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A well-drafted commercial contract is vital for every business and can protect it in several ways. However, there are various pitfalls to watch out for when entering into commercial contracts. Such pitfalls can be incredibly risky for businesses. This article will explore how to avoid some of the key pitfalls often seen in commercial contracts.
Why is it Important to Avoid Pitfalls in Commercial Contracts?
It is easy to speed through commercial contracts or not read them properly. You may not read a contract thoroughly for a host of reasons. For instance, you may be in a rush to close a deal or secure a lucrative contract. However, you must view signing a commercial contract as a very serious matter. They are critical documents for business protection and to protect against various potential legal risks. Pitfalls and problems in contracts can lead to many negative consequences, including:
- lack of legal protection;
- lack of clarity on contractual obligations; and
- disagreements and potential disputes between parties later down the line.
The following are some of the key ways in which you can avoid pitfalls in commercial contracts:
1. Make Sure Your Terms Are Clear
A major pitfall is where contracts are unclear. Some business contracts can be extremely vague and do not carefully document what products or services will be delivered. If your contract does not clearly document what you have agreed, this could lead to misunderstandings, mismatched expectations and disputes later down the line.
To avoid a lack of clarity and arguments around contractual interpretation, your commercial contract should clearly set out what products or services you are delivering so you can easily see what your obligations are.
A well-drafted contract should be accompanied by a thorough Order Form or Scope Of Work (or similar document) that clearly explains terms, including:
- what products or services will be delivered;
- any specific timeframes for delivery; and
- the payment terms.
The more detailed you are in laying out a clear scope of each party’s obligations, the less likely it is that a potential dispute could arise in the future.
2. Include a Robust Limitation of Liability Clause
Another high-risk pitfall is not to include a limitation of liability clause in your commercial contract. If you do not have a limitation on liability clause, your business will have no limit on its liability and could be sued for an unlimited amount of money. This is extremely high risk. Limiting liability clauses can be very complicated, and it is important to take legal advice if you are unsure whether your contract properly limits your liability for the correct types of losses.
You should ensure you always include this clause in your commercial contracts. This is the crucial clause to protect you if things go wrong – for example, it can exclude your liability for certain types of losses and place a maximum financial sum on your entire liability for breaching the contract.
3. Ensure Your Terms Are Tailored and That You Understand Them
Each business is different and comes with different legal risks. Some businesses fail to give their contracts proper thought. For example, some businesses choose to use generic templates, which lack the bespoke clauses and legal protection their business really needs.
Not having tailored enough commercial contracts could leave your business with very little legal protection. To avoid this major pitfall, it is always worth investing in legal advice and a professionally drafted contract that is designed to protect your business in various scenarios. The contract should be drafted to reflect how your business works in practice and prevent the potential risks it could face when trading.
As a customer, you should also ensure you fully understand what you are signing up for when working with suppliers. Simply signing a contract without knowing what it means could be high risk – for example, there could be extremely onerous provisions and obligations that you miss. If in doubt, always take specialist legal advice on the contract before signing (particularly where the contract value is high).
4. Understand How You Can Terminate
Where businesses are in a rush to sign a commercial contract, they may neglect taking the time to understand their termination rights properly. This is a major pitfall, as termination clauses can be very complicated and may only allow parties to end the contract in specific circumstances. For example, parties may be tied into a long period of time before they can go ahead and terminate. Some contracts may not even allow the customer to terminate a contract for convenience.
To avoid this pitfall, you should understand exactly what termination rights apply before entering a new contract. As a customer, you may find you are unhappy with a supplier’s services and want to exit the contract – as such, clear termination rights and a ‘way out’ will be critical for you.
Download this free Supplier Contracts Checklist to ensure your contracts will meet your business’ needs.
Key Takeaways
A commercial contract is a vital document, affording protection to businesses in several different ways. However, there are many common pitfalls businesses should avoid in commercial contracts. These pitfalls could be very risky – for example, they could lead to ambiguity, misunderstandings and, ultimately, disputes. Therefore, all businesses should invest time in their commercial contracts to avoid pitfalls and protect themselves from legal risk.
If you need help with a business contract, contact our experienced contract lawyers 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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