Avoiding Legal Pitfalls: The 5 Biggest Contract Mistakes Entrepreneurs Make
Contracts are the foundation of any successful business. Whether you’re hiring employees, leasing office space, or striking deals with suppliers, having a solid contract in place protects you from unnecessary disputes and financial loss. Yet, many entrepreneurs make costly contract mistakes that can lead to lawsuits, broken agreements, and even business failure. Here are five of the biggest contract pitfalls and how to avoid them.
One of the most common mistakes is relying on verbal agreements. While a handshake deal may feel like a sign of trust, it rarely holds up in court. South African contract law generally recognises verbal agreements, but proving the terms of such an agreement can be nearly impossible if a dispute arises. Without a written contract, it’s your word against theirs. In business, always get it in writing, no matter how much you trust the other party.
Another major pitfall is using vague or unclear language. A contract should leave no room for interpretation. Every term, obligation, and right must be explicitly stated to prevent misunderstandings. Take the case of Natal Joint Municipal Pension Fund v Endumeni Municipality, where the court emphasised that contract terms must be interpreted with clarity and purpose. If a contract is too ambiguous, a judge may rule in favour of the interpretation that benefits the weaker party. The best way to avoid this is to ensure contracts are drafted in plain, precise language, leaving no room for loopholes.
Many entrepreneurs also fail to include dispute resolution clauses. Business disputes are almost inevitable, but dragging them to court is costly and time-consuming. A well-drafted contract should include a dispute resolution mechanism, such as mediation or arbitration, which can provide a faster and more cost-effective solution. The Companies Act allows for alternative dispute resolution, and including such provisions in your contracts can save you a legal headache down the road.
Another common error is neglecting to update contracts over time. Business conditions change, laws evolve, and what worked a year ago may no longer be relevant. If you signed a long-term agreement without reviewing it periodically, you may find yourself bound by outdated or disadvantageous terms. Smart business owners revisit their contracts regularly to ensure they remain fair and compliant with current regulations.
The final mistake is failing to conduct due diligence before signing. Signing a contract without fully understanding its implications can be disastrous. Before committing, entrepreneurs should verify the other party’s credibility, financial standing, and ability to deliver on their promises. A contract may look solid on paper, but if the other party has a history of breaches or financial instability, it could be a ticking time bomb.
Avoiding these pitfalls isn’t just about protecting yourself legally, it’s about building a business that operates smoothly and efficiently. Contracts should be your safety net, not a source of stress. By ensuring clarity, incorporating dispute resolution mechanisms, staying updated, and conducting due diligence, you can safeguard your business against costly mistakes. When in doubt, consulting a legal expert can provide the guidance you need to keep your contracts- and your business- secure.