Five common contractual mistakes and how to avoid them
Drafting contracts that are robust when you’re a self-employed freelancer working with different clients is essential.
If anything unexpected happens, such as a client refusing to pay you for the work you’ve carried out, your contract is there to protect you as well as your relationship with the client.
When a contract goes wrong and a relationship with a client goes off the rails, everyone suffers and resolving a dispute can be stressful, time-consuming and expensive.
In this article, we will provide you with some tips on how to avoid five of the most common contractual pitfalls and keep things on track with your clients.
The sections we'll cover include:
1. Get it in writing
2. Prepare for the worst
3. Scope: less is more
4. Limiting exposure
5. How insurance can help
1. Get it in writing
The first area where mistakes are most commonly made with client relationships, is in failing to set out the contract clearly in writing.
That might be a total failure to get anything in writing, or it might be that only some of the terms have been committed to writing.
While contracts do not have to be in writing and an oral contract can be just as enforceable, without being written down, there is potential for ambiguity.
Where there are grey areas, there is room for more than one interpretation of your intentions. Grey areas can be reduced if expectations are set down in writing. Inevitably, both you and your client will approach any ambiguities within a project with your own interests in mind.
Given this, clear expectations are key to a successful project and the best way of ensuring these are in place is to set out each parties’ rights and obligations as clearly as possible in writing, before work begins.
If it’s not in writing, you run the risk of the other side denying that a term was agreed, at which point you are asking a Judge to decide which version of events they prefer.
A contract written in plain English and with terms kept as simple as possible is often best, as long as it covers the important points.
You can access template contracts to use as a starting point on the Markel Law Hub.
Key terms to include in your contract:
• How much time are you expected to dedicate to the project? Is there a minimum number of hours you have to work daily, weekly or monthly? Are there core hours you have to be online, or do you have complete flexibility as to what time of day, and what days, you work? Even if you think you have agreed these terms orally, get these confirmed in black and white.
• What are you delivering? Where necessary, make sure that the specification has been properly scoped and that both parties know and agree on those areas where elaboration is going to be required further down the line.
• How are you to deliver the services? How often do they want you to be on site? Are you allowed to be on site when it suits your personal circumstances, or do you have to get their prior permission to come in?
• What are the delivery dates? Is this a hard deadline or is it aspirational? In legal terms, is time for delivery of the essence? If it is, this means that if you miss the deadline, even if only by 10 minutes, you are in material breach of the contract and the other side can terminate and claim damages, which may be extensive. Where possible, you don’t want time for delivery to be of the essence.
• How and when will you be paid? What do you need to give them for payment to be processed? Is there an automated system you have to use? Is there a time limit by which you have to submit timesheets or expenses. If the process is set out in a document already then you can refer to that by name and don’t have to repeat everything in the contract, however it’s best to have the process understood and flagged somewhere to reduce the risk of issues further down the line.
Common reasons for written contracts not being in place include:
• There being an urgency to get going on a project.
Sometimes, putting a contract in place is perceived as delaying work. Given that a written contract could be as simple as an email from you to the client saying, ‘this is what you have asked me to do and this is how we have agreed I will do it’ followed by a series of bullet points, to which the client then responds with the word ‘agreed’, a contract doesn’t need to delay a project.
If you have had to start work before there is a written agreement in place, do make sure that there is some form of heads of terms and that a full written agreement follows as soon as possible. Even if it is agreed on day 7, it can still be stated to have retrospective effect from day 1 so that you won’t necessarily lose any protection by putting an agreement in place after the event.
• Having a personal or long-standing business relationship with the client.
Many of the disputes the team at Markel Law see are between former friends or close business associates. A written contract should be seen as a way of preserving a good relationship, rather than a sign of distrust. By setting out the parties’ expectations for one another clearly at the outset, you can significantly reduce the risk of a falling out further down the line.
2. Prepare for the worst
While no-one goes into a contract expecting that it will fail, it is still important to give thought to how it might come to an end earlier than intended.
Key things to consider include:
- What will your client have to do to trigger your right to suspend or terminate the contract?
- What do you need to be mindful of avoiding, so that they don’t have right to terminate early?
A good way of approaching this is to think about how a particular project could go wrong. In those circumstances, who should have what rights as a result?
Some of these will be the same for every project. For example, if you aren’t paid for a particular period then unless you have a clause to say that you don’t have to keep working, you may be required to continue performing without any guarantee as to when (or if) you will be paid.
If you aren’t paid on time, is there any additional recompense for this, such as interest or late payment charges? Where you are engaging with a business who doesn’t pay on time, the default is that you are entitled to interest at 8% and a fixed amount per overdue invoice. The amount varies based on the value of the invoice and ranges from £40 to £100.
Other scenarios may be quite project specific, like if there is a particular output that you are delivering and there is a dispute about the quality of your work, how should that dispute be dealt with? For example, a third party might be appointed to decide who is right. Should you be paid for any undisputed work, or can they withhold payment for that as well?
In other situations, you might be relying on the client’s co-operation to deliver a project but find that they won’t answer your questions in a timely manner. To help with this, you could look to include a clause that says that the client will provide whatever it is that you need in a timely manner, be that feedback, resources, sign-off or something else.
This could state that a response must be given in a set number of days, or something like ‘a reasonable period’. It’s best to state a set period of time where possible. If they don’t then comply, you may be able to walk away without any repercussions.
Make sure you’re aware of whether your client has a right to terminate at will and if so, what the notice period is. Consider whether the notice period offered is going to be enough for you to find replacement work. Even if you aren’t able to renegotiate them, understanding what your client’s standard terms say about these things could be vital to your cashflow.
As a contractor, you may be bringing to the table some of your own know-how, software, designs, confidential information, processes or other property in which you have Intellectual Property Rights. Unless there is a separation of background and foreground IP, then any existing IP used may not be carried forward by the contractor.
How is that to be dealt with if there is a parting of ways? Consider whether they will have an ongoing right to use the item and whether you’ll receive a licence fee if so. As far as you can, it is important to protect anything that you enter the project with and to try to separate that from the work product that is being developed.
3. Scope: less is more
Another way in which contracts can go wrong is when you start completing additional work for ‘free’. While there are occasions when this can successfully appease a client and help get a project over the line, there are many times where this can cause problems.
If you have a difficult client who is always wanting more, there is a good chance that if you give them an inch, they will try to take a mile and that extra work without charge will simply spur them on to hold out for more and more.
At the start of the project, agree a scope for what is to be delivered. Define project deliverables and have a process outlined for change requests when these do arise. Doing so is an important way of managing client expectations early on.
Even more important though is that where you have agreed what you will do and by when, stick to this as much as possible. If you need to deviate from it, document the reasons for this as you go and press for the client to acknowledge them as changes in writing. Ideally the client should also be paying for the additional work.
Minimising scope creep can be key to managing the client’s realistic expectations and avoiding a dispute later down the line.
4. Limiting exposure
Disagreements are inevitable in business. Some of them will give rise to disputes, no matter what you do to reduce the risk of this happening. There are however plenty of things that you can do ahead of time to reduce the risk of those disputes arising in the first place and limiting your exposure where they do.
This starts with not overselling your skill set at the outset. Everyone puts their best foot forward in their CVs, but you need to be able to deliver against what you say you can. Not being able to do something you said that you could is likely to result in termination of the contract and a claim against you for damages for misrepresentation.
If you have deliberately lied, then that could also invalidate any insurance. This could leave you having to pay legal costs of your own and to make a payment to the other side in respect of damages and its legal costs.
If you get part way through a project and find that you are out of your depth, one option might be to sub-contract the work, or appoint a substitute. These are useful clauses to have in your contract, particularly if you don’t need the other side’s consent to do so (or else if they have to agree to any reasonable request that is made).
Limitation of liability is also an important consideration and you should look to include wording in the contract to give you some protection if you are later found to be in breach.
Trying to exclude everything risks leaving you with no protection at all. There are certain things that you can never exclude liability for (such as death as a result of negligence) and if you don’t make clear that any exclusion clause does not apply to these situations, you risk the whole clause, or even the whole contract, being found void. Don’t get greedy then, but do seek to exclude certain types of losses that the customer could suffer such as loss of profits, loss of data, loss of reputation etc, and place a cap on your overall liability under the contract. Don’t forget, if your insurance cover is for less than the limit of liability under the contract, you would be responsible for any sum awarded above the policy limit of indemnity.
There is also the danger that by reducing your contractual risk, you might end up falling foul of IR35 legislation, which could vastly reduce the sums you take away from a project. There is then a balance to be struck and it is worth getting professional advice on this.
5. How insurance can help
One way of protecting yourself from contractual risk is to take out insurance.
Professional indemnity insurance provides cover for claims alleging negligence or breach of contract. Other claims that might arise include breach of confidentiality and breach copyright. Subject to any excess, the policy will cover the legal costs of investigating and responding to allegations, as well as meeting any damages that are payable to the claimant.
Claims relating to poor workmanship are often raised to avoid or delay payment. These types of claims can take on a life of their own and evolve over time.
No matter how spurious or cynical they appear, these claims have to investigated and responded to, wasting more management time and effort.
Commercial legal expenses insurance includes contract dispute cover and debt recovery of unpaid invoices. This is often used to diffuse situations where the policyholder cannot afford to write off an invoice, but will inevitably be met with a larger counterclaim if it pursues the matter.
What should I do if a contract dispute arises?
For Markel Direct customers, our 24-hour legal advice helpline should be your first port of call when your start having issues with a client. In many cases, the solicitors on hand will be able to quickly resolve the issue before it escalates further.
Having an insurance policy in the background brings with it the peace of mind that where an early resolution is not possible, you will receive legal support at no cost to you.
To find out more about our Commercial legal expenses insurance, or to get a free quote, click here.
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