Introduction
Contracts are the backbone of business operations and personal agreements alike. They ensure that all parties involved understand their rights, responsibilities, and what is expected from the relationship. However, drafting, reviewing, or signing contracts is not always straightforward. Many parties, even those with legal representation, make common mistakes that can lead to misunderstandings, disputes, or even costly legal battles.
- Failing to Define the Scope of Work Clearly
One of the most critical elements in any contract is the scope of work (SoW). The SoW outlines the specific services or products that will be provided. When the scope is vague, it leads to misunderstandings between the parties, often resulting in incomplete work, unmet expectations, or payment disputes.
Example:
Imagine a contract between a freelance graphic designer and a client. Suppose the agreement only states “design a logo,” without details on how many revisions the client is entitled to. In that case, it leaves the door open for endless alterations, potentially frustrating both parties.
How to Avoid:
Be as specific as possible when drafting the scope. Detail exactly what is expected, the timeline for delivery, how many revisions are allowed, and what constitutes completion. A comprehensive scope leaves little room for ambiguity.
- Overlooking Jurisdiction and Governing Law Clauses
Another common mistake is neglecting to specify which jurisdiction’s laws will govern the contract. This can be especially problematic in international transactions or when parties are located in different states or regions.
Example:
A contract signed between a business in New York and a company in California might lead to legal issues if it doesn’t clearly state which state’s laws will apply in case of a dispute.
How to Avoid:
Always include a clause that specifies the governing law and jurisdiction. This will ensure that in the event of a dispute, both parties understand where and under which laws the matter will be resolved.
- Failing to Address Contract Termination Provisions
Contracts without proper termination clauses can leave one party trapped in an unsatisfactory agreement or lead to disputes over whether the contract can be legally ended.
Example:
A contract for services might not outline the conditions under which either party can terminate the agreement. If one party is consistently late with payments or fails to meet deadlines, there could be no legal means to exit the contract without penalty.
How to Avoid:
Include a well-defined termination clause that outlines the grounds for termination, how much notice is required, and any financial penalties that might apply.
- Misunderstanding Legal Jargon
Legal jargon can be confusing, especially for those without legal training. Terms such as “indemnity,” “liquidated damages,” and “force majeure” are frequently misunderstood, leading to unintended consequences.
Example:
A business may agree to an “indemnity” clause without fully understanding that it means they are responsible for covering certain losses or damages, regardless of fault.
How to Avoid:
Work with a lawyer to ensure that all terms in the contract are clearly understood. Where possible, avoid using overly complex legal terms and aim for plain language to avoid misinterpretations.
- Forgetting to Include Payment Terms and Milestones
Payment disputes are one of the most common causes of contract breakdowns. When a contract doesn’t clearly state how and when payments will be made, it opens the door to disagreements.
Example:
A company hires a contractor for a large project but doesn’t set up payment milestones. As the project drags on, the contractor demands payment before significant work is completed, leading to frustration.
How to Avoid:
Set clear payment terms, including deadlines, milestones for payment, penalties for late payments, and acceptable methods of payment. Both parties should agree on the schedule before work begins.
- Ignoring Force Majeure Clauses
A force majeure clause allows parties to be excused from performing contractual obligations due to unforeseen events such as natural disasters, pandemics, or other events beyond their control. Omitting this clause can be a costly mistake, especially in light of global disruptions like COVID-19.
Example:
A manufacturing company unable to deliver products due to a flood might still be contractually obligated to fulfill the agreement if a force majeure clause isn’t included.
How to Avoid:
Include a force majeure clause in every contract, outlining what qualifies as an “act of God” or other uncontrollable circumstances, and what actions the parties should take if such events occur.
- Leaving Out Confidentiality Provisions
Confidentiality provisions are essential when sensitive information is being shared between parties. Without them, one party might disclose proprietary information without fear of legal repercussions.
Example:
A company shares trade secrets with a contractor who later uses that information to start a competing business because there is no confidentiality clause in place.
How to Avoid:
Add a confidentiality clause that specifies which information is considered confidential and what the consequences are for violating this provision.
- Overlooking Intellectual Property Rights
In contracts where intellectual property (IP) is created, such as design, software, or written content, not addressing who owns the IP can lead to disputes over ownership.
Example:
A company hires a developer to create software but doesn’t clarify who owns the code. Later, both parties claim ownership, leading to a costly legal battle.
How to Avoid:
Include clear terms that specify who will own the intellectual property created under the contract and what rights, if any, the other party retains.
- Not Considering Non-Compete and Non-Solicitation Clauses
In certain industries, it’s important to protect your business from competition. Failing to include non-compete or non-solicitation clauses can allow the other party to use your trade secrets against you or poach your clients.
Example:
A former employee starts a competing business and takes several of your key clients because there was no non-compete clause in their employment contract.
How to Avoid:
Add non-compete and non-solicitation clauses that are reasonable in scope, duration, and geography. Ensure they are enforceable under local laws to prevent conflicts.
- Failing to Review Changes Before Signing
Contracts often go through multiple revisions before being signed. However, failure to carefully review the final version can result in costly mistakes.
Example:
An agreed-upon term about delivery dates might be changed in the final draft without notice. Once signed, both parties are bound to the new, potentially less favorable terms.
How to Avoid:
Ensure that all parties carefully review the contract after any changes are made. It’s often helpful to use version control systems or change logs to track edits.
- Relying on Verbal Agreements
Verbal agreements can be legally binding in certain cases, but they are extremely difficult to enforce. Without written documentation, it’s nearly impossible to prove what was agreed upon.
Example:
A client promises to pay an additional fee for expedited services but later denies the conversation. Without a written agreement, the service provider has no way to enforce payment.
How to Avoid:
Always insist on putting agreements in writing, even for seemingly minor changes. This protects both parties and provides clarity on all terms.
- Not Clarifying Assignment Rights
In many contracts, it’s unclear whether one party can assign their rights or obligations to a third party. This can create complications if one party wants to sell their interest in the contract or delegate responsibilities.
Example:
A company signs a contract for software services but later sells the business. The new owners took over the contract, but the original developers had not agreed to this transfer.
How to Avoid:
Clearly outline whether or not contract rights and obligations can be assigned or delegated to third parties, and under what conditions this is acceptable.
- Ignoring Dispute Resolution Mechanisms
Failing to include a dispute resolution mechanism, such as mediation or arbitration, can lead to costly and time-consuming litigation.
Example:
Two businesses end up in a dispute over product quality. Without a mediation or arbitration clause, they have no choice but to go to court, resulting in a lengthy legal battle.
How to Avoid:
Include a dispute resolution clause that requires mediation or arbitration before litigation. This can save both parties time, money, and stress.
How can we help
Common mistakes in contracts can lead to significant financial and legal repercussions. By understanding these pitfalls and implementing strategies to avoid them, individuals and businesses can create enforceable contracts that stand the test of time.
Our attorneys have extensive experience guiding clients through contracts. Our team includes a board-certified family law attorney, with advanced business degrees, and a specialist in negotiation and mediation. Contact us at 832-538-0833 to schedule a consultation and get personalized legal advice on your situation