When it comes to business, it is crucial to draft business contracts the right way because you can’t undo once it has been submitted. A business contract is a gateway to the future of your business, so you can’t afford any mistake.
Here are the most common mistakes you need to avoid when you’re drafting a business contract:
- Not Considering What Constitutes a Breach
A business contract formalizes any verbal agreement you have with someone. It is a form of entering and establishing a business relationship. But you also have to think about what makes you want to end a business relationship or what constitutes a breach to avoid future major issues, provide options to both parties, and clear all aspects of an agreement.
Here are some examples you have to think about when drafting a business contract:
- What are the consequences if the company you will hire will not be able to deliver the services as expected?
- What if the quality of the product is below your set standards?
- What if the other party does not pay on time?
- Not Formulating an Appropriate Dispute Resolution Mechanism
There are many ways to resolve disputes without involving litigation outright. Besides, small businesses don’t have the means to undergo such a tedious process. Here are some recommendations:
- Mediation. This option is a form of binding voluntary dispute mechanism agreement. Mediation is usually an effective way of resolving a dispute between two parties, most especially to cash-poor businesses and early start-ups.
- Arbitration. It is a low-cost dispute resolution mechanism wherein the arguments of both sides are presented to a hired arbitrator and makes a final decision for the best outcome in favor of one party.
- Neglecting Intellectual Property
The last thing you want to happen is your company owning by another person because you did not secure your intellectual property (IP). While most startups are busy learning the processes, it’s important to set a clear statement on your contract about preserving and safeguarding your product formula, business strategies, and all essential aspects that are authentic to your business.
Make sure that everybody sign the contract, including the technical personnel. Here are the things you have to think about when it comes to keeping your IP:
- What if one of the founders decide to leave the company?
- To whom will the founder reassign the work when he decides to leave the company?
- What are the guidelines the workers have to abide to keep all company property, including the IP, secured?
- Not Indicating If a Contract Can Be Assigned
For startup businesses, one successful exit method is an acquisition from another company. The acquirer will look whether they can retain your current business relationships and contracts before the acquisition.
If your goal is an acquisition, you need to make it explicit in the contract whether it can be assigned to another company in the event of sale or purchase of a company’s assets, as well as a merger. By doing so, it will be easier to negotiate the potential acquisition of your business.
- Not Relating the Current Contract to Prior or Future Contracts
By stating how the current contract relates to prior or future contracts, it will prevent both parties from using conversations, emails, and other communication channels as mechanisms to undermine anything that is under that contract.
- Failure to Provide an Opportunity for Termination
While you want to do business straightforwardly, you also need to provide a way on how both parties can exit a contract even without breaching it. Like any other relationship, there are circumstances that will make one realize that you’re not meant for each other.
In business, there are actions and decisions that owners do which makes a business have sense but not necessarily committing a big mistake. Each party must be given a chance to notify their business partners about terminating their relationship, not for any other reason but because it is the best thing to do.
Here are some sample questions that should be answered and clearly stated in the business contract to consider for contract termination:
- What if you find someone who can deliver the products and services better, six months after signing the contract?
- What if you learn that a competitor offers competitive pricing?
- What if you need to change your business plan?
A well-written business contract should cover all possible aspects of business transactions and processes. It should be detailed, clear, specific, and results-oriented.
You need to state the actions, options or possible resolutions, recommendations, guidelines, amount of fees and penalties, and everything else that both parties should be aware of. By doing so, it prevents major disputes and litigation, as well as less stress and hassle. You’ll realize that a well-written contract saves time, money, and effort, and directs your business in the right path.