Many business owners don’t have the patience to carefully read through lengthy legal documents, and instead, resort to skimming it before signing off. However, the importance of reading a contract fully before signing cannot be understated.
Before agreeing to a legally binding document, you need to know the major contract red flags.
1. Ownership of work clause
It’s essential to clearly determine who the owner of work performed under a contract is. As a business owner, you want to ensure you’re not giving up rights to a significant portion of your work by signing the contract.
2. Noncompete clause
While noncompete clauses aren’t always a red flag, it’s crucial to carefully read through the clause to look for any warning signs. This type of clause is used to protect the intellectual property of a company, and you should be wary when they include deceptive wording in sections that should be concrete such as the geographic location or time frame.
3. Venue provision
A venue provision is a “just-in-case” plan in the contract—if a lawsuit were to arise, you would refer to the venue provision to determine the state and county where the lawsuit should be filed. When signing a business contract, look at the venue provision to determine the location is either a venue in your state or a neutral location.
4. Liability and indemnity
A liability clause defines how much money is to be paid if something goes wrong, while an indemnity clause states who’s responsible for paying that money. As a business owner, it’s essential to be wary of liability and indemnity clauses as large corporations sometimes take advantage of their resources to turn these clauses in their favor.
Business contracts are notoriously tedious and boring to read through—and this isn’t by chance. The smallest word choice can make a massive difference in legally binding documents like business contracts, and they should, therefore, be scrutinized carefully before signing off on one.
For a guide to business contracts and a complete list of red flags to look out for, check out the infographic below.