This article is for business owners who are looking to avoid common contract mistakes.
Signing a contract is often exciting. This feeling can be short-lived. For instance, when the relationship goes wrong and you discover your interests are not protected by the signed agreement.
Whether you’re acquiring a new client, buying a property or purchasing a much-needed service, the contract signing usually comes after a lot of planning and hard work.
Yet, mistakes can go unnoticed.
The good news is that most common contract mistakes can be avoided.
This article will help you spot 10 common contract mistakes and help you save time and money.
Table of Contents
Conflicting provisions
Conflicting provisions are articles that contradict each other. A typical example is the battle of the forms (see my previous blog to find more about this topic in detail).
This is a situation where both parties are referring to their own terms and conditions and claim that their terms and conditions are exclusively applicable to the underlying transaction.
Conflicting provisions create a situation of uncertainty that one need to avoid by having a clear understanding or agreement determining the applicable rules and norms to the contract.
Applicable law clauses
Determining the applicable law is essential as a choice of foreign law can cost you a lot of money. If you have to execute a contract under a foreign law you are not familiar with you can end up having serious problems. Imagine for instance you have a certain budget for the construction of a vacation home abroad but it appears then on basis of the local legislation for environmental purposes you need to use specific materials for isolation that you have not foreseen in your budget.
So better contract under a law that you know in order to avoid costly surprises afterwards.
Forum selection clauses
Besides the right applicable law clause, you need to ensure that you have a proper forum clause in your contract. Forum selection clauses stipulate that if there is any sort of litigation, it must occur in a specific venue and a particular authority (court, arbitration or alternative dispute settlement). Agreeing to a clause like this could put you in a situation ranging from inconvenient or expensive to purely untenable and very risky.
It is therefore recommended to appoint a well-known authority in the country you are living or doing business.
Intellectual property clauses
When you are entering into an agreement, it’s important to consider who owns the work of a contracted party. If you’re hiring a creative freelancer, for example, make sure you retain the intellectual property rights to the work for which you’ve paid. Otherwise, that content could be used elsewhere at the discretion of the other party, with no regard for your intended use.
Intellectual property clauses are very important and avoid that someone else uses work you have developed or paid for!
Liability clauses
Every time you enter into a contract it is crucial to determine what is the risk you occur if something goes wrong. If you have entered into a distribution agreement, for instance, that you want to terminate before its expiry you better know what is the compensation you need to pay in case of early termination. Otherwise, you risk paying a huge amount of damages or fines that is totally disproportionate in relation to your breach of contract.
Having the right liability clause in a contract is therefore essential if you want to limit or cap the amount of damages you need to pay.
Confidentiality clauses
Confidentiality clauses protect the confidential nature of documents you exchange and are especially important if you develop a new product or work on a prototype. You don’t want that somebody else steals your idea and start developing himself or sells to a third party.
By having the right confidentiality clauses in your contract you forbid the other party to disclose the information you have submitted and if the party violates the interdiction you are able to claim damages.
Automatic-renewal clauses
Sometimes, contracts appear to have a set end date, but one party will sneak an automatic-renewal clause into the text. If you sign a contract with one of these clauses, you will have to provide advance notice for termination to the other party, which is difficult to do if you aren’t aware the clause exists.
Therefore check thoroughly that a contract really ends when you expect it to, without renewing automatically.
Termination clauses
Having a proper termination clause in a contract can save you a lot of money at the moment you wish to terminate the contractual relationship. In some jurisdictions (for instance in Belgium) the only way you can terminate a contract in the absence of a proper termination clause is to introduce a lawsuit before the court which is a costly and lengthy procedure.
So better check if you have a proper termination clause before entering into an agreement.
Clauses in relation to the scope
One of the most important clauses in a contract are the clauses in relation to the scope of the services or products you need to deliver. If you do not know exactly what you need to deliver, how and when, you can simply not deliver!
Beware: the technical annexes that complete the scope are equally important to read as these are often forgotten!
Force Majeure clause
Last but not least make sure that you have a proper force majeure clause in your contract. Force Majeure is a legal term that is commonly defined as an unforeseeable event or circumstance that could not be foreseen at the moment of the conclusion of the contract preventing someone from fulfilling its obligations.
A Force Majeure clause has become even more important, especially in times of COVID, even if it is not commonly agreed that the recent pandemic can be considered from a legal point of view as a force majeure event.
Need help to deal with your contracts?
Contract mistakes are common but can often be avoided. If you are uncertain about the situation you are in or you need proper legal advice to assist you, please do not hesitate to contact me. You can also book an appointment with me for a free consultation.
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