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Infographic: Be Aware of These Contract Red Flags

Whether you are a seasoned business owner or are starting to build your first company, odds are you have had to sign a contract or two. Oftentimes, business owners will gloss over contracts and only sign on the yellow highlighted line. Contracts are legally binding and should be reviewed with caution. To help small business owners protect themselves against contracts, we’ve covered five contract red flags to keep an eye out for below.

1. Ownership of Work

As a small business owner, you want to make sure you are not giving up a large part of your company. To do that, double-check the owner of the produced work is clearly defined. If it’s not, you should not sign until it is.

2. Penalties

Who will be responsible if something goes wrong with the contract? What penalties will incur? The penalties are crucial to define in the beginning so there are no legal disputes should something go wrong with the contract.

3. Liability and Indemnity

Liability and indemnity clauses establish how much a party should pay should something go wrong with a contract and which party will be paying for any specific damages, respectively. Similar to construction bonds, these clauses are meant to protect your business and make sure the other party fills out their end of the contract. It’s important to double and triple-check these clauses. Oftentimes larger companies will take advantage of their power and include favorable language in indemnity clauses.

4. Payment Terms

A solid contract will have clear payment terms. What amount is due, by who, by when and by which method of payment should be clear and understood by both parties. Make sure there is an initial down payment; if the project is drawn-out, request payments along the way.

5. Venue Provision

Say a lawsuit arises under the contract, the venue provision defines what country and state the lawsuit will be filed. This means that the venue chosen will specify which jurisdictions laws apply. Business owners should be wary of signing any contract outside of the state they reside in. If possible, negotiate for a venue in your state.

These are just a couple of the major red flags business owners should be aware of when signing a contract. To help small business owners better understand and optimize the contract they sign, check out the visual below that covers the anatomy of a business contract and highlights 10 detrimental red flags to avoid.

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