What Contract Problems Can Lead to Loss of Business?

Loss of new or potential business can be a significant financial risk to your company as a supplier, especially in a competitive market. You could lose potential business at the contracting stage. As a supplier, ensuring that your contract terms are clear, precise and well-drafted is crucial. Ambiguous or poorly drafted contract terms can stop your business from getting deals over the line with new or even existing customers. This article explores some critical contract problems that can lead to business loss and how you can address these potential risks.

Which Contract Terms Can Be Problematic?

Various contractual terms could put customers off doing business with your company. 

It is essential to address potential customer concerns about your contracts proactively. You can do this by ensuring your contracts are robust and drafted professionally.

Here are some problematic terms which you should avoid in your contracts to reduce the chance of business loss:

Unclear Payment Terms

A key reason why customers may hesitate to work with your business is unclear payment terms. Uncertainties regarding when payments are due, the methods of payment, and the penalties for late payments can confuse and worry potential customers. 

For example, if your contract does not clearly define payment schedules or the consequences of late payments, potential customers might worry about hidden costs or unexpected financial obligations. This can also happen if your contract does not set out rules around expenses and how you will charge for them. 

Potential clients will want to know precisely when and how they should make payments. Unclear terms could lead to them walking away and seeking to work with more transparent suppliers. 

Clear, straightforward payment terms help avoid misunderstandings and ensure both parties are on the same page. You can avoid this risk by clearly setting out your payment terms, including due dates, acceptable payment methods, and late payment penalties. This will also help demonstrate your business’s professionalism and reliability, which can be crucial for building trust with new clients. Further, clear terms will help avoid legal disputes that could otherwise occur over payment terms. 

Non-Compliant Data Processing Clauses

Are you working as a data processor? If so, you must comply with data protection laws and reflect your contract obligations. Customers are increasingly concerned about data privacy, so compliance with privacy laws, such as the UK General Data Protection Regulation (UK GDPR) and the Data Protection Act 2018, is crucial.

If your business will process personal data on behalf of customers under your contracts, your contract must include mandatory data processing clauses.

Non-compliant data processing clauses in your contracts make customers (particularly data controllers) wary of working with you. Controller customers must carefully decide whether to work with third-party processors, which involves conducting due diligence to assess their compliance with data protection law rules.

Clauses that fail to meet data protection law standards expose your customer’s business to potential legal penalties, such as fines for non-compliance. Customers are increasingly aware of the importance of compliance and high regulatory penalties, and any indication that your business is not compliant can be a significant red flag. This can also lead to repetitional damage to your business. 

Customers typically want to be assured that their data will be handled securely and under data protection law. You can comfort them by ensuring your contracts are up to date with data protection laws and that the data processing terms are compliant. This can help assure clients that they can trust you to process their data safely and securely.

Onerous or High-Risk Clauses

Contracts with onerous or high-risk clauses, such as broad customer indemnities, might be too risky for potential clients. For instance, a broad clause requiring the customer to indemnify your business against several potential losses may lead them to find your contract terms too onerous. Clauses with excessive termination rights for your business or cancellation charges for a customer may be too high for a new customer. 

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It can be helpful to balance protecting your business and appearing fair to your customers. This may help you reach new deals with potential customers. A contract lawyer can review any potentially problematic or onerous clauses to help you ensure they are reasonable enough not to deter potential business partners. 

How Can Working with a Lawyer Help You Avoid Loss of Business?

The problem issues above can result from companies trying to draft contracts without legal expertise or downloading problematic template contracts they have found online without asking a qualified lawyer to check them. 

Working with a contracts lawyer can help your business mitigate these contract risks. A lawyer can draft precise payment terms that clearly outline payment schedules, methods, and penalties. This can help ensure pricing transparency and prevent potential worries over payment clauses. It can also help reduce contract negotiations and save your business time and money.

Your legal team can also help you stay updated on regulatory changes and ensure your contracts comply with all relevant laws and regulations, particularly the UK GDPR. This can help you avoid legal penalties and gain the trust of potential customers who value compliance.

Overall, a lawyer’s expertise in contract law can help you identify and address potential issues in your contracts before they become problems. This could help you win more customer business in the long run and guide you on the contract management process and contract risk management in general. 

Key Takeaways

New potential customers will likely carefully review your contracts before doing business with you. A customer may use your contracts to assess your professionalism and compliance with legal rules. Contract problem issues such as unclear payment terms, non-compliant clauses and onerous provisions can impact your business significantly. They could deter customers from working with you, meaning a loss in revenue. Working with a contract lawyer can help you effectively address these issues. A contracts lawyer can help you by drafting transparent, compliant, and balanced contracts that protect your interests and make your business more attractive to potential customers.

If you need advice on your customer contracts and best practices for reducing contractual risk and effective contract management, LegalVision’s experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

Frequently Asked Questions

1. What problems in a contract could lead to a business loss? 

Unclear payment terms, particularly those with ambiguities in payment schedules and penalties, can be major red flags for customers. Non-compliant data processing clauses and highly onerous terms such as excessive indemnity provisions can also worry customers. 

2. How can businesses prevent potential loss of business at the contracting stage? 

Companies can avoid this risk by ensuring their contract terms are clear and precise. Seeking legal advice can help a business ensure its contract terms are clear, unambiguous, and balanced so potential customers do not raise concerns which could stop them from working with the company.