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Red flags to watch for in a business contract

On Behalf of | Nov 8, 2023 | Business Law |

The Small Business Association reported that there are over 313,000 small businesses in Utah that make up 99.3% of all companies in the state. If you are a small business owner, you know that engaging in business transactions often involves signing contracts.

These contracts, whether for services, partnerships or sales, serve as a written agreement that outlines the terms and expectations for both parties involved. They are essential for clarity, accountability and ensuring that all parties know their responsibilities. However, before you sign on the dotted line, it is important to be aware of certain red flags that might indicate a problematic contract.

Vague terms and conditions

A good contract is clear and specific. If you come across terms that are ambiguous or general, be cautious. These vague terms can lead to misunderstandings or might be intentionally written that way to allow one party more leeway than you are comfortable with.

Lack of detail on payment terms

Money matters can make or break a business deal. If the contract does not clearly spell out the payment amounts, deadlines and methods, you should reconsider. You need to know when and how you will get paid or when and how much you owe.

No termination clause

Any solid business contract should provide clear guidelines on how either party can terminate the agreement, under what conditions and what the repercussions are for early termination. Without this clause, you might find yourself stuck in an unfavorable situation without a clear way out.

Unilateral amendments

Be wary if the contract allows one party to change terms without the other party’s agreement. Any modifications to the contract after signing should require input from both parties.

Excessive penalty clauses

While contracts often include penalty clauses for breaches, ensure that they are reasonable. If they seem excessive or overly punitive, reconsider.

Lack of dispute resolution method

Disputes can arise in any business relationship. A robust contract will specify how to address disputes, whether through mediation, arbitration or another method both parties agree on.

Generic terms

If the contract appears as a one-size-fits-all template without details specific to your business transaction, proceed with caution. Contracts should cater to the unique needs of the agreement between you and the other party.

When you examine a business contract, always be thorough and vigilant. Make sure you understand every term and condition and seek clarification for anything unclear or suspicious. A contract should protect all parties involved, so it must exhibit fairness, clarity and mutual respect. Watch out for these red flags and always prioritize your business’s best interests.