The risks of signing a bad contract
It is inevitable that you have entered or will enter into contracts during the course of your business, whether that’s with suppliers or with companies engaging your services. Are you aware, however, of the dangers that might be lurking within those contracts?
Kerry Gibbs from BEB Contract & Legal Services explains what the risks of signing a bad contract might be, and what you should be aware of when entering into one.
What are the risks?
No matter the type of contract, there will always be things to look out for in order to best protect you and your business – below are some of the key things you should be aware of and try to negotiate with third parties when signing into their contracts, whether by suggesting changes or having your own contracts that take precedence. We can even help draft them for you.
Purchase Terms
When payments are due to you for services you have completed, I am sure you will agree that you do not want to be waiting months on end to receive payment that is rightfully yours – an exaggeration, perhaps, but too many contracts set out unfair and frankly ludicrous payment terms. It could be that they state payment will be made from 30 days to even 120 days from the date an invoice is submitted by you, or, perhaps more sneakily, state that payment will not be made until the invoice is confirmed as acceptable: companies can do this and it is often written in the contract, which could delay payments either further.
If you have set your own payment terms, it is best to try and ensure these apply. Otherwise, ensure the contract states payment is to be made as soon as possible, with a deposit always being our recommendation. A deposit gives you security that at least some of your costs will be covered, even if the contract is cancelled.
Liability
Arguably one of the most important things to keep an eye out for is your liability under a contract. This commonly applies where you have entered into a third-party contract – such as another business’ terms and conditions – and you then breach that contract, accruing liability for the breach.
Though you cannot legally limit your liability for personal injury and death caused by you, you can and should always try to limit all other liability. This can be done by excluding your liability for consequential losses, which consist of things like loss of profit and loss of business suffered by the other party, and limiting that liability to the levels of your insurance policies or even capping any liability to the amount of the contract value.
However, it is very unlikely that a third-party contract will automatically include this, and they will instead typically be a lot harsher, with no limit for your liability at all. This is where you will need to negotiate with the other party and decide yourself what you are ultimately willing to accept. Remember that where your liability is unlimited, you may be required to pay large, unproportionate sums for what might only be a small breach of a contract.
Insurances
A contract may ask for certain levels of insurance in order for you to carry out certain services or perform your obligations under it. Though these may be industry standard levels, and not necessarily higher than your own, it is always best to double check to ensure you are not agreeing to maintain steep and unnecessary insurances.
Instead, presuming your current policies are suitable, insurance requirements should be removed from the contract entirely or changed to match your own.
Programme
It is impossible to fully guarantee that any services will be performed at a certain date – after all, there is always a possibility that delays outside of your control may occur. Do you really want to be punished for those delays?
The answer is most probably no – but under certain contracts, there will be a clause along the lines of “time is of the essence under this agreement” which will deem your failure to perform those services a breach under the contract, even for circumstances where the delay is caused by the other party, whether that be due to their failure to provide you with necessary information or access to their premises. This should ideally be removed from the contract, as agreeing to this puts an awful lot of pressure on you to comply with what might turn out to be some very tight deadlines.
Service Levels
Similar to programme, many contracts may also have service levels that you will need to agree to, which may require you to provide a refund of fees paid to you or reduce the fees where you fail to meet those service levels.
Though these could be reasonable, they may not be, and it is rather unlikely that they will be in your interest – this is why it is always essential to review them at the very least, and ensure that you are capable of complying with them. If you find these too harsh (and chances are they will be), make this clear to the other party and try to push for their relaxation or removal from the contract entirely. It may be that you provide a warranty, which should be a suitable alternative for ensuring customers are satisfied with your services.
Overall, you should always read a contract provided to you, keeping in mind the value of the contract, and whether any associated risks outweigh that value. It may be that you have a good relationship with the third party, but that doesn’t always matter – contracts are designed to protect the involved parties, and you should always ensure they protect you as much as possible.
Terms and Conditions
In an ideal world, your own terms and conditions would form the contract between you and your customers. That way, they’re specific to your services and (should!) cover all eventualities. If you’re sent a purchase order or contract from the client, we always advise trying to push for this to instead be on your terms.
