Hiring a new employee? Leasing new property or equipment? Thinking of onboarding a new business partner? Getting a new supplier?
If you said YES to any of the questions above, you already know that you will have to enter into a contract with the other party but before getting this signed by them make sure you read this article because it will tell you what to look out for in contracts to safeguard your business and how you can take preventive action rather corrective action. Its better to negotiate terms of the contract before signing it and you will find below guidelines for things you should look out for and are negotiable before signing a contract.
So, what guidelines can you follow you ask? Well here goes nothing!
1. Mutually agreeing on definitions
Make sure that all major terms are defined completely and clearly. For example, an unclear definition of the term “commission” may lead to confusion and issues later in the contractual relationship. Commission usually means a fee paid to a party for referring business or performing a service and the percentage of this commission or what constitutes the payment of commission is what can raise some issues and differs from business to business.
For example, if hire an employee on a consultancy basis who is to be paid commission, make sure you specifically state what work constitutes and is eligible for commission and what that commission will be. If different types of work constitute to different percentages of commission, then this must be also specifically stated and agreed to by both parties. When are commissions payable is also an important point to consider, will it be paid as soon as the job is completed? Or are commissions only paid monthly or quarterly?
Possible pitfall: If you do not make sure that definitions are specific and clear there is a high likelihood for vagueness, and which can later bring disputes in what commission should be paid and when it must be paid. You can end up paying a consultant a higher percentage of commission than you intended to, or if you are to receive commission you may have to wait a long time to receive it.
If you sign on a new client and that client wants you to stay on and offer your services after the end date of your contract, make sure you get this in writing. Also consider if you signed up for a service which you pay a monthly fee for, when the contract comes to an end does it automatically renew? Is there a notice period you must give to ensure that the contract does not automatically renew if you no longer require the service?
Possible pitfall: The client may have indicated that they want to stay on for another 2 years after their initial term and they are open to the fees associated with the contract to be reviewed. If you don’t put this specifically in the contract its likely that when the initial term of the 2 years lapse, the client goes to you “Nah mate, I will only renew but only if you keep it at the same fee” – this can sometimes mean – if you say yes, you don’t make a profit and if you say no, you lose a client – so really no winning.
3. Terms and Obligations
If the terms of a contract change, for example, you now require your client to deposit funds into your account before commencing work or the client has now asked you to not construct only the house on their property but also a pool too, make sure you amend the terms of the contract or prepare a schedule that you can attach to the original contract, and get it executed and keep it with the existing contract. You must make sure that the schedule states all additional terms without any vagueness.
If, on the other hand you have contracted for materials or other products to be delivered, ensure the terms state clearly who will be liable if material or products are damaged in transit, what happens if they are not able to deliver on time, will you be compensated in some manner?
Possible pitfall: You could end up being paid less, or in some instances, not be paid at all for constructing the pool because there was never anything in writing about payment amounts and terms. Your product could be damaged and then you find yourself losing money because there are no recourses available to you; it is possible the warranty on the product does not include damages caused in transit.
You can generally only terminate a contract, based on the terms you’ve agreed as per the contract. A contract is legally binding, so it can be difficult for one party to terminate it if the reason is not set out in the contract’s terms. It is possible that the contract only gives termination rights to one party and not the other. Make sure the termination clause is fair and is something that is agreeable to by both parties.
You must also make sure that post-termination procedures are also set out in this clause.
Possible pitfall: You could end up not being able to terminate the contract for some breaches that were not set out in the contract. For example, the contractor has not made any progress in construction for 2 weeks now but because the contract states that you can only terminate if there has been no progress for 2 months.
5. Payment Obligations
Now it is obvious that we all want to get paid for our services and products.
Make sure you clearly identify who pays whom, when these payments must be made and the terms for making payments.
Make sure payment options like installments are incorporated and clearly stated in the contract, for example, installment option is only available if all previous invoices are cleared, and the current invoice amount is above a specified threshold.
It is also a good idea to include the method of payment. Maybe you are not okay with a business cheque or business charge card; make sure you specify it in the contract.
Possible pitfall: You may end up signing a contract with a business who only pays by a business cheque, and you only find this out when it comes time for payments and the contract is already signed. It’s all well and good if the business agrees to use your payment method but it is also a possibility that they won’t.
6. Dispute Resolution
Make sure the contract has a dispute resolution clause. This clause will specify what you and the other party will do when a dispute arises.
Possible pitfall: If there is no clear dispute resolution strategy in place, you may have to go to Court or be taken to court which is time consuming and an expensive affair.
It is advisable before entering any contract, to get legal advise. This article is not legal advise but definitely provides you with a solid guideline on what you have to look for and be sure of when signing a contract. At the end of the day, always remember, that you must be proactive in making sure you and your business are safeguarded when entering any contracts, and as simple as it may sound – READ EVERYTHING BEFORE SIGNING ANYTHING.