Business contract negotiations are complicated, and some business people fail to consider how their decisions will affect their businesses in the future. In most cases, the parties entering into a contract are so focused on signing the agreement that they forget to analyze the long-term impact of the contract. This ‘short-term thinking’ approach can lead to many problems in the future.
Make no mistake; an incorrectly constructed business contract has the potential to undo all the good work you have been doing to grow your business. The goal here is to ensure such bad things don’t happen to your business. One way to achieve this is by having a contract management system such as ContractSafe to review and analyze your contracts before signing effectively. Here are the business contract mistakes that could cost you money.
1. Failure to create a contract
You probably know that a promise is a noble thing. It is a commitment to get something done without the expectation of a payment or reward, and people who keep their word should be lauded for their integrity and exceptional character.
In business, however, things are different. A promise may not be the best thing you want with your shareholders, suppliers, and other business stakeholders. This is because a promise isn’t enforceable by the law. If someone makes a promise to your business, they can change their mind in the future and leave your business without recourse to move forward with the high expectations you had. Business is all about money, and you need a way to hold someone accountable in case they fail to execute their duties.
Starting and managing a business is challenging, and if you must work with other vendors or experts, you need a well-thought-out business contract. It will keep everyone at the check and ensure they execute their duties perfectly. Without it, some business stakeholders may be reluctant to do what’s expected of them, and that means your business will always take a hit whenever something goes southwards. This isn’t good news for your business’s long-term success.
2. Not specifying what constitutes a breach of contract
Once you have decided to enter into business relationships with other people or businesses, it is important to formalize those relationships. This process requires you to create a contract and specify what constitutes a breach of contract as an important step. Considering what constitutes a breach gives you answers to common questions like what would happen if the counterparty fails to pay. What should you do if the company you hired fails to deliver the products or services is expected? What’s the best course of action if the quality of the products or services delivered isn’t what you expected?
These are critical issues that should not be overlooked during the creation and implementation of a business contract. By thinking through some of the worst-case scenarios during the creation of a contract, you lower the chances that any of those worst-case scenarios will occur. Besides, this process ensures the creation of a contract that serves the interests of both parties.
3. Failure to offer a clear opportunity for contract termination for the parties involved
Let’s face reality; not all business relationships or contracts end because someone breached the contract. Just like all other relationships, a business contract can end because you feel that it does not serve the interests of your business and other reasons.
For instance, you might realize that a competitor provides better services or products at an affordable price six months after you’ve signed the contract. Or, you can realize that other experts can do a better job at the same price or if you just decide to change your overall business strategy to streamline its operations. Do you now realize that there are many reasons you may want to terminate a business contract?
Unfortunately, most small businesses and start-up contracts only allow for contract termination only if there is a breach. According to most experts, this is short-sightedness and a mistake that could cost your business a lot of money in the future. Each business contract should have a legal way for both parties to terminate it not just because one of the parties committed a horrible mistake but because it makes sense for both businesses.
Even when the other party has been operating in accordance with the contract terms, sometimes it makes economic sense to change a supplier and move on. This makes it important to have a legal opportunity to offer the other party involved in the contract a reasonable notice and terminate the business relationship. Failure to include this opportunity during the contract creation could mean that you are stuck with the other party until the expiration of the business contract.
4. Failure to consider appropriate business dispute resolution process
Perhaps you know that it is costly to litigate any kind of civil legal dispute to the point where a jury or judge makes an actual decision regarding all the facts of the dispute. These expenses could hit over a hundred thousand dollars if you choose to hire a cheap law firm. If you choose to hire the best law firm, get ready to spend hundreds of thousands.
In some cases, business contracts are drawn by amateurs, and such inexperienced people really consider the best way to resolve business disputes that might arise under the business contract. Keep in mind that the whole point of having a business contract in place is to ensure the agreement is enforceable under the law. However, there is no point in creating a contract if the expenses of enforcing it are too high for your business. This is why you should ensure that the contract outlines clear guidelines on business dispute resolution long before you sign it.
It’s worth mentioning that business contracts aim at streamlining the operations between a business and its stakeholders. Avoid the four issues discussed in this article to prevent future issues that could cost you a lot of money.