Sign here, suffer later: How businesses can steer clear of contract traps

You got the deal at last. It's the one that will make your company thrive. When the client sends you a contract, you're so excited to get started that you sign on the dotted line, ignore the fine print, and get to work. After six months, the relationship has soured, you've been hit with unforeseen penalties, and all of a sudden you're locked into a deal that you can't escape.

For many small business owners in South Africa, this is their reality.

It's easy to seize the chance and put the paperwork off when you're eager to get your business going. Contracts, however, are enforceable legal documents that regulate how things proceed when things go wrong. They are not merely formalities.

We frequently work with well-meaning business owners who have put themselves in a difficult situation because they signed without fully comprehending the legal ramifications. A contract is about the contractual relationship, not just the business relationship. It covers everything from how you get paid to the procedure for resolving disputes.

Do you think you can simply tell a judge that you didn't read that part? Be careful, You are bound by it if you signed it without reading.

Be it a service-level contract, a lease, a supply agreement, or your cousin's "standard template," you must be aware of what to look for before signing a contract. 

Here's ten useful things to watch out for that may not seem significant right now, but will be crucial if a good deal goes south.

Don't depend on the relationship:

It's simple to believe that the contract won't matter because you trust the other party. Relationships, however, evolve. Individuals depart. Companies are sold. Contracts are mostly used when things go wrong, not when things are going well. The document you signed, not the assurances you heard, is your backup.

Caveat subscriptor - you get what you sign:

It is presumed by South African law that you have read, comprehended, and agreed to the terms of a contract once you have signed it. This includes the shady details that are concealed in fine print. Unless fraud or egregious injustice can be proven, courts will not save you from your own signature, and even then, it will be a difficult fight.

Examine non-variation and waiver provisions:

These provisions state that unless both parties agree in writing, the contract cannot be altered. Therefore, it is meaningless if someone later verbally agrees to something different but it is not documented. The same is true if you overlook something once; unless there is a waiver clause that states otherwise, you might still be able to enforce it later.

Clearly state any violations or cancellations:

What precisely qualifies as a breach? How can I cancel? Do you have to wait seven or thirty days and provide written notice? If you fail to make a payment, can the other party cancel right away? When things go wrong, you must know how to activate the exit rules.

Recognise indemnities:

This one is significant. By requiring you to pay for losses, damages, or third-party claims, an indemnity clause can transfer a significant amount of risk onto you. Even if you did nothing wrong, you could still be held accountable. Pay close attention to these clauses and object if they seem biassed.

Recognise who is responsible for any damage or loss:

Find out who is responsible for the risk during delivery, storage, or transit if you are delivering or receiving goods. If the contract states that you assume all risk as soon as the goods leave the other party's warehouse and they arrive damaged, you're in a bad spot. You will still be required to pay.

Pay attention to the jurisdiction clause:

Where legal disputes must be settled is determined by this clause. You're in for a rough ride if the contract stipulates that disagreements must be arbitrated in Cape Town, but your company is located in Pretoria. Unless you're comfortable travelling across the country (or abroad) to defend your position, you should always aim to keep jurisdiction close to home.

Keep an eye out for hidden notice periods and automatic renewals:

Auto-renewal clauses are slipped into some contracts. The contract will renew for another year if notice is not given in a timely manner, which is typically 60 or 90 days prior to the end date. On the day you sign, always note cancellation windows in your diary.

Examine interest clauses and terms of payment:

Verify the due date, the trigger (invoice, delivery, acceptance, etc.), and the interest rate associated with late payments. Contracts frequently contain automatically accruing penalty interest. Avoid being taken by surprise.

Safeguard your intellectual property and privacy:

Make sure the contract contains appropriate confidentiality clauses if your company deals with proprietary concepts, trade secrets, product designs, or client information. The other party can take your expertise away without them. Additionally, keep an eye out for deceptive intellectual property clauses that claim that anything you produce, even if you weren't compensated for it, belongs to the client. From the beginning, safeguard your software, designs, content, and brand.

The take home:

Contracts are there to safeguard your rights in the event that the deal doesn't work out, not just to get the deal done. Avoid signing in the dark. Seek guidance if you are unsure of the meaning or implications of a clause. A three-year lawsuit is more expensive than a one-hour consultation.

It is possible and desirable for small businesses to engage in negotiations. The majority of contracts are not final offers, but rather beginning points. Push back if it seems unfair. No matter how attractive the opportunity appears on paper, you have the right to leave if the odds are stacked against you.

Van Zyl Scheepers Attorneys assists  businesses in avoiding problems and negotiating more effectively. Give us a call if you need assistance reviewing a contract or if you want to ensure that your standard terms do not result in legal action. We've got you covered.