5 Contract Red Flags to Watch Out For

By  //  December 3, 2022

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Building a business often includes signing several contracts. Before you sign any contracts, you should look closely at the terms and discuss them with your contract lawyer in Sydney.

When you sign contracts, they are legally binding, even if you find flaws with them later. Recognizing red flags protects your finances and your business’s reputation. 

There are several red flags to watch for, but start with these top five problems:

1. Non-Compete Agreements

Small business owners often get caught up in non-compete clauses to protect intellectual property, especially when they hire new employees or let employees go.

A non-compete clause can deter people from sharing details about confidential or secretive information. 

Unfortunately, non-compete clauses aren’t always enforceable, especially if they are missing specifics like reasonable and realistic support with time limits and rational geographic locations.

Many non-compete agreements are not enforceable, as they usually have unrealistic terms. Unenforceable non-compete agreements are a waste of money and time, which small business owners cannot waste. 

2. Liability and Indemnity Clauses

Liability clauses can be problematic because they involve paying for damages. Small businesses should be wary of liability contracts to protect themselves from negligence, especially if they are working with large companies.

The big companies use liability and indemnity clauses to take advantage of small companies that cannot afford similar protection. 

The red flag occurs when a contractor brings in a third party that is not included in the original contract or indemnity clauses. If a business brings a contract without an indemnity clause, then something is wrong and a lawyer should check the contract’s language. 

3. Automatic Renewals

Automatic renewals should be automatic red flags, as they continue contracts when the original time frame passes. B2B contracts often include automatic renewals in the smallest possible language so it is overlooked as business relationships continue until someone cancels the renewal.

Automatic renewal clauses are surprising, as most business owners overlook the terms, and continue to renew without second thoughts. With automatic renewals, business owners cannot renegotiate their contracts, so they cannot take advantage of new prices and specials. 

4. Termination Clauses

Terminations clauses are red flags because they include the language that usually ends contracts. When you sign a contract, you are committing to an agreement. Termination clauses include language that defines what the parties get at the close of the agreement.

When you sign a termination clause, you want to be sure you are paid for your work, and some clauses leave out those terms. 

Some termination clauses are early-termination fees – think of smartphone contracts or mortgages, which often have early-termination fees. Rookie business owners often fall prey to contracts with early termination fees, because they are simply trying to build relationships without reading the fine print. 

5. Penalties

Business owners should look closely at the penalties section of their contracts. If the contract has a problem, who is responsible for it? What penalties occur? The contract needs to have a cure period so organizations have time to repair problems so they can avoid penalties and dealing with excessive legal issues.