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Contracts are key legal documents in business. If you enter a contract and breach your obligations, the other party could sue you for damages in court. As such, contracts need great care and attention. Legal advice on contracts can be invaluable, and failing to take legal advice can give rise to various risks. This article will explore the risks of entering a contract without taking legal advice.
Benefits of Legal Advice on Contracts
Your business may enter several different types of contracts during its journey. For instance, contracts with:
- customers;
- suppliers;
- collaborators;
- agents or distributors;
- employees or contractors; or
- funders when seeking external investment.
Each contract will carry with it its own legal terms and risks. Working with a commercial contracts lawyer to review, advise, and negotiate contracts carries great value.
A commercial contracts lawyer will be able to help you in several ways, including:
- advising you on your contracts and ensuring you understand them;
- helping negotiate your contracts so you have beneficial remedies and your interests are protected, and
- helping guide you through contract provisions and minimising contractual risks.
Contracts are important legal documents; working with a lawyer will help you feel confident and protected when entering new agreements.
Lawyers have expert knowledge of legal rules and will be able to advise you on any applicable laws that impact your contracts. They can also update you on changes in legal and regulatory rules, which require you to update your contracts accordingly.
Risks of Entering A Contract Without Legal Advice
Your business may seek to enter contracts without taking legal advice. For example, you may feel that proceeding without getting a lawyer involved will make the process quicker. Likewise, you may not want to get a lawyer involved to minimise costs.
Certain businesses, such as start-ups, may not be familiar with working with lawyers or understanding the benefits. However, companies should note that entering contracts without legal advice does come with risk.
We outline below some of the critical risks of entering a contract without legal advice.
1. Inability to Comply With the Contract
Contracts are legally binding documents when entered correctly. When entering a contract, you must be able to comply with all of your obligations. You might be asked to sign a third party’s contract at some stage – for instance, a supplier’s standard terms. Those contracts may include various complicated legal obligations and ‘legalese’ which you cannot understand—for example, a clause stating that ‘time is of the essence’ for payment. If you accept this clause and fail to pay on time as a customer, the supplier may have the right to end the contract and claim damages from you.
If you fail to comply with a contract you sign, the other party may have a potential breach of contract claim against your business. This could lead to various negative consequences for you, including being sued for damages (monetary payment).
An essential purpose of legal advice is to help you understand your key contractual obligations. A lawyer will carefully review a proposed contract for you, identify issues and advise you on your obligations. By working with a lawyer, you can identify contractual commitments that you cannot adhere to in practice. This may influence you to negotiate those terms or decide not to sign the contract. Without legal advice, your business will be at risk if it cannot commit to performing its contractual obligations.
2. Contract May be High Risk
Certain contracts may contain terms that are highly risky for your business. For instance, there may be terms requiring you to indemnify (compensate on a pound-for-pound basis) the other party for various losses. If the indemnity obligations are not limited in any way, you could face substantial financial exposure under the contract.
By working with a lawyer, you will receive guidance on the legal risks in a contract and how to approach them. A lawyer can advise you on whether risks are worth accepting or if you should negotiate them. A lawyer will also be able to envisage the risks that could arise for your business under a contract and help you mitigate against them. For instance, if a supplier’s services are critical to your business, a lawyer can help you negotiate service levels or tight contractual timeframes to ensure you do not suffer due to supplier delays.
Several risky clauses may exist that you cannot spot or for which you do not understand the legal consequences. Without legal advice, you may not be able to identify such risks or know how to address them. This could be particularly damaging for your business if you accept those risks and things go wrong under the contract.
3. Contract May Not Comply With Legal Rules
You should be aware that your contracts need to comply with applicable laws. Various laws could have an impact on your contracts. For instance, data protection laws may require that your contract contain mandatory personal data processing terms. Similarly, consumer laws may apply to the extent that your contracts target consumer customers. There are also other laws, for instance, employment and intellectual property, which could require specific wording in your contracts.
Without legal knowledge, your business could miss this. If your contracts do not comply with legal rules, you could suffer from a range of problems, including regulatory enforcement action and complaints.
Moreover, from an intellectual property perspective, your business should retain the right to all the intellectual property you independently produce. That being said, contracts that do not comply with legal regulations pose adverse implications for your intellectual property. For instance, assume your contract’s intellectual property transfer provisions are not legally compliant. As such, your business may not then own crucial intellectual property that was transferred or licensed to another party. This will likely lead to subsequent legal disputes with your other contracting party.
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Key Takeaways
Sound legal advice on contracts can help protect your business in many ways. You should consider taking legal advice on your contracts to avoid several risks. For example, without legal advice, you could misunderstand and breach your contractual obligations and suffer from legal claims against you. Investing in legal advice on contracts will help you feel confident with your agreements, avoid taking on onerous liabilities, and protect your business in the long term.
If your business needs advice on a 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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