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10 Common Contract Gotchas to Avoid

Common contract gotchas
Credit: thodonal88/Shutterstock

Signing a contract can be an exciting moment. Whether you're signing a new client, buying property or purchasing a much-needed service, the signing is the culmination of a lot of planning and hard work. However, it could be disastrous if you fail to thoroughly review the legally binding document.

To help you avoid being duped, Business News Daily talked to business owners, attorneys and other experts to find out what common contract "gotchas" you should be on the lookout for. Don't fall victim to a shoddy contract; stay vigilant, read and re-read the document, and keep an eye out for these dirty tricks.

In some cases, contracts will incorporate terms like "notwithstanding" in order to offer a way out of previously stated requirements. Keep an eye out for a contract that contradicts a party's previously stated obligations by using this terminology.

"If you've read a services agreement or another business's boilerplate, chances are words like 'notwithstanding' and 'hereunder' discreetly pop up during the course of your read," said Alex Lauderdale, founder of EducatedDriver.org.

"One can go through an entire contract, up to the end, thinking they've just landed the most amazing terms and conditions the world has ever seen. But wait! There it is: 'Notwithstanding the terms and conditions set forth in clauses A-Z.' …  If you see this phrase, it's time to start paying close attention. Chances are good you just ran into your part of the bargain, and it may not be what you were expecting."

Who owns the work of a contracted party is a major concern when entering into an agreement. If you're hiring a creative freelancer, make sure you retain the intellectual property rights to the work for which you've paid. Otherwise, that content could be used elsewhere at the discretion of the other party, with no regard for your intended use.

"Under U.S. copyright law, the owner of a work is generally its creator. Therefore, an independent graphic designer may be the copyright owner of the work that he or she produced for you unless a written agreement says otherwise," said Ozelle Martin, founder and managing attorney at The Law Office of Ozelle Martin.

"Many entrepreneurs are not aware of this and tend to think that if they paid for the design, they own it, but this is not how it works under U.S. copyright law. To attain full ownership of the work, you must ensure that the language of the contract indicates that the graphic designer will convey all rights, title and interests in the work to you."

Don't let one party's constant revising and altering of a negotiated contract trip you up. If you see excessive revisions, chances are they're trying to hide something in the edits. While it might be exhausting (or expensive if you're paying an attorney), review every revision, even if the other party claims it was just a clerical change. Otherwise, it could cost you big time down the line.

"The most common form of a pitfall is in an altered contract. An investor may make a change and claim majority ownership or may state that termination can be a possible option if profits do not meet a certain standard," said Jesse Harrison, founder and CEO of the Employee Justice Legal Team. "This is generally not present on the first draft of a contract; it is often added in later after numerous changes have been made and negotiations agreed upon. [T]o avoid this, have a dedicated attorney who will be willing to oversee all contractual exchanges [and] help you lay out the best terms of partnership or investment."

Sometimes, specific accounting practices might mislead investors to expect their dividends will be paid before management compensation when the opposite is true. To really understand the flow of money in an organization you're investing in, it's important to read through the contract in its entirety and see what counts as a company expense.

"Frequently, investors will believe they are getting a preferred return, [where] they are repaid their investment plus interest before management and others receive any payout," said Geoff Morgan, founder of Morgan Legal Group. "Be careful, because management can pay themselves bonuses or other salary or compensatory payments that are classified as 'expenses' on the company's income statement but have the effect of funneling money to management ahead of the investor."

Sometimes, contracts appear to have a set end date, but one party will sneak an automatic-renewal clause into the text. If you sign a contract with one of these clauses, you will have to provide advanced notice for termination to other the party, which is difficult to do if you aren't aware the clause exists. Check thoroughly that a contract really sunsets when you expect it to, without renewing automatically.

"In countless instances, small business owners, often without their knowledge, continue having payments deducted from their bank account or charged to their credit card long after they ceased using the service," said Marc Rappaport, founder of Rappaport Law Firm. "I suggest carefully reviewing a contract to determine whether it provides for automatic renewals. Either negotiate these out of the agreement or carefully calendar the date on which you need to give notice of termination."

Another common "gotcha" is any clause that requires you to pay the other party's legal fees or fulfill other financial obligations in the event there is a conflict or pricing change. If you sign a contract with these clauses within the text, there is little you can do to defend yourself.

"Business owners should carefully review the default provisions in a proposed contract," Rappaport said. "Contracts that require a business owner to pay the other party's legal fees, or which escalate the balance of periodic payments, put you at the mercy of the other party."

Forum selection clauses could make it geographically prohibitive for you to litigate against the other party in the event a conflict arises. These clauses stipulate that if there is any sort of litigation, it must occur in a specific venue. Agreeing to a clause like this could put you in a situation that ranges from inconvenient or expensive to purely untenable.

"The first thing I tell clients to avoid is 'venue selection' or 'forum selection' clauses that require that any dispute be resolved only in a far-off jurisdiction," said Sam Ventola, commercial litigation attorney and founder at Ventola Law. "Signing such a provision can effectively prevent you from obtaining any redress in court if it's too expensive to appear in the selected jurisdiction, and, at a minimum, they put you at a tremendous disadvantage."

If you sign a contract subject to the laws of a foreign country, you could find yourself without the protection of rights you took for granted and assumed would cover the terms of the contract. Always be sure you understand which national laws your contract is subject to and the implications of those laws.

"Contracts governed by the laws of another country that don't provide the same rights for individuals and companies [can] be prohibitively expensive for you or your company to contest or litigate," said Anne Miner at The Dunvegan Group.

Agreeing to at-will employment contracts gives you very little recourse if you're fired without cause or compensation. Agreeing to a contract containing at-will employment clauses can put you in a precarious position that leaves you high and dry if your employer terminates you for any reason, at any time, even if they withhold severance payments.

"Contract terms like 'at will' in an employment contract mean you can be terminated at will and with no right to notice or severance," Miner said. "[This is a] big 'watch out,' especially if you will be posted in a remote area or foreign country!"

If you're writing a contract for a client, consider adding a clause that stipulates what happens if that client is acquired by another company during your time working together. Otherwise, you could find yourself losing time and money.

"If you're serving other businesses, it's worth addressing in your service contracts what happens if your client gets acquired," said Eagan Heath, owner of Get Found Madison. "This happened to us when our largest client, an assisted living company, was purchased. Fortunately, the new company at least paid the termination fee, but we weren't totally sure whether our claim would hold up if they didn't. We had to revisit our contracts after this."

Adam Uzialko

Adam C. Uzialko, a New Jersey native, graduated from Rutgers University in 2014 with a degree in political science and journalism and media studies. He reviews healthcare information technology, call centers, document management software and employee monitoring software. In addition to his full-time position at Business News Daily and business.com, Adam freelances for several outlets. An indispensable ally of the feline race, Adam is owned by four lovely cats.