Contracts are fundamental to doing business. From hiring a vendor or providing services to a customer to entering a partnership or working with another company, a well-drafted contract can set expectations and protect your business.
Unfortunately, many business disputes begin with contracts that were poorly drafted, incomplete or not carefully reviewed. Understanding common contract mistakes can help business owners reduce the risk of conflicts and costly litigation.
1. Using vague language
One of the most common sources of contract disputes is unclear language. A contract should clearly explain each party’s responsibilities. Using vague terms without defining them can lead to problems.
For example, a contract may state that the work must be completed within a reasonable time. The customer may believe the work should have been completed in two weeks, while the vendor considers two months reasonable. Disputes arise when the parties interpret the contract’s terms very differently.
2. Relying on verbal promises
Business owners sometimes rely on conversations, emails or informal promises instead of putting everything into a written contract. This can create problems later when the parties remember things differently. Include important promises and obligations in the written agreement whenever possible.
3. Failing to identify payment terms
Payment disputes are another common type of business contract dispute. A contract should clearly establish the amount owed, when payment is due, accepted payment methods, deposits or retainers, late-payment consequences and how to handle disputed invoices. The more detailed the payment provisions are, the less room there is for disagreement.
4. Ignoring termination provisions
Some businesses focus too much on how a relationship will begin and not enough on how it will end. A contract should explain the circumstances under which either party can terminate the agreement. Depending on the relationship, termination provisions may address termination for convenience or breach of contract, notice requirements and opportunities to correct a breach before termination.
5. Signing without complete understanding of the contract
The most basic mistake is signing an agreement without carefully reviewing it. A business owner may be eager to close a deal and assume the contract includes the terms discussed during negotiations. However, the final written agreement controls many aspects of the relationship, and overlooked provisions can become points of contention later.
It can also be worthwhile to have a legal professional review an important contract before signing it. They can help identify ambiguities or unfavorable provisions before they become the basis for litigation.