5 Contracting Pitfalls To Avoid

6.18.2015, Written by Annie Wang
Attribution: ITLA image
Attribution: ITLA image

When running a business, having clear and written contracts can prevent a lot of headache and heartache. For solution providers, whose customer relationships increasingly depend on long-term service arrangements, having the right contracts in play is non-negotiable—it is a must.

In a world rife with technology and a country hungry for lawsuits, it’s important to take care you don’t agree to something you didn’t mean to, over-promise or enter into a contract inadvertently. Such missteps can lead to conflicts, claims and compensation to an aggrieved party.

Well-written contracts that are fully executed will help protect your interests, especially when third parties you can’t directly control are involved (which is often the case with IT services agreements). Here are five contracting pitfalls to avoid:

1. Exaggerating or misleading the customer: Don’t engage in sales puffery, because it will get you in trouble. Specifically, you want to avoid exaggerating your capabilities or misleading the other party during contract negotiations. Whatever you tell a customer during negotiations, make sure the contract backs it up. If you say your cloud service is bulletproof but the contract notes no guarantee of security, not only will a perceptive customer call you on it, but you could be forced to pay compensation for false claims if the contract is signed and executed.

2. Signing pre-contractual documents: When negotiating a contract, especially larger agreements, you may be asked to sign a summary of the main terms. This pre-contractual document goes by different names, including term sheet, letter of intent (LOI) and memorandum of understanding (MOU). Though not legally binding, it could create legal and moral obligations if you sign it, so don’t sign it before speaking to your attorney. Remember, as soon as you put your name on it, you are effectively giving your word and staking your reputation on it.

3. Entering into a contract inadvertently: It might surprise you to know that it’s possible to enter into a contract inadvertently by agreeing to something through email or the phone. Under the federal and state electronic signature laws, you don’t need to put a pen to paper for an agreement to be binding. To prevent this, be clear in your communications that you are not entering into a contract by means of that communication. To help clarify that negotiations are ongoing, mark all correspondence “subject to contract” or “not legally binding.”

4. Preventing employee and customer poaching: Technical talent can be so hard to find that a company you do business with may try to steal your employees. The best prevention against poaching is being a great employer, of course, but that isn’t foolproof. If the other party in a contract has access to your company’s employees, consider asking them to sign a non-solicitation agreement. The same goes for protecting your customers against third parties that may want to poach them.

5. Sharing business-sensitive information with third parties: Disclosing certain types of information such as personal data about customers and employees with third parties may be unlawful. Consult with an attorney who can guide you through what is permitted. In some cases, signing a confidentiality agreement is necessary. Also consider whether the third party truly needs the information or is simply on a fishing expedition.

Keeping these common pitfalls in mind—and taking care to avoid them—will go a long way in helping keep your business free and clear of unnecessary contract disputes and legal woes. Channel partners who approach each negotiation with equal measures of clarity, honesty and caution, stand a better chance of cultivating long-term relationships protected by solid contracts.


Contributed by Dan Liutikas, Chief Legal Officer at CompTIA and Managing Attorney at ITLA