On some level, a business contract is a lot like a prenuptial agreement. You hope nothing goes wrong between you and your vendor/client, but if it does, you’ll be protected.
At least, that should be the goal of the contract. If there is a dispute, you only have the constraints of the contract to protect your interests. In other words, once both parties sign it, a contract becomes legally binding.
That is not to say that there aren’t contract disputes. When those disputes do arise, you’ll benefit from retaining the services of Owen, Owen & Smith, PLLC. We are a team of experienced Gulfport litigation and appeals lawyers who have helped a wide range of Mississippi business owners with their contract matters.
The best course of action is to make sure the contract you intend to sign contains those clauses that support your interests.
That is why you want to be on the lookout for these red flags in your business contracts:
1. Unenforceable Non-Compete Clause
When a non-compete clause is added to a contract, it helps protect a business’s trade secrets and intellectual property (IP). A potential employee or client may be asked to sign a contract with a non-compete clause that would prevent them from disclosing the confidential information of the company.
There is nothing wrong with a non-compete clause in theory, but it must be structured in a way that makes it enforceable.
For instance, the non-compete clause needs to be reasonable and realistic. That means including a time limit on any restrictions. It should also have reasonable location restrictions, if applicable.
2. Unclear Contracted Parties
Do you know who you’re doing business with? That should be spelled out in the contract, including all the correct parties, corporate entities, dates, and timeframes. Those inclusions will help you know where the money is coming from.
Sometimes, these can be clerical errors, but they can come back to haunt you if there is a dispute. You can’t sue someone if they aren’t included in the contract.
3. Undefined Ownership of Work
A business produces products or provides services. When the business hires you, you are being contracted to create and manage those products and services, but who owns them?
That needs to be clearly defined in the contract. For example, if a company hires you to make new ice cream flavors, then the recipes you develop belong to the company. You can’t turn around and use those recipes for your own ice cream company.
4. Lack of Penalties
What happens if something goes wrong with the contract?
If a breach occurs, the contract should clearly outline the penalties to be applied in the event of a violation. Those penalty clauses should also include a cure period. This is the amount of time provided for the party to repair any mistakes.
For instance, you might enter into a contract with a company to deliver a product on a specific date.
If they miss that date, it could impact your entire supply chain. There should be a penalty for that, and there should be a way for the company to fulfill the contract so that you can conduct business as intended.
5. Unfair Liability and Indemnity Clauses
One of the first lessons that business majors learn is that incorporating a business helps protect personal assets. In other words, if the business is sued, only the business is at risk, not your personal assets, such as your home. Liability clauses are intended to define who is responsible for paying damages in the event of an incident. Indemnity provides protection for a business that prevents them from being sued.
Sometimes, a larger company will include indemnity clauses that shield them from any responsibility. That might not be fair to a small business, which could be left on the hook for a problem caused by the larger company.
6. Automatic Renewal Clause
Have you ever been charged for a subscription that you were no longer using?
That happened because of an automatic renewal. Depending on the type of business, there might be no need for an automatic renewal. If there is one, it has to come with proper notification.
7. Lack of Payment Terms
You can trust a contract that has clearly defined payment terms. Those terms should detail when payment is due and how it will be delivered. This includes any down payments and recurring payments.
8. Obvious Boilerplate Language
There is nothing wrong with a company adopting a boilerplate contract as the foundation of their contract. However, this often leads to clauses that don’t pertain to your business being inadvertently added. That is why you need to make sure a knowledgeable business attorney carefully reviews your contract.
9. Vague Termination Clauses
Breaking up is hard to do in any circumstance, but when a business “breaks up,” it has to follow the termination clause in the contract. If the termination clause is vague, the dissolution can become complex and costly. Not every business agreement is successful. When problems arise, there should be a way to terminate the contract that is fair to both parties.
Before you sign any contract, you’ll want to ensure it is as ironclad as possible and protects your business.
The team at Owen, Owen & Smith, PLLC, can help with that goal. We can also assist in litigating any dispute where a contract is found to be lacking.
Call to schedule a consultation to get your contract matters sorted out.
