What makes a good contract? The 9 key things you absolutely need to know.

How do you know whether the contract you're looking at is good, bad, or just plain ugly?

Bad contracts might contain unreasonable indemnity clauses, hidden charges, ambiguous and unclear language and no way to resolve disputes. (I could go on … I've seen it all, over the years.)

If you're not particularly knowledgeable on legal matters, and you don't have a lot of experience in reading contracts, it's pretty easy to be bamboozled by legal jargon. And, as a result, many people find themselves agreeing to terms and conditions that are unreasonable, even unachievable.

But why jeopardise your business? It's your livelihood. It's precious to you.

Protecting your business from such contracts is vital.

The good news? You don't necessarily need an expensive lawyer to help you demystify the lawyer-speak; someone who is qualified in contract law will deliver just as well – and more affordably.

What a BAD contract looks like

• One-sided agreements and lack of joint liability can mean you're paying more than the service costs.

??BAD: …

1.2 if the Party B is in breach of the warranties in Clause 4.1 of this agreement, Party A, at its sole discretion, without the publication of the work and the payment of licensing fees and shares; moreover, Party B shall return to Party A [50] % of all income from Party A from the performance of this agreement and compensate Party A for all losses suffered in that connection, including but not limited to any expenses incurred by Party A such as notary fees, lawyer fees, accreditation fees, litigation fees and travel fees.

Beware!

• Weblinks referring to terms and conditions can be changed at any time, which increases your risk and uncertainty.

??BAD: …

2b. If you lease equipment from Processor, it is important that you review the lease terms. First Data Lease IS A NON-CANCELLABLE LEASE FOR THE FULL TERM INDICATED. Agreement terms in the MA&A booklet found on the website. Bank is not a party to this agreement.

Knowledge is power!

• Ambiguous legal jargon creates confusion on the side of the customer.

??BAD: …

For the purposes of this agreement and all agreements executed pursuant hereto, no course of dealing, between or among any of the parties hereto and no delay on the part of any party hereto and no delay on the party of hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof and thereof.

It was all the rage in 1321; these days, there's just no need. Clarity is king.

• Some liability clauses may not even be legal.

??BAD: …

XYZ company enters into a multi-year contract to sell smart meters and ongoing monitoring services for one of its largest customers, a public utility based in UK. Under the term of this 8-year contract, XYZ company will recognise ￡10 million in revenue each year. Any claim for liability is strictly prohibited and XYZ company shall assume its own costs in the event of the public utility not being able to perform aforementioned services.

Two years into the contract, the public utility is found to have been the cause of massive wildfires overseas.?

The liability as a result of these events caused the utility to declare for bankruptcy.

The rules about liability are regulated – people who write GOOD contracts know this.

• Late payment clauses can be punitive and unreasonable.

??BAD: …

2.3 All invoices are to be processed and received within 30 days; however, if payment is late ABC company will charge 35% on top of the invoice value and may cancel the agreement at any time, restricting the customer access to the aforementioned service.

Late payment clauses pose huge risks to your business if the service is a business-critical application.

What a GOOD contract looks like

• It's understandable and allows for things going wrong, on both sides.

??GOOD

1.2 if the Party B is in breach of the warranties in Clause 4.1 of this agreement, Party A will contact Party B and work to remedy the issues, without penalising for the publication of the work or payment of licensing fees and shares.

Both parties agree to bear its own cost and not apply liability on each party in the agreement. Each party accepts responsibility for all losses suffered in connection, including but not limited to any expenses incurred by the Party, such as notary fees, lawyer fees, accreditation fees, litigation fees and travel fees.

A dispute resolution clause will strengthen the business relationship and allow both parties to improve future endeavours.

• It's up-front and open about what your duties and benefits are.

??GOOD: …

2b. If you lease equipment from Processor, it is important that you review the lease terms. First Data Lease IS A NON-CANCELLABLE LEASE FOR THE FULL TERM INDICATED. Agreement terms in the MA&A booklet can be found in Annex A of this agreement. Bank is not a party to this agreement.

Visibility of terms can be easily checked and is at the hand of disposal.

• Time-limited contracts are helpful, and liability insurance decreases your risk.

??GOOD: …

XYZ company enters into a 1 year (with optional years) contract to sell smart meters and ongoing monitoring services for one of its largest customers, a public utility based in UK. Under the term of this contract, XYZ company will recognise ￡10 million in revenue each year. Any claims for liability will be covered under the parties Liability insurance who will cover costs in the event of the public utility not being able to perform aforementioned services.

Signing up to a 1-year deal decreases the risks if the company should fail to deliver on its promise. Liability insurance will ensure your company is not out of pocket.

• Appropriate financial penalties with realistic time-spans help your business out, rather than penalising it.

??GOOD: …

2.3 All invoices are to be processed and received within 30 days; however, if payment is late ABC company will charge 2% on top of the invoice value to cover administrative costs.?Cancellation of this agreement will be accepted if both parties give 90 days' notice to allow the customer time to move services onto another supplier.

A reasonable supplier will give you time so as not to affect the services provided.

Let's wrap up

Knowing the difference between a bad contract and a good contract can have a huge impact on your business – and can potentially make or break your business.

If you're working with suppliers who have contracts like this, please share your experiences with me. I do what I do because I find this stuff fascinating. Wading through legal spaghetti is my idea of a good time!

If you like what you hear, drop me a line at [email protected] and take advantage of a free consultation with no small print.

Let's get your contracts fighting fit! ??