Understanding business contracts: Protecting your money and interests

Photo by Mari Helin on Unsplash

In this article, we’re sharing tips for understanding business contracts and protecting your money and interests.

A contract is a legally binding document and one which is vital when buying or selling goods or services as a company. Despite this, legal services in Gloucester are often sought by businesses who have been caught out through nonexistent or inadequate contracts.

This is because many companies – particularly SMEs make some common mistakes with their agreements. In this article, we’re sharing tips on understanding business contracts to better protect your money and interests.

What is a business contract?

In brief, this is a legally binding document which lays out the terms of an agreement between two business parties. For example, a contract may be drawn up between a business which makes clothing and a company which supplies them materials such as fabrics. A business contract is designed to protect the interests of both parties and, therefore, is usually extremely detailed and often lengthy.

Common contract mistakes by SMEs

Photo by Elisa Ventur on Unsplash

With the best will in the world, the most diligent of companies can find themselves embroiled in a business dispute. However, in many cases, these occur due to simple contract errors, and we’ll look at some of these in this section:

Generic online agreements

Many small and new businesses choose to save money by using blanket contracts which they have downloaded from the internet. This will, in many cases, prove to be a false economy as the contract will fail to adequately cover all the salient points specific to that business deal.

Making assumptions

Another commonly made error is assuming that a certain case point is understood by both parties – usually because it is a point which simply makes sense. In reality, this error can sometimes provide a wide-open door for the other party to perform an action which could be detrimental to your business.

The entire point of a contract is that everything is, quite literally, spelled out to avoid misunderstanding, so never make assumptions when drawing up or signing a contract.

Performance or delivery standards

Picture the scene – you’ve drawn up and signed a contract with a supplier which states that the supplier will perform marketing and PR services for your company. The contract even states how these duties will be performed. It doesn’t, however, clearly state the minimum required result or standard.

This means, in effect, that the supplier might choose to put in the minimum amount of work and, therefore, deliver the least possible amount of results. Without performance and delivery standards stated clearly in the contract, the supplier will almost certainly get away with this behaviour. Again, the purpose of a contract is to cover each and every base in terms of what is expected from both parties.

Indemnities

Indemnities are contract clauses which have tripped up many a business over the decades, and are something that every business owner needs to know about. Indemnifying a person or business in a contract means that, in certain circumstances, your company will take a loss and will not seek compensation if that party creates a loss. This very much has its place in business law, but you should always avoid agreeing to broad indemnities without reading the fine print.

Understanding business contracts

Photo by Sebastian Bill on Unsplash

As a business owner, it’s in the best interests of yourself and your company that you gain at least a rudimentary understanding of business contracts. This doesn’t mean that you have to drop everything and go to law school but, by getting on board with the following tips, you can help to make sure that your business contracts are bulletproof:

• Read them: this may sound pretty simple but you’d be amazed at how many business owners don’t actually read the contracts that they’re signing. Take the time to read each contract and make a note of anything that doesn’t look right.
• Common terms: create a spreadsheet of common contract terminology and use this as a guide to help you to spot any red flags when receiving new contracts from clients or suppliers.
• Invest in a guide: in 2023, there are any number of resources available online which will help you to gain a better understanding of how contracts work and, in many cases, these won’t cost you a thing.
• A professional template: in many cases, a local firm of solicitors will – for a small fee – draw up a professional contract template for your business. This can be really useful if your business contracts all tend to use similar terms.
• Retain a solicitor: I know, I know – solicitors costs money right? This is, of course, absolutely correct, however, the amount of money you’ll pay a solicitor will often pale in comparison to the funds that you may stand to lose without it.

Protecting your business with bullet-proof contracts

As a business owner, think of your business contracts as bullet-proof vests which protect you, your business, and your money from harm. When you rely on something to protect you, you take good care of it and make sure that it’s in working order at all times – and this is exactly how your contracts should be treated.

While you can handle business contracts yourself with some of the tips in this article, it is always recommended that you seek the services of a business solicitor to ensure that any and all loopholes in your contracts are slammed completely closed.

Please be advised that this article is for general informational purposes only, and should not be used as a substitute for advice from a trained contract law professional. Be sure to consult a contract law professional if you’re seeking advice about business contracts. We are not liable for risks or issues associated with using or acting upon the information on this site.