3 Problems Strong Business Contracts Can Prevent
[Note: I originally wrote this blog post in 2015, and I updated it in 2018 and 2023, but only to remove outdated links and enhance readability. This post reflects the blog structure used in 2015 and my writing style at the time. Both have changed measurably since then. Estimated reading time: 8 minutes.]
What a Solid Contract Can Prevent
Every year, between 36-53% of small businesses find themselves fighting a lawsuit. Although in a litigious society like America, there are no guarantees that someone won't find a reason or way to sue you, it's still important to make it difficult. In fact, any legal dispute can be costly and time-consuming to resolve, so preventing them is imperative.
That's why your business needs to create and execute practically bulletproof contracts or service agreements with your clients. You should resist signing those that are not solid to take advantage of a much-desired opportunity.
That includes not signing any you sent to a client that they significantly changed in ways that stripped you of necessary legal safeguards and options. Also avoid signing those sent to you by customers who don't provide you the right legal protections for you and your business. Any contracts you sign should be mutually beneficial and protective. They should preserve any rights you want to keep, too, like copyrights to your work product.
Firm, protective contracts are one of the most important strategies you can use to protect yourself from legal problems, they must be enforceable. So, you should get your attorney involved in this process to be sure your contracts or those from clients, defend your rights and provide your responsibilities.
That way, they help prevent you from facing lawsuits or other legal disputes, like those related to nonpayment. Accordingly, here three elements your contracts should have to provide the most reliable protection.
Scope Creep Prevention
While boilerplate language can be used much of your standard contract (since those clauses are virtually the same in every legal agreement), this is one section where you must modify in each contract to fit the specific requirements of every customer and project.
That's because no matter what kind of contractor or business owner you are, scope creep can become a problem if your contract or service agreement doesn't address it in advance. Scope creep, also called requirement creep, feature creep or function creep, refers to uncontrolled changes or continuous growth in a project's scope. It usually happens without additional payment to you.
Sometimes it's unintentional if you and the client failed to scope the project properly at the outset. But, often, clients will try to get you to provide more during the project than they paid to receive—like extensive revisions or complete content rewrites.
Therefore, your "Scope of Project/Services to Be Performed" and "Term of Service" clauses should identify the precise services that you are providing, their particular scope and the length of time you expect to be working on the project. That includes exactly how many hours total you will dedicate to that customer's work during that period. It also should provide any deadlines and milestones, if requested or required, and, for one-off projects, a clear contract termination date with an exact time of day.
Also in your contract or service agreement, clearly state that you don't agree to provide services that are not identified in the contract, or outside of the project scope. Then, make it clear that your written legal agreement supersedes any prior or future discussions about the scope of services or term of service. Remember this later when you're exchanging emails or other written documents with clients about the work, because those can be considered legally binding.
Your client should know by your contract what happens if the project starts moving outside its defined scope. Will you charge your standard hourly rate for every task or additional amount of time you're required to spend outside the scope? What are the other requirements for remaining within scope, on time, and on budget? At what point will you terminate services if the scope clause is repeatedly breached by the client? Carefully answer all of those questions and related ones in your contracts.
If you decide to charge for the extra time or work, contact the customer by email or otherwise in writing, identify the amount of extra time or work you'll expect to do and what the fee for that time or work will be. If you're on retainer, require it in advance based on the billing agreement established in the original contract.
Make sure you enforce this aspect of the deal vigorously. Otherwise, you could find yourself behind on that project and other work. You also could be forced to reject new opportunities and may lose money everywhere else in your business.
Payments Issue Prevention
Explicitly outline your policies about billing and payment in your contract or service agreement. If you're providing a project rate like many consultants and, even attorneys, do now, make sure you state your price, payment dates, and fees for late payments. Be sure your project fee precisely covers the amount and type of work that will be provided by you for that fee.
Your written contract or service agreement should cover how and by what dates you expect payment, what happens when you don't receive it on time or if a credit card payment gets reversed or a check bounces. If you require full or partial payment in advance (which is ideal), include a clause that states checks or payments must clear your bank before you start or continue work.
Again, explain in detail what happens with billing when clients request you go outside the scope of the project or extend its term of service. Tell the customer when and how you will bill in those situations, then strictly adhere to your policy.
For situations where you're signing a client's contract like many independent writers do make sure the agreement spells out the same things identified above, particularly as it relates to payment. In all cases, you should take steps to ensure you get paid on time and in full.
But, don’t make idle legal threats like you’ll send past due accounts for collection if you don’t intend to do so. That’s illegal in most cases.
Certain Legal Liability Prevention
Your contracts should protect you from liability and identify how you won't be held legally responsible for acts of your clients or the public (in response to content or a website you create for them, for example). Clauses that indemnify you and your business, that provide disclaimers against legal liability or guaranteed results by you or your business, and whatever exclusions you and your lawyer think you should include in the document should be.
Ask your attorney to include a performance clause in the contract to make sure you have protection in case something out of your control prevents you from completing the project or performing specific duties you’ve committed to in the contract on time. That can include anything from natural disasters to technology issues.
Also, address what happens when it's the client’s fault that you can't perform the duties outlined in your contract. Cover intellectual property rights as well, yours and your customer’s. You also should discuss in your contract how the contract parties will pursue legal action if there is a disagreement and who will be responsible for what attorney and other legal fees.
If you're signing a contract presented by a prospective client, make sure it provides that you are only liable for breaches related to the specific performance of the agreement. Also, make sure there are mutual disclaimers of liability and bilateral indemnification clauses.
If those clauses are unilateral, don't sign the contract. You're accepting total responsibility for something going awry that your client should share. You should not be made liable for every global legal contingency for your foreseeable future and have to give away your descendants rights, too.
Make sure it also protects your other legal rights as identified by your attorney or local law. Just avoid signing contracts that can keep you and your business tied up on legal messes for years.
Get Legal Help with Business Contracts
Above are just a few elements each business contract should have. But, there may be much more yours need to contain to protect you and your business from legal difficulties. That makes it imperative to get a qualified lawyer to help you create robust contracts and service agreements.
Also, remember that not all contracts or service agreements are legally binding in all jurisdictions. If you conduct work in multiple states, you'll have to address in the contract what jurisdiction governs your contract. Get legal help on that because an experienced business attorney, particularly one specializing in your type of enterprise, can contribute to making sure your contract is enforceable in your jurisdiction.
In fact, talk to an attorney before adding any of the elements identified here to your contracts. It's important to get reliable legal help to make sure you're incorporating these elements in a way that considers your unique issues and provides the most protection for you and your business.
But, not only will firm contracts and service agreements help you avoid legal issues, your profitability won't suffer because of bad contracts and related legal and financial problems.
[Disclaimer: This post is for informational purposes only so you must apply information here thoughtfully and responsibly. This information is not meant to substitute for legal, financial, accounting or other business or personal advice. You should get from qualified professionals in those areas that require licensed professional assistance. In fact, it's essential that before taking any action based on the information contained here that could have legal, financial, or any other significant consequences for you, your family or your business, consult with qualified, licensed professionals who can provide guidance that considers your unique circumstances.]
(c) 2015-2023. Dahna M. Chandler for The Stellar Communicator, Inc., a division of Thrive Media Collaborative, Inc. All rights reserved. This blog post may not be reproduced or reposted in whole or in part without express written permission of the author. Reading time estimated by Read-O-Meter.
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