and a whole new pool of talent. However, if your business contracts do not have an assignation clause, this could hinder the business buyout.
An assignation clause is basically a provision for transferringa contracts to anyone who buys your business. Anyone interested in buying your business may do so only if your business will retain its contracts in case ownership goes to another party.
Using a Pre-Made Form
Online, you might find some pre-made business contracts. While these can seem like an attractive and low-cost option when you're entering into common types of business arrangements, it is better to steer clear of these cookie cutter forms for several reasons:
- A pre-made form may not touch on all applicable Colorado business laws. The contract must be relevant in your locality.
- Some of the language may be ambiguous. If anything in a pre-made contract seems unclear to you, avoid using it.
- The pre-made form may leave out important details, such as a termination clause, an assignation cause, or guidelines on how to handle breeches and disputes.
If you do decide to use a form that you find online, don't sign it until you have a legal professional look over. A qualified lawyer can point out and amend any parts of the form that might spell trouble for you later on.
Not Considering Breaches and Termination Clauses
What happens if one of the parties breaches the contract? The contract should include detailed information about what constitutes a breach and the consequences for that breach. Will a breach enable the innocent party to get out of the contract? Will there be monetary fines for the person who breached the contract? How serious are various types of breaches? What actions are serious enough to lead to litigation?
In addition to information about breaches, the contract also needs a termination clause. The termination clause will create a way for either or both parties to get out of the contract. Some people might hesitate to include a termination clause because they don't want the other person in the contract to have second thoughts about the contract and wiggle out of it. Such a clause is important, though, because helps to avoid costly and lengthy litigation.
Not Addressing Disputes Before They Happen
Disputes commonly arise in business, and it behooves you to be prepared for these disagreements. The contract may state that both parties will make good-faith attempts to resolve disputes without resorting to legal action. The contract may also direct the parties to enter mediation or to try other dispute resolution procedures that will avoid the courtroom and preserve the relationship between the parties in the contract.
The best way to avoid common mistakes in business contracts is to have a lawyer look over any contract you're thinking about signing. You might even ask the lawyer to be the one to draft the contract. Look for an experienced attorney who is familiar with your type of business and who can offer you advice that will help you and your business to prosper.