How To Avoid Getting Trapped In A Bad Contract
Sometimes, I’m really left scratching my head after reading about major, multi-million dollar business contracts.
“Huh? How could that be? Why wouldn’t they have a clause to cover that?”
Contracts that don’t seem to cover the ‘What ifs…’ leave me particularly puzzled. Though, I am a love of contingency plans – so perhaps it isn’t second nature to everyone else.
When a business relationship or the business climate changes, contracts can fall short when it came to defining the process for re-negotiating or the responsibilities and liabilities for the party that decides to walk away. It isn’t surprising that a market proves to be more dynamic than a contract – and that can happen to businesses of any size.
As an indie business owner or entrepreneur, you shouldn’t feel trapped by any of the contracts that you’re asked to sign. Sometimes business changes – and your contracts should provide you with the flexibility to make adjustments as needed. A contract with protection + flexibility? Sweet.
Here’s my take on two types of clauses that can help you prepare for the ‘what ifs…’ and create a contract that can react to your dynamic and growing business.
Re-negotiation Clause: “We need to talk…”
A re-negotiation clause provides an opportunity for the parties to have the tough talks that come along in any relationship. Performance issues, communication issues, even discussions on whether or not both of their business visions and strategies are still aligned can be brought up during these re-visits to the contract. A re-negotiation clause will typically outline:
- How the opportunities to re-negotiate are identified (once a year? For every $10,000 growth in business? $1M in business?)
- How the opportunities to re-negotiate are executed (formal written notice of intent to re-negotiate? Proposal submitted in advance? How long can negotiations last?)
- What qualifies as an adequate reason for re-negotiation (a certain percentage change in a cost-driver? A drop in sales of x dollars?)
- What happens if the re-negotiation cannot be resolved (back to status quo? Option to terminate?)
A great example of when you would love to have a re-negotiation clause is for when the project scope starts creeping outside what you originally quoted a client. A short and sweet paragraph in a contract can set the stage for you re-opening discussions on rate, timeline or deliverables, so that you don’t end up at a loss because of the project’s expansion.
Termination for Convenience Clause: “I’m just not that into you anymore…”
Introducing a Termination for Convenience clause is a great way to set the parameters around what happens when one of the parties decides that they no longer want to continue the business relationship. This language can even be linked to the re-negotiation clause as a ‘what if we can’t agree in the new negotiation…’ solution. This section will usually outline:
- How much warning needs to be given (a 1 year heads up? 6 months? This will need to be long enough to allow the injured party to make other arrangements, but not so long that the other party loses all agility)
- What penalties will be paid (a certain percentage of the projected revenue? Coverage for lost profit? Flat-value penalties for early termination? These aspects are covered in consumer contracts – think of the gym membership and cell phone contracts you’ve signed – and also work well in B2B contracts)
- Restrictions that the exiting party must abide by (exiting firm prevented from entering business with a direct competitor for a set period? Limitations on hiring staff away? Setting some ground rules about what is and isn’t appropriate can save hassle and legal action later on.)
Let’s face it – some people and businesses and fickle. One minute you’re their favourite designer/developer/coach and the next, they’ve found some hot new number to replace you with. What happens if they cancel? Having a clause that details what the cancellation policies are is important to protecting the work and investments you’ve already made.
This article isn't intended to be legal advice, as I'm not a lawyer or legal professional. I recommend seeking the advice of a licensed attorney.