Contracts are a crucial part of business operations, and you may sign contracts frequently with new clients, employees or potential suppliers for your business. Each contract creates obligations for your company and opens it up to risks, so each contract requires careful consideration.
Sometimes, executives and others in a position of business authority stop reviewing the contracts they sign carefully or stop taking them to an attorney before they sign. After looking over so many boilerplate documents, they may think that all they need to do is skim before signing.
However, a thorough review is always necessary before signing a contract because another company could have something in there that disadvantages you. What are ways a contract could negatively affect your company?
It has a mandatory, binding arbitration clause
For decades, numerous businesses have required that others commit to arbitration in the event of a dispute. There are numerous issues with signing a contract that includes a mandatory, binding arbitration clause.
If a dispute does arise, you won’t have the legal right to go to court but will instead have to agree to not only undergo arbitration but abide by the decision reached. The other party could benefit far more from the arrangement than you do, especially if they hire the arbitrator or have years of experience handling business arbitration.
There could be long-term obligations
Especially if you sign a contract with a service provider or a supplier, there is a risk that they might try to lock you into a long-term agreement with the company. You might unknowingly agree to monthly payments or a long-term subscription that the contract doesn’t allow you to cancel.
Revision or cancellation penalties
Some businesses or professionals will include penalty clauses in their contracts in the event of a violation. Others will charge you for canceling the agreement or making any future changes to the terms, like reducing the volume or frequency of supply orders.
It’s important to make sure that you can absorb whatever penalty they want to assess in the event of a breach. Someone who has a seven-figure penalty clause in their contract could do a lot of damage to your business if they try to enforce that later.
Reviewing contracts allows you not only to catch these problematic inclusions but also to negotiate terms that are more appropriate and fair for you and the other party. Protecting your company in all business-to-business matters requires advance planning and assertive responses when conflict arises.