Contracts are the backbone of every business relationship, yet many small business owners treat them as an afterthought. They sign agreements without reading them carefully, use templates without customizing them, or skip written agreements altogether. These mistakes can cost thousands of dollars in disputes, lost revenue, and legal fees.
After nearly 20 years of practice, attorney Michael Zara has seen the same contract mistakes come up again and again. Here are the five most costly ones and how to avoid them.
1. Using Generic Templates Without Customization
Online contract templates are convenient but dangerous. They are written for generic situations and almost never address the specific risks and requirements of your business, your industry, or your transaction. A template NDA may not adequately protect your particular trade secrets. A template service agreement may not include the liability limitations you need. A template employment agreement may contain non-compete provisions that are unenforceable in your state.
The fix: start with a solid template if you like, but have a business attorney review and customize it for your specific situation. The cost of customization is a fraction of the cost of a contract dispute.
2. Ignoring the Indemnification Clause
Indemnification clauses determine who pays when something goes wrong. Many business owners gloss over these provisions, not realizing they may be agreeing to unlimited liability for the other party's losses. A poorly drafted indemnification clause can make you responsible for losses that were not your fault, have no reasonable limit, and extend to third-party claims you cannot control.
The fix: every indemnification clause should be mutual (or at least balanced), limited in scope to losses caused by the indemnifying party's actual breach, and capped at a reasonable amount relative to the contract value.
3. No Clear Termination Provisions
What happens when a business relationship is not working? Without clear termination provisions, you may be locked into a contract with no practical way out. Common issues include agreements with no termination-for-convenience right, unreasonably long notice periods, excessive early termination penalties, and no provision for what happens to work in progress or prepaid fees.
The fix: every contract should include clear provisions for termination for convenience (with reasonable notice), termination for cause (with defined triggers), wind-down procedures, and post-termination obligations including return of property and confidential information.
4. Vague Scope of Work
Ambiguous scope descriptions are one of the most common sources of contract disputes. When the scope of work is not clearly defined, both parties may have different expectations about what is included, leading to disputes over deliverables, timeline, cost, and quality. This is especially common in service agreements, consulting contracts, and construction projects.
The fix: define the scope of work with specificity. Include detailed descriptions of deliverables, acceptance criteria, timelines, and change order procedures. If the scope cannot be fully defined upfront, use a master services agreement with individual statements of work for each project.
5. Forgetting About Dispute Resolution
Many contracts are silent on how disputes will be resolved, or they include boilerplate provisions that may not serve your interests. Litigation is expensive and time-consuming. Without a dispute resolution clause, a simple disagreement can turn into a six-figure lawsuit in a distant jurisdiction.
The fix: include a dispute resolution clause that specifies the method (mediation, arbitration, or litigation), the venue (your preferred jurisdiction), the governing law, and who pays attorney fees. For most business contracts, a stepped approach (negotiation, then mediation, then arbitration or litigation) provides the best balance of efficiency and protection.
For comprehensive contract guidance, schedule a consultation with our contracts practice. Investing in proper contract drafting is one of the best ways to protect your business from lawsuits.
About the Author
Michael A. Zara is a business law attorney with nearly 20 years of experience, serving clients nationwide from Denver, Colorado. He holds a J.D. from the University of Denver Sturm College of Law and a B.S. in Accounting from Arizona State University.
Learn More About Mike Zara