There’s a reason contracts are written in small print. Small business owners especially need to be wary of the contents of a contract to avoid getting screwed over by larger companies. To help you navigate a contract with confidence, we’ve covered five contract red flags to keep an eye out for the next time you put pen to paper.
1. Non-Competition Agreements
A non-compete clause is set in place to make sure a business’s intellectual proper is protected. The common problem with this clause is making sure that it is enforceable. In order for a non-compete clause to be valid, it must be supported by consideration, include a time limit on the restriction and have a reasonable geographic location covered by the agreement.
2. Ownership of Work
As a small business owner, it’s important to make sure you are not giving up a large chunk of your company. To avoid this, make sure the owner of the produced work is clearly defined in every contract that you sign.
Say something goes wrong with the contract—someone doesn’t fulfill their role or the produced work isn’t what is expected—who is responsible? Clearly defining what parties are responsible for what is critical to identify from the very beginning. This will save you a lot of legal headaches should someone breach part of the contract.
4. Payment Terms
Unclear or confusing payment terms is a major red flag. A trustworthy contract will clearly state what amount is due, by when, by who and by which payment method in clear terms. Make sure that both parties agree upon the price.
5. Liability and Indemnity
Liability clauses define how much the responsible party will pay should something go wrong. Indemnity clauses define which party is responsible for paying damages. Similar to construction bonds, these clauses are meant to protect your business and make sure the other party fills out their end of the contract. It’s important to double and triple-check these clauses. Oftentimes larger companies will take advantage of their power and include favorable language in indemnity clauses.
Before you gloss over a contract and only sign on the yellow highlighted line, make sure you take note of the above sections and be wary of any red flags. For more tips on how to protect yourself against business contracts, check out the infographic below.