No one likes to feel like they’ve been taken for a ride—especially in business and when your valuable time and money are at stake. So what are some common “red flags” in a business transaction or contract? Here are the most common contract red flags:
Poor formatting and bad writing.
You don’t need even need to read a contract sometimes to know it’s something you should run away from. Unfortunately, we’ve even seen some bad contracts come from other attorneys. The spacing is off, you can barely read the contract, and there is a lack of standard formatting. This indicates that a person who has no contract experience wrote the contract, or an attorney who is not well versed in contracts wrote it. This also raises the question of “if these people can’t get a contract done right, what else is wrong, and do I want to do business with them?”
Length of the Contract.
The length of the contract will, of course, be different for different types of transactions, but when the length is totally off, it’s a red flag. Are you entering into a 6-figure deal with a 3-page contract? Red flag. A contract could also be too long if the author put in unnecessary boilerplate or “standard” language that does not apply. If it looks like a kitchen-sink contract, the contract may have terms that could be harmful or do not make sense for your situation—leading to potential conflict down the line.
One-Sided Terms
You usually need a legal advisor to really know if the terms are too one-sided, but common ways a contract can be one-sided are:
Damages clauses that are too one-sided:
- Unfair non-compete language
- One-sided indemnity clauses (this means that only one side gets extra liability for the other side’s faults)
- Termination clauses that heavily prefer one side over the other
- Clauses that make it difficult to enforce your rights
Automatic Renewals.
Automatic renewals can be convenient sometimes, but make sure you pay attention to them and cross-check them with the “termination” clauses to make sure you know how and when you can end the contract.
Arbitration Clause
Many people think staying out of court and going to arbitration instead is better, but the reality is that arbitration tends to favor larger companies and is better only in certain circumstances. Generally, you want to avoid arbitration clauses because arbitration means you may lose some rights and can actually be very costly.
As the saying goes, “an ounce of prevention is worth a pound of cure.” Having an attorney review your contract to spot those red flags will go a long way in protecting your future.