A Single Contractual Clause with the Potential to Devastate Your Business

If you’re a founder / business owner, you’ll undoubtedly need to deal with customers, suppliers and, sometimes, funders.

You’ll probably have had situations, or heard of situations, where working relationships with customers/ suppliers /funders have broken down and either:

there wasn’t a contract in place;

or(where there was a contract) the contract didn’t give the clarity required to sort out the mess.

There can be catastrophic fallout when people don’t have any legal arrangements/ the right arrangements in place and it can be really unpleasant. One rogue contractual clause may leed business owners like you to lose their business and even their families and homes. This is painful on so many levels: financially, emotionally, mentally and even physically.

It starts with ONE bad decision.Either:

you don’t have a contract in place;

or you sign a contract without reading and understanding it, and in doing so you inadvertently sign up to onerous terms which damage your business. How?

When your product/ service doesn’t go according to what your customer had in mind, your customer invariably asks you to make things right. They are probably doing this as one of their rights under the contract that you signed off without reading/ understanding.

And this is the problem, you didn’t know that they could ask for this as a remedy (whether you have a contract or not). For example: the customer is asking you to re-do work because they are not 100% happy with it, even though it meets the requirements in the order form.

The problem is that what they are asking for is not what you expected, but the impact on your business is that this now diverts staffing resource to sort out the issue.

By taking staff away from their normal role, your other customers start to suffer because they are not getting the service that they expected.

And then you have another unsatisfied and complaining customer, and the downward spiral continues.

By the time you know it, you have several dissatisfied customers who you’re trying to get back on track. Your staff are getting stressed because they can’t meet their targets as they keep having to re-do work.

The outcome is that your staff become tired and also unmotivated, which impacts morale and also the number of staff sick days that they take. This adds to the downward spiral.

Less staff resource = less sales volume and your bottom line starts to suffer.

To give your staff some breathing space, you might think to offer your complaining customers compensation… but this too has negative consequences on your bottom line.

Those profits that you were going to use to expand your offering and your team are now being used to compensate customers is not what you envisaged.

You may decide to take out a loan to steady the ship financially but this doesn’t fundamentally solve the problem of the onerous contracts that you signed, which has led to unsatisfied customers and your plummeting staffing levels. So actually, paying the loan back creates even more of a squeeze and leads to another source of stress for you.

Further, this loan is likely to be secured against your home / by a personal guarantee from you and your life partner, which means that losing your home / life savings is now a real threat.

All the while, this excessive pressure has caused arguments at home and now your family relationships are under severe strain.

Your stress levels are through the roof and the pressure is taking its toll on your physical and mental health. You did not plan this for your business or your life

Most of all, you can’t see a way through it, and after months and months of stress and battling on, the only way to get out of the situation is to close the business, lose your home and declare bankruptcy. No words can convey how devastating this is for you, your partner and your family

One mistake: you decided that you didn’t need a contract, or you simply signed the contract without understanding its impact.

Let’s take the following real-life example as something you might have inadvertently agreed to. It’s a fairly standard legal clause that I see in contracts all of the time:“You agree to fully indemnify, defend, and hold harmless the other party from any and all claims, damages, losses, and expenses, including but not limited to attorney’s fees, arising out of or resulting from your breach of obligation, negligence and /or misconduct in relation to the work defined in this contract.” First off, this is typical legal jargon. I get that when you’re trying to sign off a sale, this is the last thing you need or want to deal with.

What does it even mean? Why are you wasting your time trying to work out what it’s saying when you’ve got way more stuff to be getting on with? Besides which, you know what you verbally agreed with the other party, so what’s the problem here? From legal perspective, this is full of red flags that could lead to the horrible story above.

In layman’s language, what this clause is saying is that you will fully pay the other party for all losses where you have not complied with any one of your obligations under the contract, or where you’ve acted negligently.

What this means in practice is:· this claim will be enforced as a debt against you (because it’s an indemnity not a contractual claim). That’s right, straight to debt recovery measures if you don’t pay it.· Your losses are not capped, so you are on the hook for an unlimited amount of money.· The type of loss is not limited, which means that you’ll be paying for losses with even the most tenuous connection to your breach e.g damage to the other party’s reputation – which could be infinite.

Now you can see, this clause has the potential to wipe out your business and you personally, especially if it’s enforced by several clients.

Instead of the awful scenario above, you could have a business with satisfied customers who know exactly what they’re going to get from you, as well as a motivated workforce.You could now be using your profits to expand the team and develop your product and service.

So to wrap up this long post, all I’m saying is that the right legal input could make a huge difference to your life. Getting a contract reviewed and negotiated properly could be literally life changing for you.