Top Errors Small Business Owners Make in Business Contracts

business contracts

Each year, about 36% to 53% of small businesses will face a lawsuit, and approximately 12 million contract lawsuits will file against small businesses. Typically, a small business that earns one million dollars per year will have litigation fees for the amount of $20,000.

For small business owners who worry about future legal troubles and costs, it pays to have well-written business contracts on hand. You will need them in every facet of your business to protect yourself from lawsuits.

It is not enough just to have business contracts. Having a poorly written one can cause legal troubles. Further, badly constructed language can be just the tip of the iceberg, leading to a situation that can cause your organization a lot of harm.

Sometimes, it could even put you out of business.

What you need to understand are the typical mistakes that small business owners make with their business contracts. Shedding light on what is common will help you prevent foreseeable mistakes and potential litigation.

Now, let’s get started protecting your business with these tips.

You Must Have Business Contracts

First, it is imperative to understand that a colossal mistake is not having a contract at all. Small business owners may put off business contracts because of the expense to create them or their lack of time, but you cannot afford to not have them.

Partners and vendors should keep their promises. It is understandable that you want to take people for their word, seeing the best in them.

Verbal promises can cause misunderstandings, however. It will not be enforceable by law.

If someone makes you a verbal promise, they can change their mind, and they leave you with no recourse for the expectations you had. Remember that business involves money, or they would not call it “business.”

Not only that but starting a business is hard work. You are not putting in all this effort for your health. Contract law offers the protection that you require for building and growth.

Not Seeing the Future

Well-written contracts help to prep for uncertainties. It gives your company the opportunity to focus on moving the business forward instead of fighting lengthy legal battles regarding items that happened in the past.

Plus, when you are forming a new business relationship, whether it is with owners/partners or with vendors, writing everything down helps to think through all the details. There are minor details that you would not think about on your own if you didn’t have a business contract in place.

This will strengthen your relationship more than you realize it will. You can confront issues head-on before they occur during a mission-critical state.

Not Considering What is a Breach

When you enter a business relationship, and you want to formalize it, this is a great start for your organization. However, you will need to consider what could happen that would make you want to put an end to a business relationship. Think in terms of:

  • Nonpayment
  • Poor quality
  • Delivering late products
  • Poor customer service
  • The person you work with is a jerk

This doesn’t make you a pessimist, it only means that you are practical and taking the business seriously. Also, thinking about the worst-case scenario and spelling it out in a contract lowers the chances that it will happen. If it comes to fruition, there is a process that is clearly in place to deal with it.

Not Providing Clarity on Termination for Both Parties

Sometimes, business relationships do not work out simply because of a mismatch. It doesn’t need to be dependent on poor character or a catastrophic fight. Just like any relationship, maybe things just don’t work out.

Maybe you can find another partner for a better price, or you can hire someone to perform better quality work. If it does not work out, there must be a possibility for termination beyond a breach of contract or because a horrible misdeed occurred.

If it is time to move on, your business contracts need to state this. There must be a part of a contract that states business partners can give a reasonable notice to end the relationship should it make business sense.

No Appropriate Mechanism for Dispute Resolution

Litigating is expensive. Cases can go on for long periods of time before a judge or jury can decide the fate of a case. Meanwhile, if you are paying by the hour, money keeps flowing out of your bank account.

Too many times, a poorly written business contract (that is not drawn up by a professional legal expert) will not consider the best way to resolve a dispute.

The point of business contracts is that you have a written document that you can enforce. It makes little sense to draw up a contract that is meant to protect your company, but really only puts you in harm’s way in terms of a long, drawn-out legal battle.

If litigation is too expensive for you, you want to include mediation as the way to achieve a resolution. If both parties agree to mediation, once mediation is complete, the outcome is binding. This is often an effective mechanism if both parties can negotiate in good faith.

An alternative to medication is arbitration, which is also low cost with a binding system of dispute resolution. An arbitrator is hired to hear both sides’ arguments and will render an ultimate decision that favors one party.

While mediation and arbitration are imperfect, so is litigation. All offer a chance for both parties to be heard. The difference is how much it will cost.

The Wrong Venue or No Venue

While you want to include a mechanism for dispute resolution, that is not all. You must specify where to resolve disputes which should be easy to choose.

If you are in the city of Savannah, then you want to choose the state of Georgia as the venue. If you have a business relationship that is outside of the country, then consider a virtual or remote venue for mediation to save on travel expenses.

What Happens With Prior/Future Contracts?

This is both an easy and common mistake. If you have multiple business contracts with the same business partner, you must clearly state how they relate to one another. Your contract should state something to the effect of:

“This agreement replaces and supersedes all other agreements between the parties, whether written or oral.”

Something along these lines will prevent parties from using conversations and emails to undermine what the contract states.

Not Considering All Issues to Negotiate

It is not enough to look at each business contract and only dissect a few key terms. You must consider all variables at play. Investigate with your counterparties if there is a value that can be mutually beneficial.

It requires creativity, which is why it pays to have an expert attorney work with you on this. A little extra effort on this part of the business contract can go a long way.

View situations from all angles, tinkering around with any kind of variable. You must determine if there is a fresh vantage point that you should look from.

In any negotiation, you want to put everything on the table and determine what matters most. Unless you ask the question, you won’t know the outcome.

Leaving Intellectual Property Unprotected

Early in a business, especially a startup, typically the biggest asset is intellectual property. That is especially true in the early stages of growth when there are so many other things going on that demand attention.

From the beginning, if there are multiple founders and there is no agreement on intellectual property, one founder could walk away and refuse to assign the work they did. You are at the mercy of negotiation after the fact and if the owner refuses to assign the work; you do not own your own company. Yikes!

From day one, a primary consideration of business contracts is one that memorializes the assignment of intellectual property. This includes:

  • Contractors
  • Developers
  • Marketers
  • Anyone who contributes

You must make sure to have a business contract that states that you own their work, so they do not own your company.

Mistakes with Employment Contracts

When you hire someone, you want to outline all expectations in an employment contract in advance. To be most effective, you must carefully draft them.

Again, if you do not get the language correct, they will not enforce it in a court of law. Here are common mistakes for employment contracts to be aware of:

  • Not accounting for regulations
  • Not updating them over time as things change
  • Mis-classifying an employee (employee versus independent contractor)
  • Lacking consideration or a signature

Employers are accountable for responsibility, just like the employee or contractor.

To draft an effective employment contract that is precise and enforceable, you must be consistent with best practices and with legal regulations.

Business Lawyer in Savannah

At Smith Barid, we appreciate the businesses that keep our neighborhood flourishing! For small business owners wanting to draft, review, and negotiate business contracts, we can help. We will work with you to make sure that your business has the protection that you deserve because we know you work hard for it.

You only need to take steps forward, not backward, because of a poorly written contract. Let’s get it right from the get-go. Contact us now.

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