Every business owner signs contracts. With vendors, clients, employees, partners … contracts are the grease in your business machine. However, here’s the problem:
Every year small companies experience 12 million contract lawsuits.
12 million.
12 MILLION.
12 million lawsuit dollars later, and here’s the best part, most of those lawsuits could have been avoided if they had only understood the contracts in the first place and had an attorney from the beginning.
What you will learn:
- Why business contracts are more important than you realize
- The 6 most common contract mistakes
- 6 ways to protect yourself before you sign a business contract
- When to get professional legal help
Why Business Contracts Are More Important Than You Realize
Contracts are not just boring pieces of paper your business keeps in a filing cabinet. Contracts are the sword and shield of your business. Contracts are how you prevent misunderstandings, avoid disputes and protect your assets and bottom line.
In the United States, 64% of all cases in state courts are contract disputes. (US Census Bureau 2002) That means, in all likelihood, if you ever have to go to court, it is going to be a contract dispute.
Contracts also:
- Clarify each party’s expectations.
- Establish payment terms and delivery schedules
- Define what happens when someone doesn’t perform
- Protect your intellectual property
A business with poorly crafted contracts is like a business operating on little more than handshakes and luck. Not a great business strategy.
The Most Common Contract Mistakes
Here is the thing, most business owners don’t realize that 70% of potential conflict occurs BEFORE a contract is even signed. The potential for conflict begins during negotiation and drafting, not after.
Here are the most common mistakes I see business owners make:
Using Generic Templates
Downloaded a contract template from the internet. Fill in the blanks. Done.
WRONG!
Every business is different. Every contract different. Templates leave out key provisions your business needs. They are missing language that might protect you from liability or create unnecessary provisions for your business. Stick with your own attorney that specializes in business law based in Pittsburgh PA .
Not Reading The Fine Print
Contracts are long and boring.
Trust me, I know.
But ignoring the fine print is how you end up with automatic renewals you don’t want. You get non-compete clauses that tie you down later. You agree to liabilities that leave you with all the risk. You accept payment terms that strangle your cash flow.
Read it. Twice.
Ignoring Termination Clauses
Starting a business relationship is exciting. Ending a business relationship SUCKS.
But you must have clear termination clauses that specify:
- How a party can end the contract.
- The required notice period.
- What happens to pending payments and deliverables
- Who owns what information after the contract ends
Failing to include this makes dissolving a bad partnership a legal nightmare.
Not Putting Everything in Writing
“We’ll work out the details later.”
“Let’s just shake on it.”
“I trust him, we don’t need a formal contract.”
These are the exact phrases that have cost business owners millions of dollars. If it is not in writing, it is not legally enforceable. Verbal agreements are almost impossible to prove and open you up to all sorts of legal risk.
How to Protect Yourself Before Signing
Prevent becoming another contract dispute statistic with this action plan …
Have a Lawyer Review Important Contracts
Get a lawyer to review any contract that:
- Involves a substantial amount of money.
- Is a long-term agreement.
- Contains complex or unusual provisions.
- Impacts your intellectual property.
Working with a business attorney based in Pittsburgh, PA can save you a lot of money by identifying errors, clarifying obligations and negotiating contract terms to protect your specific business needs.
The cost of a lawyer review? A few hundred to a few thousand dollars, at most.
The cost of a lawsuit? American companies spend $870 billion a year on dispute resolution!
That is math you can do in your head.
Ask Questions About Everything
Don’t sign a contract unless you fully understand it. If a clause is confusing or upsetting, ask questions. If terms seem unfair, renegotiate.
Remember once you sign a contract, you are bound by that agreement.
Keep Detailed Records of Agreements
Create a system to organize and track all your contracts:
- Keep signed copies of all agreements.
- Record important dates: renewal, termination, payment
- Document any amendments or changes
- Store any related correspondence
Organization is your best friend if a dispute ever arises.
Include Dispute Resolution Mechanisms
Smart contracts include provisions for handling problems without going to court. Include terms that:
- Require mediation before a lawsuit.
- Specify arbitration for faster resolution
- Outline how to raise and resolve issues
These methods can save time, money and headaches.
When to Get Professional Legal Help
Here is the hard truth most entrepreneurs don’t want to hear …
Nine out of ten businesses get sued at some point in their history. It’s not a matter of if, but when.
Get professional legal help:
- Before starting your business to choose the right structure.
- When negotiating or creating any major contracts. (clients, vendors, partners)
- Before hiring employees to create proper employment agreements.
- If you or your business is ever breached by a contract to understand your options.
- If you receive a legal demand or notice to respond appropriately.
Don’t wait until the business ship starts sinking. Preventive legal work is always cheaper than damage control.
Securing Your Best Success
Contracts are one of those parts of your business you may dread. Filing cabinets full of legalese, legions of lawyers, and mountains of money to get what you deserve.
However, contracts are also one of your most powerful tools to run a successful business. Good contracts protect your assets and intellectual property, clarify expectations for everyone involved, provide remedies when someone does not do what they promised, and give you peace of mind so you can run your business and focus on growing.
The most successful entrepreneurs in the world are not the ones with the best ideas. The most successful entrepreneurs are the ones that protect those ideas with solid legal foundations.
Take the time to learn about your contracts. Invest in legal review. And never sign a contract you do not fully understand or agree with. Your future self will thank you for it.
Common Questions Answered
What makes a contract legally enforceable?
Mutual assent of the parties, something of value exchanged (consideration), legal purpose and competent parties. Each party must agree to the contract terms willingly and also receive something of value in return for their promise.
Do I need a lawyer for every contract?
No, but it is strongly recommended. Simple low-risk contracts with standard terms may not require legal review. Contracts that involve significant money, long-term obligations or complex terms should be reviewed by an attorney.
Can I change a contract after signing it?
Yes, but both parties must agree to the changes. Contract modifications must be in writing and signed by all parties. The change can be an amendment, addendum or entirely new agreement.
What should I do if someone breaches our contract?
Review the contract to see what rights and remedies you have. Gather evidence of the breach and contact the other party to attempt resolution. If that fails, contact an attorney to discuss legal options.
How long should I keep business contracts?
At least 7 years after the contract expires. Permanently keep contracts with ongoing rights and obligations such as intellectual property agreements or business formation documents.
