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A business contract is critical for every business, regardless of its size or industry. The contract should clearly define the way you will do business, protect your interests and help prevent customer disputes. Trading without a business contract means you are exposing your business to high risk and many potential problems. However, there are lots of crucial issues which are commonly missed in business contracts. This article will explore five common mistakes in business contracts and why your business should avoid them.
1. Not Clearly Documenting Your Products or Services
Your contract needs to outline what products or services you are delivering so you can easily reference what your obligations are.
A well-drafted contract should be accompanied by a thorough Order Form (or similar document) which clearly sets out:
- what products or services you will deliver;
- any specific timeframes agreed upon with the customer; and
- the payment terms you have agreed to.
Some business contracts can be extremely vague and not comprehensively document what products or services will be delivered. If your contract does not clearly document what you have agreed to provide, this could lead to confusion, misunderstandings and disputes later down the line.
2. Not Recording All the Agreed Terms
Sometimes, a business will agree to deliver extra products or services verbally, such as over the phone or in a conversation. However, verbally agreeing to some terms can also result in confusion and potential arguments. For example, a business may forget to comply with the extra commitments it promised customers over the phone, and this could lead to complaints.
As a result, everything you agree to with your customers must be correctly documented in your customer agreement. This way, you can look at the terms of your document to check what you have agreed to do and ensure you do not accidentally end up breaching your obligations.
In the unfortunate event of a dispute, having clearly documented terms could help you to argue your case. Additionally, having clearly documented terms can help you enforce your contractual rights if the customer fails to pay for the goods or services you provide.
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3. Not Having a Limitation of Liability Clause
There are specific clauses in a contract that are critical. One of those is a ‘limitation of liability clause’. This is a key clause that can limit your liability to your customer if things go wrong. For example, it can exclude your liability for certain types of losses and place a maximum financial cap on your entire liability to the customer for breaching the agreement.
If you do not have a limitation of liability clause, your business would have no limit on its liability and could be sued for an unlimited amount of money. This is extremely high risk. In saying that, limitations of liability clauses can be very complicated, and it is essential to take legal advice if you are unsure as to whether your contract properly limits your liability.
4. Not Having Terms to Comply With Legal Requirements
Some business contracts must have mandatory terms in them to comply with legal requirements. For example, e-commerce laws require businesses to provide various information to customers in writing before a contract they enter into a contract.
Additionally, data protection laws require mandatory ‘data processing terms’ in contracts where a data controller uses a data processor. In simple terms, if your business contract involves processing personal data for and on behalf of a customer, then you are likely to need several mandatory data protection law clauses in your contract.
Failing to have mandatory legal terms in a business contract can be extremely risky. For example, a lack of mandatory data protection law teams could mean your business breaches the UK GDPR rules. This could lead to various negative consequences for your business.
This factsheet sets out how your business can become GDPR compliant.
5. Business Terms Are Too Generic
Each business is different and comes with different legal risks for business owners. For example, a software developer will need bespoke agreements with key provisions around intellectual property rights. If you use generic templates or, worse, copy contracts published online (which itself is a risk as this is copyright infringement), you heighten your business’ exposure to risk.
Not having tailored business contracts could leave your business with very little legal protection. As a result, you must take specialist advice and invest in a professionally drafted business contract that are designed to protect your business in various scenarios. A specialist can draft the contract to reflect how your business works in practice and mitigate against the potential risks it could face when trading.
Key Takeaways
A business contract is a vital document, affording protection to your business in several ways. However, there are various common mistakes businesses make in their contracts. These mistakes increase the chance of disputes, expose businesses to large financial claims and fall in breach of regulatory obligations. Therefore, all businesses should have robust, professionally drafted business contracts that avoid mistakes that could otherwise be extremely damaging.
If you need help with avoiding mistakes when drafting your business contracts, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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