One of the main tasks that LegalVision network lawyers perform on a daily basis is reviewing and amending contracts on behalf of small and medium sized businesses.
It’s an unfortunate reality that many business people just sign contracts without getting them reviewed by a lawyer.
Another unfortunate reality is that many businesspeople draft important legal documents themselves, using a template from a previous job or simply a free template they’ve discovered on a random website.
This sort of approach will invariably lead to issues down the track. We’ve put together a list of the 12 most common issues we see with poorly drafted contracts. This week we’ll set out 1-6, next week 7-12.
1. Dating the contract before both parties have signed it
You’d be amazed at the number of times we are sent a contract for review which already has a date inserted. You cannot date a document before the two or more parties to the contract have signed it. The contract won’t be valid. A contract should be dated on the date that the last party signs the contract.
2. Scope of work being poorly defined
If you’re performing services for a principal, it’s likely that the principal will have drafted the document, and you, as service provider, will need to review it. The principal is incentivised to keep the scope of work as broad as possible.
If you don’t pick this up when reviewing the contract the principal is in a position to require you do to more and more work before being paid. This is work which in your verbal discussions was never to be included in the scope. Having a lawyer read through, and redraft the clause setting out the scope of work is vital.
3. Clauses which don’t relate to Australian law
We see numerous instances where businesses trying to save money use a contract they’ve found for free on the internet. Many of these documents were initially drafted for US companies, and entirely irrelevant to Australian small and medium business.
A good example is a clause stating that a service provider will comply with the US Foreign Corrupt Practices Act, or that the business will not employ “illegal aliens”. There is clearly no reason for you to warrant that you will comply with irrelevant foreign legislation, and this just places another unnecessary burden on your business.
4. Clauses which are illegal in Australia
Our network of lawyers also regularly see clauses in which the parties undertake to take certain actions that can be illegal in Australia! US contracts often contain clauses stating that a service provider will perform regular drug testing of employees or contractors.
You can’t just drug test employees and contractors in Australia willy nilly and it’s never a good idea to enter into a contract which requires you to break the law!
5. Making representations that are not correct
Another common issue we see in contracts are clauses which require a party to make representations which are either not correct, or which they haven’t verified. A common example is a standard representation relating to the party having an effective set of anti-bribery policies and procedures in place.
Very few small and medium businesses have such procedures in place. If you don’t then you should not be representing that you do in a contract. Another clause to keep an eye out for relates to insurance representations. Make sure you check your insurances before you warrant or represent that they are in order.
6. One-sided termination clauses
Finally (for this week at least!), keep an eye out for one-sided termination clauses. Most contracts will have a termination clause, allowing one or both of the parties to terminate the contract for a variety of reasons.
It’s vital, however, if you’re providing the goods or services set out in the contract, that the termination clause is drafted in a way which ensures you’re paid if the contract is terminated. This can either be in full, or in part.
Key takeaway
There are a number of issues we see time and time again when reviewing contracts. If a contract is worth entering into, it’s worth reviewing and ensuring it doesn’t leave you open to numerous problems in the future. Above all, make sure you have a lawyer review your contract. For a few hundred dollars you can save thousands of dollars’ worth of trouble!
