While it may not seem that way, we enter contracts every day of our lives. For example, when shopping online or in person, a contractual obligation is made between the buyer and the seller, wherein they agree to pay for the products or services they provide. However, while some contractual obligations are informal, many are not quite so simple. That is why proactive contract management is so important when running a business.
What are the dangers of poor contract management?
Whether they are dealing with collaboration agreements or licensing agreements, poor contract management can quickly lead to trouble for business owners. For example, if they are unfamiliar with legal jargon or do not read the fine print, they could find themselves caught up in a contract that does not work in their best interests.
While this can lead to a wide variety of complications, poor contract management could mean that they are bound to unfavourable terms (such as payment plans) that they are contractually obligated to uphold. This, in turn, could have an impact on the company’s long-term financial health and success.
How to identify and mitigate risks before signing a contract.
Proactive contract management plays a key role in mitigating risks. After all, it allows business owners to identify potential complications ahead of time so that they can re-negotiate terms before signing the contract.
Identifying potential risks
When looking over contracts, business owners should keep an eye out for the following risks:
Legal risks. Poorly drawn-out contracts could lead to legal risks when regulatory compliance is not taken into account, therefore exposing signers to a potential litigation case further down the line. While this varies depending on the nature of the contracts, legal trouble can put a business on the path to closure.
Security risks. Security risks are often unaddressed in contracts. For example, when proper procedures for protecting data are not outlined or discussed, this could mean that a businesses’ day-to-day practices are not up to scratch. This, in turn, could bring forth significant consequences should a data leak take place. When drafting or signing contracts, ensure that any potential security issues and risks are not only identified but that there is a clear plan in place to prevent them.
Reputational risks. Business owners are also advised to take reputational risks into account during the contract management process. This is largely based on the public perception or response to the work they are carrying out or the work/reputation of any potential collaborators.
Financial risks. Financial risks refer to any elements of the contract that could land the business in financial trouble or harm its bottom line.
Mitigating potential risks
Fortunately, there are plenty of steps business owners can take to mitigate risks in contracts of all kinds, from influencer agreements to confidentiality agreements (NDAs). They should:
- Familiarise themselves with the common terms or phrases that appear frequently in contracts so that they are able to understand what they are agreeing to.
- Read any contracts that they are given carefully, keeping an eye out for any potential risks, confusing language or unclear terms.
- Work with professionals, such as contract drafting solicitors, to ensure that contracts are not only compliant but working in their favour.
- Re-negotiate the terms of the contract when necessary, ensuring that their best interests are protected throughout.
- Never sign a contract that they do not understand or are not 100% happy with.
Final thoughts
Whether they are drafting contracts on behalf of their business or collaborating with another business owner, effective contract management is crucial. While this may seem obvious, a recent study from the University of Law found that 68% of people “either do not read or do not understand the contracts they sign.”
This means that business owners should prioritise proactive contract management moving forward. A lack of understanding is not an excuse for not properly reading contracts, especially when the consequences of poor contract management can be catastrophic.
Whether they are drafting contracts independently or have been handed a contract by a potential collaborator, they should be sure to read every last sentence. If there is a clause they do not understand or do not agree with, bring this up during the negotiation process. Again, working with a contract drafting solicitor is key during this stage, as it can help ensure that their best interests are protected.
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