6 Important Contract Terms that Should Raise a Red Flag

Publisher Channel Content by

These 6 Important Contract Terms Should Raise a Red Flag

Too many small business owners gloss over important terms in contracts they sign. This can cause a problem later in the relationship if they are not properly negotiated. While a lawyer may not need to be involved in every transaction, here are the areas that all companies should look for to protect themselves before signing any agreement:

Important Contract Terms

1. Dollars and Timing of Payments

Always review this part first in the contract. Do this by searching on the symbol “$” throughout the document. Ensure that the financial terms were what the parties verbally agreed to before this draft. If this section is wrong, it does not make sense to focus on the other parts of the agreement until this is fixed. Carefully note if the exact timing of the payments is tied to specific dates, elapsed time (90 days from now) or to milestones being achieved (and who determines if the milestones are complete).

2. Non-competes

Many contracts state that once a company is doing business with one company, they can’t do it with a competitor, in similar industries, or for a period of time. While this can make sense in some situations, try to take these clauses out of the contract or at least make them as narrowly defined as possible. Fighting this limitation may be important to growing a company since expertise in an industry can be valuable to future customers.

3. Ownership of Work

Understand who owns the work that is produced as a result of the contract. This may be critical if the company wants to use what is produced or learned for other customers or markets. If the company is being paid to make something, typically the payor will own it, but try to negotiate joint rights or continued access to this information. For example, when Microsoft was paid by IBM to develop the DOS operating system, they retained the right to sell it to other companies which drove the growth of their business.

4. Actual Contracted Parties

Read the agreement to make sure that the contract is between the correct parties or corporate entities. This is especially important to determine where the money is coming from and who it will be paid to. This becomes even more critical if things go wrong and lawyers get involved.

5. Penalties If Things Go Wrong

If something goes bad in the execution of the contract, note what the penalties to either party will be. It is also important to see if there is a “cure period” when a deadline is missed or one party is dissatisfied. This is typically the time that one party gets to “make it right” before penalties or legal action can begin. It provides a very important time buffer or cooling off period before things can get ugly

6. Liability and Indemnity

Contracts are a set expectation of what is to be done. Therefore, they become critical as a written record of what happens if things go wrong. Review who is liable if either of the parties get sued by an outsider and who will pay the legal costs. These sections typically have very ominous legal language like “Party A agrees to indemnify, defend and hold harmless Party B and their employees, officers, directors or agents from and against any loss, liability, damage, penalty or expense (including reasonable attorneys’ fees and cost of defense) they may suffer or incur arising out of any claim…” Try to get the other party to be responsible for all claims or at least have each party take care of their own legal expenses.

What do you look for in every contract?

Red Flags Photo via Shutterstock

More in: 4 Comments ▼

Barry Moltz Barry Moltz gets small business owners unstuck. With decades of entrepreneurial ventures as well as consulting with countless other entrepreneurs, he has discovered the formula to get business owners marching forward. His newest book, BAM! shows how in a social media world, customer service is the new marketing.

4 Reactions
  1. I hate doing contracts. It’s like you’re putting together a plan and road map for when things will go wrong. But these are all good points and you need to take care of them.

  2. As much as hate them, I think that they are still important because at least you have a written agreement on what will happen in those cases that things went wrong.

  3. Copyright and ownership is particularly interesting and challenging as not only contract considerations but legal and other obligations can apply too. Professional Indemnity Insurance can be troublesome as policies often require a copy of whatever’s produced to be retained by the consultancy. I get round this problem by requiring the client to grant a licence to my firm to retain a copy for non-commercial business purposes, and ensuring the intellectual property contained within the deliverable is recognised as my firm’s. Anything produced solely for the client is the client’s.

    Queries are dealt with on the basis my insurance won’t cover their project if it isn’t there. Usually that’s enough to find agreement, but if the client insists then I do walk away.

  4. I thought this was a very good article. I often have clients say to me, “I just want a one page document.” This is not the correct way to go.

    The reality of the situation is that once the contract is signed, nobody ever looks at it again unless they have a problem. At that point in time, you will be thankful that the drafter of the document put all those words into the contract.

    I often say to clients, “If you want it in the contract, then put it in the contract.” Otherwise, your wishes cannot be enforced.

    Finally, just because the document is long, does not mean it cannot be understood by a normal person. When I draft contracts i go through them paragraph by paragraph with my client so they understand not only their rights, but the rights of the other party.