#240 What a bad contract looks like
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If you have been around here for a while, you have heard me say it more times than you can count. Prevention is better than cure and there is no substitute for preparation.
I talk a lot about contracts, documents and the power they can deliver when they are done properly. I also talk about why I care so much, because I spent the first part of my career as a litigation and disputes lawyer, stepping in when things had already gone sideways. So many of those situations could have been avoided if the right advice and the right documents were in place earlier.
What I have not done until now is spell it out plainly. What does a bad contract actually look like?
That is what we are doing in this article and I am going to approach it through two lenses. First, the legal lens, which is what most people expect. Then the business lens, which is where a lot of contracts quietly fail even when they are technically “fine”.
The Legal Lens: The Red Flags That Make A Contract Dangerous
When most business owners think “bad contract”, they think no contract at all, or a template. And yes, no contract is a bad contract. Templates are also incredibly risky as they are not customised appropriately to your business.
But there is another category that catches people out. Contracts that look impressive, sound official and still miss the clauses that matter. This is where AI-drafted contracts often fall down. They can read well, but they often skip the practical protections that small businesses need.
Here are the most common red flags I see.
Red Flag One: The Two Page Contract
If you ever see a one or two page contract and it is meant to cover a real service, a real project, or a real client relationship, treat that as a warning sign.
Years ago, I used to have business owners ask me to draft a contract but “keep it to two pages”. My answer was always no, because there are no prizes for the shortest contract. Two pages cannot realistically cover what needs to be covered legally.
To be clear, I am not saying you need a 60-page document full of legal jargon that nobody reads. You do not. But two pages is usually a sign that something important is missing.
Red Flag Two: No Clear Scope Or Deliverables
A bad contract is vague about what is being delivered.
If someone reads the agreement and still cannot tell what the service provider is doing, what the client is receiving and what is included or excluded, you are setting yourself up for misaligned expectations.
Sometimes contracts link to a proposal or quote, and that can work well. The key is that the wording needs to tie everything together properly so there is no confusion about what the scope actually is.
Red Flag Three: Missing Or Vague Payment Terms
Payment terms should never be left to assumptions.
A bad contract is unclear about deposits, milestones, invoicing, due dates and what happens if payment is late. That lack of clarity can be fatal for a small business because it creates room for delays, disputes and awkward conversations you should not have to have.
A good contract makes payment expectations clear for both parties, including what happens if invoices are not paid on time.
Red Flag Four: IP Ownership That Is Silent Or Inadequate
Intellectual property is one of the most common gaps I see.
A bad contract either does not address IP ownership at all, or it addresses it in a way that is too thin to be useful. It does not deal with background IP, licences, or who owns new IP created during the engagement.
If you create frameworks, processes, content, designs, or anything that has value beyond one project, you need clarity on what stays yours, what transfers, and what the client is allowed to use.
Red Flag Five: Termination That Is Missing Or Useless
Termination clauses matter more than people realise.
A bad contract has no termination clause, or it has a one-liner that does not actually help anyone. A good contract is intentional about how either party can exit, including what happens if there is a breach and what happens if someone simply needs to end the agreement because circumstances have changed.
I always say you need an exit strategy whenever you enter into anything. Contracts are no exception.
Termination also needs to be fair. If a termination fee is really a penalty, that can create problems, including unfair contract term issues.
Red Flag Six: Auto Renewals With No Opt Out
Auto-renewal clauses can be a trap when drafted poorly.
If a contract says it will automatically renew with no notice and no real opt-out, that is a problem. You cannot shift all responsibility onto the client and pretend the business has no obligations around notice and fairness.
Red Flag Seven: No Dispute Resolution Clause
This one is big.
A bad contract has no dispute resolution clause, or it has one that is so vague nobody could follow it. A properly drafted dispute resolution clause can stop a disagreement from turning into legal letters, court action and a huge amount of stress.
It is designed to bring people back to the table, have a proper conversation and try to resolve things in good faith before it escalates. Even if the relationship cannot be repaired, it can help both parties exit cleanly and move on.
Red Flag Eight: Silence On Confidentiality And Data Handling
We are in a world where privacy matters and clients are paying attention.
A bad contract is silent on confidentiality and data handling. A good contract builds trust by making it clear how information will be treated, and it usually ties back to the business’s privacy policy so the client can see what the business is committing to.
A Bad Contract Can Become Bad Over Time
Here is the part business owners often miss.
A contract does not have to be “bad” on day one to become bad later. Growing businesses often outgrow the documents they started with. The business changes, the offers evolve, the risks shift and the contract stays stuck in the past.
That mismatch is a problem, even if the contract once worked fine.
The Business Lens: When A Contract Is Legally Fine But Still Fails You
Now let’s talk about the contracts through a business lens.
You can have a contract that technically includes all the right clauses, and it can still be a bad contract for your business because it is not on brand.
If your agreement feels like a boring 60-page slab of legal jargon, it creates friction. Clients do not want to read it, and you do not feel good sending it. That matters.
In my view, contracts should look like your business and sound like your business. You should feel proud and confident when you send them. They should integrate into your processes, match your proposal language, and create a consistent experience from first enquiry through to delivery and offboarding.
When your contract supports the whole client journey, you are not just protecting yourself legally. You are setting expectations clearly, building trust and making it easier to deliver a great experience that leads to repeat work, referrals, and reviews.
What To Do Next
Pull out your client agreement and read it like a client would.
Ask yourself two simple questions. Does it feel like your business, and does it serve the business you have now, not the business you had when you first put it in place?
If the answer is no to either, take that as your nudge to get it reviewed.
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[00:00:50] Tracey: If you're a longtime listener of the podcast, you have no doubt heard me say time and time again, "Prevention is better than cure, and there is no substitute for preparation." [00:01:00] And I talk so much on the podcast about contracts and your documents and the power that they can deliver and the importance of getting them right And I share with you the reason that I'm wedded to that.
[00:01:14] I share with you insights and real-life examples of clients that I acted for earlier in my career as a litigator and a dispute resolution lawyer, and I share with you so many things that could have been avoided if clients had have had the right advice or the right support in place.
[00:01:32] What I haven't shared with you, though, is what a bad contract actually looks like. So you can certainly take away from all of the things that I share, what they need to have and, and what's missing in a particular example. But I haven't actually gone through point blank and said to you, "This is what a bad contract looks like."
[00:01:51] That's what I'm going to do in today's episode. It's occurred to me that because I talk so much about the frameworks and the prevention being [00:02:00] better than cure and what you need, it's occurred to me that it would be really helpful if I just stepped you through what comes so easily to me, because I see it all the time, what constitutes a bad contract and why.
[00:02:12] So let me dive in and do that. I'm going to approach this episode in two parts. first through the legal lens. So I'm gonna talk to you about a bad contract legally. But like everything I do, I have a holistic approach to my work, and I have a holistic approach when I work with my clients. So I'm going to then spend some time talking to you about bad contracts through the business lens, which can often be very different.
[00:02:36] Stay with me, I'll get to that in a moment. But first, let's dive in legally. So when business owners think about contracts and bad contracts, the first thing that usually comes to mind is no contract at all or a template, and yes, that's absolutely right.
[00:02:50] No contract is a bad contract. We need contracts. a template, well, you'll deduce for yourself after listening to this why I don't think templates are [00:03:00] appropriate for legal documents
[00:03:01] But they're also contracts that can look good and look impressive, but they miss the critical clauses, and you know it. I'm talking about AI-drafted contracts. So do I think AI-drafted contracts are good? no, I don't think AI-drafted contracts will serve business owners for the reasons that we're going to talk through, because they often miss the key things, the really important things. let's dive in. Here are the key things that I say will create a bad contract. One, a two-page document. Short and sharp, one or two-page document. My goodness, I can't tell you the number of times earlier in this business, certainly not now, but earlier in this business, so about six or seven years ago, small business owners would reach out to me and say, "I'd like you to draft me a contract, but I only want it two pages."
[00:03:49] My answer would be, "No, I'm not the lawyer for you, but let me explain why that doesn't serve you." Because one, you're sending a message that you either don't understand what needs to be in your contract or [00:04:00] that you don't care, because there are no prizes for having the shortest contract, and there is no way two pages can cover everything it needs to legally.
[00:04:08] So it's bad from an optics perspective. It's bad from a legal perspective. That said, I'm not suggesting we need to have a 60-page document drafted by some boring lawyer from the '60s that's gobbledygook and no one's going to read it. That is absolutely not what I'm saying. I'm just saying two pages won't do it.
[00:04:27] That is the first red flag. If ever there was one, it's that one. Two, a contract that doesn't have clear deliverables or a clear scope, or there's no way of knowing from reading the agreement what it is that you're asked to do, or what it is that the service provider or the provider is being asked to do.
[00:04:48] Sometimes contracts can link back to a proposal or a quote. Excellent. No problem with that, but the wording needs to work so that it ties in nicely and you can have absolute clarity over [00:05:00] what the scope of work and the deliverables are under this contract. A bad contract doesn't have that. Next one is payment terms, either missing payment terms or vague payment terms so that you're not really clear when payment is expected and what happens if you don't pay. The lack of clarity around payments can be fatal for a small business. So there needs to be clarity around deposits, invoices, milestones, when the invoices are to be issued, when payment's expected, what's to happen if they're not paid, can interest be charged?
[00:05:33] All of the things we need clarity around the payment terms. It should not be left to assumptions, and it should not leave either party confused. The next one is IP ownership. Now, a bad contract either won't address IP ownership or it will be inadequate, and it won't deal with the really important things like background IP, who owns it, licenses over who owns IP and who's permitted to use it, or the ownership of new IP that's created [00:06:00] in a client engagement.
[00:06:01] So a bad contract will be really inadequate when it comes to dealing with your, your intellectual property, your IP
[00:06:07] Termination. A bad contract won't have a termination clause, or it'll have a one-liner which is really unhelpful. There needs to be some serious thought given to termination for a contract to be good, and that means termination in circumstances of a breach by either party, a breach of the agreement by either party, termination for no cause, so something's changed and, and a party doesn't wish to continue.
[00:06:32] That can be the client, they've had a change of circumstances, or it can be you. You really don't want to continue working with this client, they're not aligned, and you'd like to set them free to work with somebody who is aligned, which is a win-win. But termination needs to be intentional, and it needs to address that.
[00:06:50] So I always say to clients, "You always need an exit strategy whenever you're entering into anything," and your agreements and your contracts are no exception to that. How do you get out? [00:07:00] What is the lever that can be pulled if you need to exit, whether you're the provider or the client? The termination is really important. Will there be a reasonable and necessary termination fee which is legitimate to protect the interests of the business? Can't be a penalty. That's an unfair contract term. So having a penalty in a termination clause is a component of a very bad contract because you can't have unfair contract terms.
[00:07:27] So you can see the complexity around termination and why it needs to be intentional so that it is clear, and so that you can manage expectations regardless of which side you're-- of the fence that you're sitting on when you need to exit a contract. So a bad contract will be really inadequate when it comes to termination
[00:07:44] Extending from termination is auto renewals. If the contract has an auto renewal clause and doesn't give the other party an opt-out and says that no notice will be provided, it will just automatically renew, that is a bad contract.
[00:07:59] [00:08:00] Part of that would be an unfair contract term, so unlawful, not allowed to do that and you must give notice. You must have an opt-out if somebody decides they don't wish to continue. So bad contracts deal with auto renewals, trying to take the obligation and the responsibility off the business owner and putting it all onto the consumer or to the client, and you can't do that.
[00:08:20] The next one is big. As a former litigator, as somebody who has spent many, many years acting for clients in court involved in disputes or litigation, the importance of a dispute resolution clause cannot be overstated. A bad contract won't have a dispute resolution clause at all, or it'll have one that's really wishy-washy and no one really knows what it means.
[00:08:45] In my experience, a properly drafted dispute resolution clause can be such an important mechanism to avoid the parties ending up in court or to avoid somebody running off and lawyering up, and then you start getting legal letters. We don't need to [00:09:00] get there. A dispute resolution clause is designed to bring the parties to a table to use their words, be adults, let's have a conversation to resolve the issue before things turn so sour.
[00:09:11] Ideally, the conversation to be had in relation to misaligned expectations or a fractured relationship so that the matter can be resolved and the parties can move on smoothly and successfully without sabotaging the agreement or fracturing the relationship. And even if that can't be achieved, and even if the relationship has fractured to allow the parties to move on peacefully, the dispute resolution clause is really important because that's a mechanism that will require the parties to engage in those good faith discussions or even a mediation before ending up in court.
[00:09:42] Trust me, you want that. So a bad contract won't have that, or it'll have one that no one can understand, so they're certainly not gonna follow it And the last one that I want to share is a contract will be bad if it's silent on confidentiality and data handling. [00:10:00] We're in a world where privacy is a thing.
[00:10:02] There is the privacy legislation. People are becoming increasingly educated around what they are entitled to know about how a business will treat their data, their personal data. So a good contract will deal with confidentiality to build trust and credibility with the client so that the client knows that they can trust them, and I'm happy to talk to you about my things.
[00:10:22] A good contract will also deal with privacy. What it'll often say is, "We're aware of the privacy legislation. We know we've got obligations, and we're going to treat your data in accordance with our privacy policy, and you can grab that on our website." That's what it should say, something like that. A bad contract will be silent on those things.
[00:10:41] So you can see that it was very easy for me to come up with my very long list of what makes a bad contract, but it's something that I am asked about when I talk to usually new businesses who are growing, who have said to me, "We've had templates in place and we haven't had them looked at for a long time.
[00:10:57] Can you come in? Can we engage you? Here's the [00:11:00] scope. We need everything reviewed so that we can make sure we're compliant and that our contracts are doing the, what we need them to do, and so that we can set ourselves up for our next stage of growth with our clients." So there's that type of conversation, and in doing that, I inevitably talk to them about what's a bad contract.
[00:11:18] I just hadn't shared it with you on here, which is the purpose of the episode. So I'm hoping that that's been helpful and that there's been some light bulb moments for you, and that I've been able to explain this in a way that's really digestible for you so that you can jot it down and you can have a look and go, "Right.
[00:11:32] Next time I'm going to enter into a contract, I'll either reach out to my lawyer to get it reviewed or I'll take a look. I'll look at these things, and if I've got some concerns or red flags, then I'll reach out to my lawyer to get it reviewed." The bad contract doesn't have to be bad at the beginning to be bad later.
[00:11:50] Like I say, growing businesses often reach out to me to ask for a review of a whole host of things, and then often we will stage it over a period of time because there often can be so [00:12:00] much. Because it may have turned bad because the business has outgrown it, because they've been through growth seasons and the documents haven't kept up, and so now all of a sudden they're realizing that the documents don't serve them.
[00:12:13] That can be a bad contract too. It's not just the clauses that are missing, but contracts that no longer serve. Keep that in mind as well. Now, at the beginning, I said I wanted to talk to you about two lenses here. What I've just shared with you is the legal lens, and I've shared that with you now, what makes a bad contract according to law.
[00:12:32] But I just want to take a moment holistically to look at the contracts through a business lens, because we could have a contract that ticks all of those boxes and says all of those things. So legally, yes, you'll be protected, but in my view, it can still not be suitable for the business And that's because it's not on brand.
[00:12:51] So when we're talking contracts, it doesn't have to be, like I said earlier in the episode, a 60-page document drafted by some boring lawyer, [00:13:00] and it's got so much gobbledygook and no one's gonna read it, and it feels awful when you send it. That in itself is a bad contract, even if it has all of those clauses that I've just shared.
[00:13:09] That's a bad contract because it shouldn't feel like that. In my view, and certainly for the businesses that I work with, we ought to be creating contracts and agreements that are on brand, that look like the business, that sound like the business, and so that the business owner, every time they send it out, they are proud and they are confident.
[00:13:31] That's what I create. That underpins the work that I do, is empowering those business owners. And often I'm surprised still, after this many years of doing this work, where a business owner says, "My gosh, I didn't know it could be that good. I didn't know we could include that. I didn't know I could have that."
[00:13:48] It can. It needs to feel right for your business, so that means it needs to be on brand. Absolutely. The language needs to be you. It needs to integrate into your processes and [00:14:00] systems. It's got to work for your business. So having the contract is one thing, but knowing how to use it and being really clear that you're covered is another.
[00:14:10] And so in the work that I do, I always spend time with my business owner clients on implementation. What is your process? How are you issuing it? Is it with a proposal? Is it for signing? Let's have a look. Let's look at that proposal. Let's make sure it's consistent. if that's the language you use, let me pepper that through.
[00:14:26] Let's make sure so that the touch point for your clients is really consistent all throughout their user experience, from when they've heard about you, when they've checked you out, they've spoken to you, they've received your proposal, they've got your agreement or your contract, you've delivered the services, you've off-boarded.
[00:14:43] It's all stellar. And what we're doing throughout that whole process is setting you up for success with your clients so that you're not just meeting their expectations, but you are exceeding their expectations, because that way we're setting you up for repeat [00:15:00] work, referrals, positive reviews.
[00:15:03] This is what we want as a growing business. that's the business lens, and I spend a lot of time there, believe it or not, when I'm developing contracts for businesses because I know what works, so I can definitely develop the legal side of things no problem. But the input from the business owner is so important to get that holistic contract that's on brand, that looks like the business, that sounds like the business, that the clients enjoy and expect, that works for the business, that integrates into their processes and systems.
[00:15:32] you can no doubt tell how passionate I am about this because I love this so much. My view here is that when done well, contracts for a business can be one of the most powerful tools that business has, both in terms of legal protections but also with their clients. Because you are setting yourself up for success with your clients, we want your clients to say a hell yes to working with you when they receive your contract, and we want to make sure that you are set up to [00:16:00] manage misaligned expectations, deliver beautiful services, and not just meet expectations but exceed them.
[00:16:06] That's the world we want to be in, and that's what I bring to the table when we develop contracts. So what does a bad contract look like? It looks like a boring 60-page piece of gobbledygook that some lawyer from the '60s has drafted which serves no one. It doesn't have the clauses we need. It doesn't have clarity around the scope and deliverables.
[00:16:27] It is not clear with payment terms. IP ownership is either not addressed or it's inadequate. There is no termination clause or one that doesn't really work. Auto renewals that spell danger for the business owner. No dispute resolution process, and it's silent on confidentiality and data handling. And all of that even worse in one or two pages.
[00:16:49] That's what makes a bad contract, my friend. So now you know when you receive something, you know what to look for, and now you know when you're looking at your documents, are they doing what they need to be [00:17:00] doing? So if there's one thing I could ask you to do when you finish listening to this episode and when you're next at your desk, take out your client agreement, take out your contract, take out your contracts that your business has.
[00:17:12] Take them out and have a look at them. How does it feel? Do they reflect the business? That's the first thing. And the second thing, when you read them, do they serve the business for where the business is at now? Not where the business was however many years ago when you got them in place, but do they serve the business for where the business is at now?
[00:17:32] If the answer is no to either of those, this might just be your little nudge that now is the time to get these documents reviewed, to have them developed holistically so they're doing all the things they need to do legally, and so they're setting you up for success from a business perspective. so that they are legitimately, hand on heart, one of the most powerful tools you have in your business.
[00:17:54] Thank you so much for listening. I appreciate your time. If you haven't left a review wherever you listen to your podcasts, I'd be [00:18:00] so grateful if you would take a moment to leave a review. It's really important for podcast hosts to increase our reach so that we can together get the podcast into the ears of even more business owners.
[00:18:10] Catch you next time.
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