Contracts play an integral role in any business, and if you’re a start-up, negotiating and formalizing contracts is great news – you’re in business. But one wrong move – or one poorly constructed contract – can potentially sink your business and everything you’ve worked so hard to achieve.
To prevent this from happening, here are four business contract mistakes to avoid.
1. Not Having a Contract
One of the biggest mistakes businesses make is not having a contract at all. Doing business on a promise or good faith will almost always get you burned.
If you don’t have a formal contract in place, you will have minimal – if any – legal recourse should things not go as planned.
Typically, the no-contract issue comes into play when forming a business or doing business with someone you know and trust (e.g. friends and family). They may skip the contract step to avoid hurting each other’s feelings, but if issues do come up, they often escalate quickly and tensions grow beyond repair.
Even if you are friends with the person you’re doing business with, it’s crucial to have a contract in place – especially if that person’s work will have a direct effect on your business’s performance.
“The entire relationship with these individuals must be dictated by contract, which will likely include the duties and obligations of each party, the prices paid for services rendered and milestones and provisions for terminating the relationship,” explains business attorney Marc J. Blumenthal.
2. Not Being Clear about Deadlines and Deliverables
Contracts with customers should specify the deadlines for every deliverable in the contract. They should also detail the options for cure if the deadlines are missed.
Catastrophic cure options, such as contract termination, may not be the best option. Find reasonable ways to cure the alleged breach and preserve the working relationships of all parties.
Regardless of which cure options you choose, it’s important to be clear about them. Deadlines and deliverables need to be clearly outlined.
3. Not Clarifying What Constitutes a Breach
When drafting a business contract, it’s important to think about one important – but overlooked – thing: what would make you want to end the business relationship?
- The other party doesn’t pay
- The quality isn’t up to standards
- The deliverables are not delivered on time
No one goes into business thinking the worst-case scenario will happen, but it’s important to have a plan just in case it does. Clearly defining what constitutes as a breach will also ensure that everyone understands what’s expected of them.
4. Not Choosing a Resolution Mechanism
What happens if a dispute arises? How will it be handled? Litigation is a costly affair that only big businesses can afford.
Mediation is a more affordable means, but both parties must be willing to negotiate in good faith. Another option is arbitration, in which an arbitrator hears arguments from both sides and issues a final decision in favor of one party.
Defining a resolution mechanism will ensure that you know exactly what to do when a dispute arises. And in addition to choosing a mechanism, you should also choose a venue – typically the state in which you do business.