Pitfall #1: Lack of Clarity and Ambiguity
Vague language is the enemy of a strong contract. Unclear terms can lead to misinterpretations, disagreements, and ultimately, costly legal battles. Here's how to achieve clarity:
Define Key Terms
Ensure crucial terms like "confidential information," "completion date," or "intellectual property" have clear definitions specific to the contract.
Use Plain Language
Avoid legalese and complex sentence structures. Strive for clear, concise writing that both parties can readily understand.
Be Specific
Don't rely on generalisations. Outline specific details like deliverables, timelines, and performance expectations.
Example
Instead of: "The contractor will deliver the project on time."
Use: "The contractor will deliver a fully functional website with all features listed in Appendix A by no later than December 1st, 2024."
Pitfall #2: Undefined Scope of Work
A well-defined scope of work prevents "scope creep," where additional, unanticipated tasks arise and cause delays or cost overruns. Here's how to define scope effectively:
List Deliverables
Detail the specific outputs expected from the contract. Are you purchasing a product, a service, or both?
Outline Exclusions
Clearly state what is not included in the agreed-upon scope. This helps manage expectations and avoid disputes over additional work.
Include a Change Order Process
Establish a clear procedure for requesting and approving changes to the original scope, including potential adjustments to timelines and costs.
Example
A contract for website development should specify the number of pages, functionalities, and content management system integration. It should also clarify if ongoing maintenance or future updates are included.
Pitfall #3: Inattention to Payment Terms
Unclear payment terms can lead to cash flow problems and frustration for both parties. Ensure your contract addresses these key points:
Payment Schedule
Outline the payment amounts and due dates. Specify if payments are based on milestones achieved or upon project completion.
Payment Methods
Define acceptable payment methods (e.g., check, wire transfer) and any associated fees.
Late Payment Penalties
Include late payment penalties to incentivise timely payments.
Example
A contract for freelance work might specify a 50% upfront deposit, with the remaining balance due upon project completion. It could also outline a late payment penalty of 2% per week.
Pitfall #4: Neglecting Termination Clauses
Unforeseen circumstances can necessitate ending a contract prematurely. A well-defined termination clause protects both parties in such situations.
Termination for Cause
Specify breaches of contract that constitute grounds for termination by either party.
Notice Period
Define the required notice period for termination, allowing for an orderly transition.
Consequences of Termination
Outline the consequences of termination, such as payment for completed work, return of materials, and confidentiality obligations.
Example
A contract might allow termination for cause if a contractor fails to meet deadlines or deliver work of acceptable quality. It could also specify a 30-day notice period for termination without cause.
Pitfall #5: Skipping Dispute Resolution
Disagreements can arise during the course of any contract. Having a clear dispute resolution clause helps avoid costly litigation.
Options for Dispute Resolution
Consider including alternatives to litigation, such as mediation or arbitration, which can be faster and less expensive.
Selection Process
Outline a process for selecting a neutral third party for mediation or arbitration.
Example
A contract might stipulate that any disputes will be resolved through mediation before resorting to litigation.
Additional Tips for Contract
Seek Legal Review
While simple contracts may not require an attorney's involvement, complex agreements benefit from professional legal review.
Maintain Records
Keep detailed records of all communication and agreements related to the contract. This can be crucial evidence in case of a dispute.
Review and Update
Regularly review your contracts, especially for ongoing relationships, to ensure terms remain relevant and up-to-date.
Generate Well-Drafted Contracts with Lexagle.
A well-drafted contract is an essential tool for safeguarding your business interests and fostering successful collaborations. By prioritising clarity, defining expectations, and establishing clear procedures, you can minimise the risk of misunderstandings and disputes.
However, navigating the intricacies of contract law can be complex, especially for businesses with limited legal resources. This is where leveraging technology can provide a significant advantage. This is where a contract management software comes in handy.
Lexagle, Asia’s leading contract management platform, empowers businesses of all sizes to streamline the contracting process. Our user-friendly platform simplifies contract creation, negotiation, approval, and storage, ensuring your agreements are secure and readily accessible. Book a demo with us today and discover how our platform can help you avoid common contract pitfalls and prime your business for success.
