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Top 3 Legal Red Flags in a Business Contract

By Christopher Coble, Esq. on October 20, 2016 | Last updated on March 21, 2019

Chances are, when you started your small business you couldn't have known just how many transactions would require contracts. And you certainly didn't get into business to read fine print all day. Still, certain contracts -- and even specific clauses -- can make or break your small business, so you need to know what you're doing.

No one can become a contract expert overnight, but there are some red flags to look out for when signing certain business contracts. Here are three of the biggest:

1. My Employee Invented It. Who Owns the Rights?

Given the amount of tech startups these days, chances are you're hiring a bunch of innovators -- employees you expect to bring new ideas and inventions to the table. But who owns the rights to intellectual property created on the company dime? Any good employment contract will address whether you can patent your employees' good ideas. So if yours doesn't specifically assign IP rights, make sure it does.

2. Is Your Non-Compete Clause Valid?

As more and more businesses look to protect their IP, non-compete clauses and non-disclosure agreements are becoming more and more common. The problem, though, is that not all agreements, and not all clauses contained therein, are always enforceable. You need to know the limits of any non-compete clause in a contract, and whether or not they're valid.

3. Attorney, Arbitration, or Mediation?

We sign contracts with the hope that all parties will be on notice about their requirements, responsibilities, and restrictions, in order to avoid legal conflicts later. But sometimes those conflicts are unavoidable. And more and more, contracts are choosing the methods for contract resolution before the parties ever get to that point. Make sure you know whether the contract mandates arbitration or mediation rather than litigation, and that you approve of the chosen mediator.

If you have more questions, or spot a red flag in a contract, have an experienced contracts attorney take a look.

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