Killer Traps To Avoid When Drafting Business Contracts


Cindy Dowling, Negosentro |  Nowadays, the costs involved in working with lawyers are relatively high, thus more businesses take measures to save themselves from legal fees. This effectively involves drafting and reviewing their own contracts. Likewise, they may only ask their business lawyer to assist them on any key terms which they may not comprehend.

Unfortunately, this may lead to issues or killer traps that are missed. Eventually, it may cost the business more than the initial legal expenses would have been.

The thrust of this article is about business contracts and the inclusions you must be cautious about it. Before discussing the killer traps entrepreneurs must avoid, let us first briefly discuss business contracts.

What Are Business Contracts?

It essential for small business owners or self-employed individuals to enter in a business contract before any operations. Generally, business contracts refer to a legal consensus or agreement between you and another party.

Further, a business contract can be utilized in circumstances where particular services are rendered for free or when certain duties are demanded to be performed. A business contract becomes successful, valid, and legal when it features the following elements:

  • Parties
  • Terms and conditions
  • Considerations
  • Competent parties (all parties must be mentally competent)
  • Legal purpose

What Is The Importance Of A Business Contract?

Business contracts are very important and useful documents within any kind of transaction. Some business transactions may seem easier and more straightforward than others. Meanwhile, these are the following transactions to prepare a business contract for:

  • Working or employing with a freelancer
  • Clean-up or maintenance services
  • Selling or purchasing products
  • Entering into service contracts
  • Selling or leasing a property

In these circumstances, a business contract is crucial in making sure everything operates smoothly. Allowing a lawyer to draft the agreement also ensures your business’ interests are safeguarded. It makes sure that you avoid loopholes or killer traps, and your business is protected by the law.

Loopholes To Avoid When Drafting Business Contracts

Some entrepreneurs draft the business contracts on their own when they think a transaction is simple. However, this is where most killer traps arise.

Unaccustomed to the appropriate, legal terms may give the other party the option to not obey the terms and conditions, and still fulfill their obligations.

Here are the killer traps to be cautious for when drafting business contracts to minimize problems in the future.

  • Exclusivity

A business contract may exclusively say that you are not permitted to use or accept a similar service offered by another provider if the services of the involved party is rendered to you throughout the terms of agreement.

In case the contract is established on exclusive dealings or agreement, then consider the effect this may bring upon your business. Think of the future and analyze whether the benefits specified on the contract justify the exclusivity that is provided.

  • Assignment rights

In drafting and negotiating contracts, conditions allowing another party the capability to transfer, assign, or allocate their interest in the contract to somebody else are frequently overlooked. Having the capability to assign or transfer a contract without the approbation of the other party can be useful in case you assign, transfer, or market your business.

In the event that the approval of another party is needed, be sure the consent should not be “unreasonably withheld.”

  • Termination rights and penalties

Scrutinize the termination rights mentioned in the contract and consider the effects of any penalties or notice periods that may prevail such as early termination. Also, if any issue on the terms and policies arises, try negotiating better terms.

  • What constitutes a violation?

It is crucial to be aware exactly what actions will put you in the breach of the contract, and the penalties underlying when being in breach.

Some contracts may state that a party’s failure to comply with specific terms of the contract constitutes a breach of the contract. Meanwhile, failure to abide, comply or respect other less essential terms of the consensus may not embody a breach unless the party does not succeed in complying with the term on a particular set of circumstances. However, other contracts say that failure to abide with any terms in the contract will constitute a breach.

  • Automatic extension of the contract’s term

Examine whether the drafted business contract mentions any terms that will inevitably extend the contract at the commencement of its term if neither party provides notice of the contract’s expiration.

It is likewise very crucial to note whether the payments under the contract eventually increase upon the initiation of the extended term.

  • Security

Lastly, ensure to check whether the contract provides the other party a privilege to take extract security over any personal assets or assets of the business’s. Also, check whether your are compelled to stipulate personal guarantees.

Further, consider under the contract what security measures you can establish against the other party to ensure better security of the terms in the business contract.

For instance, if the other party is a business or company, you may want to acquire personal guarantees from the directors or upper management that the company shall execute its obligations.

Seek Legal Advice If You Are Unsure

So those are the killer traps to avoid when drafting a business contract. In the event that you are unsure of the contract after drafting and reviewing it, seek legal advice. They can help you understand what your contract means and how it can be drafted better to protect your personal or business’ interests.

Contracts are essential in business. If you’re concerned about your business interests, you can click here to have your contracts reviewed legally.

Cindy Dowling

Cindy Dowling is a part time writer who offers a fresh take on various law topics with the pieces she writes for local firms. Cindy enjoys a good cup of coffee and a good book whenever she has the time.