Bad contracting: three common pitfalls when entering into contracts

In brief - Don't sign a contract if you don't understand it and get advice if you need it

Make sure you get everything in writing, don't assume that a standard form contract is in your best interests and don't let anyone tell you that a contract is not negotiable.

Getting contracts right is one of the most important skills in business

If you run your own business, you enter into contracts all the time. Whether you realise it or not, contracts are a major part of what your business does day to day. You entered into a contract when you leased your premises. You entered into a contract when you purchased your stationery. You entered into a contract when you hired your first employee.

Contracts are a fact of life in business. One of the most important skills you can learn in business is how to get a contract right. An important part of getting a contract right is learning from the failures of others. Here are three pitfalls to avoid.

1. "We do business on a wink and a handshake"

Not any more. The only way you can make sure you’re covered if things go awry is if you have everything in writing. If you’re doing deals without at least a purchase order and an invoice, you’re heading for trouble.

Have a look at each and every transaction where a person supplies you with goods or services, or where you supply goods or services, and make sure there is a paper trail showing the business that you have done. Murphy’s Law dictates that it will be your biggest transaction that comes back to bite you if you don’t.

Get contracts in place for any ongoing transactions. A properly drafted contract will protect your rights and give you a leg to stand on if the other party decides to go off book.

It is just as important to make sure that if the scope of your agreement changes, you vary the contract in writing. A common story I hear from clients is that "we had a fixed price contract, and then he asked me to do extras and said he would pay me by the metre/hour".

Well unfortunately, that’s not what the contract says, and while they may have done significantly more work than what is stipulated in the contract, those people will have an uphill battle to get paid anything over the contract price.

2. "It’s a standard form contract"

Standard form contracts are often produced by industry or government bodies for use within a particular industry. Standards Australia, for example, produces a number of contracts for various different transactions.

The tip here is that just because it is a "standard form" contract does not mean that it reflects the terms on which you intended to contract with the other party. It also does not mean that the contract is not weighted in favour of one party or another.

Standard form contracts can still contain provisions which are not in your best interests. Read every clause and think about whether you are comfortable with it. If not, speak to the other party about removing or changing it.

3. "This contract is not negotiable"

Every contract is negotiable. You’re about to hand over your hard earned cash. You have every right to negotiate the terms under which you do that. I often recommend to clients that they amend certain clauses in their contracts, to which they respond "I don’t think we can". Of course you can.

Read every page (yes every page) and make sure you are comfortable with the contract and how it operates. If you are not happy with a particular clause, negotiate to have it changed or removed. If you do not understand a particular clause, seek advice to make sure your rights are properly protected.