Three Phrases That Cost Businesses Money

Sometimes a business loses money not because sales fall or advertising is weak. The cause is an unfavourable contract, an unchecked counterparty, a verbal arrangement with a partner, or obligations whose consequences nobody worked out.

A legal risk is rarely visible straight away. At first it is one clause in a contract. Then it becomes an advance that is never returned, work that is never paid for, a conflict between partners or a lengthy court dispute.

Below are three phrases with which such stories often begin, and what to do while the risk has not yet turned into a loss.

1. “It’s a standard contract – no need to read it”

There is no such thing as a “standard” contract: any template is drafted in the interests of whoever prepared it. The terms on which the money depends are usually found not in the subject matter but in the sections on payment, acceptance of work and liability.

Before signing, check:

• the subject matter and the result – what exactly you receive and by what criteria the work is considered completed;
• payment – deadlines, grounds for delay, the currency and the exchange rate if the price is linked to a foreign currency;
• acceptance – who signs the acceptance certificates, how much time there is to object, and what happens if a certificate is not signed on time;
• liability – the amount of fines and penalties, and whether the party that drafted the text has limited its own liability;
• termination – on what terms you can withdraw from the contract and what happens to money already paid;
• disputes and correspondence – where a dispute will be heard and whether the parties recognise correspondence by email or messengers.

Look separately at automatic renewal and at the annexes. It is in the annexes that prices, deadlines and specifications often appear which change the essence of the deal.

2. “Transfer the advance – they’re people we trust”

A recommendation from acquaintances is no substitute for checks. Recovering an advance from a company that has disappeared or already has plenty of debts is difficult even with a court judgment in hand.

What to check before paying:

• the entry in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organisations: the registration date, the director, the founders and the status (whether the company is in the process of termination);
• the signatory’s authority – whether this person may sign the contract on the company’s behalf or needs a power of attorney;
• court cases in the Unified State Register of Court Decisions – whether there is a series of disputes over unreturned money or breach of contract;
• open enforcement proceedings in the Unified Register of Debtors;
• bank details – whether the payee is the same as the party to the contract.

Contract terms also help protect an advance: staged payment, a clear deadline for returning the advance if the contract is not performed, and a penalty for delay. For large sums, it is worth providing security – for example, a bank guarantee or a surety.

3. “We’re best friends – we’ll definitely sort out the business”

Partner conflicts rarely start with a quarrel. More often they start with different views on who contributed how much, who takes decisions and how profits are shared. Without written arrangements, such a dispute has to be resolved in court, and it can drag on for years while the business stands still.

What to put in writing while relations are good:

• shares and contributions – who contributes what: money, property, work, clients;
• decision-making – who decides key issues and how, and what to do if the partners cannot agree;
• profit – how it is distributed and when it is paid out;
• a partner’s exit – how the value of the share is determined and when it is paid;
• access – who controls the bank accounts, electronic signatures, brand, domain and client base.

In a limited liability company, these issues are settled by the charter and a corporate agreement. If the partners work as individual entrepreneurs (FOPs) without a joint legal entity, the arrangements are set out in a separate contract.

How to spot risks in advance

These three phrases are just the tip of the iceberg. Mistakes in contracts, counterparty checks and partner relations are cheapest to fix before signing and paying. Afterwards, they have to be fixed through claims and in court.

A legal audit shows where exactly a business could lose money. An advocate analyses contracts, checks counterparties and corporate documents, identifies specific risks and draws up an action plan.

This material is general in nature and is not a substitute for advice on your specific situation.

Need a contract or a counterparty checked? An advocate will analyse the documents and show the risks before you sign → Legal due diligence · Contract disputes · Corporate disputes