Do-It-Yourself business contracts – what could go wrong?

Do it yourself business contract what could go wrong

Contracts are fundamental to the operations of a business and set out the reciprocal promises made between parties to a commercial transaction. It is virtually impossible to do business without some type of a business contract.

Over time, your business needs are likely to grow, and a range of negotiations and transactions will take place that should be documented in a legally binding agreement. These might include contracts for the provision of goods and services, terms of trade, employment contracts, partnership, agency, licensing, and distribution agreements.

While it can be tempting to take a ‘do-it-yourself’ approach to your business contracts, can you really afford to? The reality of the modern business world is that a poorly drafted contract may cost you money in the long run.

Beware the home-made contract

Like it or not, our world has become more complicated than when agreements were made with a ‘hand-shake’ or by penning a few words on paper.

At some stage, most commercial lawyers would have helped anxious clients involved in disputes where a contract has gone wrong, or a deal has become messy because of an incomplete or non-existent contract. Numerous court reports have lengthy judgements interpreting ambiguous contract terms – all a costly and draining exercise for the parties.

Home-made or DIY business contracts may appear to represent value for money but are unlikely to be tailored to your individual business and personal needs. Online business contracts may exclude terms to cover a range of contingencies or be unsuitable for the subject matter, jurisdiction or industry in which your business operates.

Involving a lawyer to prepare or review a business contract will help keep negotiations on track and ensure that your personal and business interests are protected. A lawyer can draft a contract from scratch or tweak an existing contract to fill in the blanks and flag issues that could otherwise prove costly.

Why involve a lawyer to prepare your business contracts?

During negotiations, parties are sometimes keen to sign a contract without considering all the potential issues.

Lawyers are trained to anticipate legal problems, flag pitfalls, and mitigate risk. Yes, they see the gloomy side of a business transaction – but that’s their job – not to put a handbrake on your growth plans, but to avoid stopping them altogether!

An experienced lawyer will recommend any additional terms that should be included in the contract and strike out provisions that are contrary to your interests. A lawyer can negotiate and add terms that reduce risk and deal with certain events that the parties may not have considered. For example, the inclusion of provisions to deal with the unexpected illness, injury, or death of a key partner in a partnership agreement. This in turn may trigger a review of the parties’ insurances and consideration of keyperson insurance to help the business minimise loss in such circumstances.

Other ‘forgotten’ terms might include indemnification clauses, dispute resolution clauses and provisions that determine what will happen if a party breaches the contract.

Taxation and financial implications, as relevant, should also be considered and it may be prudent for a lawyer to work with a client’s accountant to ensure that the agreement is tax effective and structured for the most beneficial financial outcome.

Surprisingly, the correct identification of the parties to a contract is something that can be overlooked. While it’s obvious that you need to know who you are dealing with, the real identity of a party is not always so, particularly in a commercial context. Certain investigations can confirm the individuals behind a business or company name and may show if a company is undergoing administration at the time of searching. Similarly, there are specific searches that can be carried out to discover whether there are any encumbrances over certain property that is the subject of a contract.

Should I talk to a lawyer before entering into a contract?

The ideal time to take advice from a lawyer is before entering into a contract.

However, if you have already signed a DIY contract, a lawyer may be able to assist by explaining your legal rights, discussing your options, and recommending steps to minimise any potential loss.

Conclusion

While many business owners are keen to sign a contract or new deal and get on with their business activities, involving a lawyer is an important part of the contract process. Lawyers generally think outside of the box and contemplate what could, and sometimes does, go wrong. A well-drafted business contract puts the parties on the same page from the beginning of their relationship by providing clear terms that balance their rights and responsibilities.

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