In today’s world of online legal forms and AI-generated documents, it’s easy to be tempted by template contracts—especially when they’re free or low-cost. But when real money or the future of your business is on the line, using a contract that isn’t tailored to your situation can lead to real consequences. Even if you don’t have the legal training to parse every clause, there are some tell-tale signs a contract template may not be appropriate for your deal.
Here are some practical red flags that suggest a contract deserves a closer legal review—ideally before you sign.
1. Mismatch Between Length and the Stakes Involved
Just the number of pages can indicate whether a template is worthwhile to use. Documents that are efficiently drafted should be shorter than others that use a lot of legalese or include unnecessary terms. A contract’s complexity should reflect the seriousness of the deal. If you’re loaning someone $10,000,000 and the contract is only one page long, that’s a problem.
Technically, a single sentence might state the loan amount and repayment deadline, but a properly drafted loan agreement should include much more:
- Personal Guaranty: If you’re lending to a business entity, you likely want the owner(s) personally liable if the entity defaults.
- Attorney’s Fees Clause: In California, each party generally pays its own legal fees unless the contract says otherwise. Including this clause can be crucial if litigation arises.
- Compliance with Usury Laws: California has limits on how much interest you can charge. Even if labeled as something else (like “late fees” or “default interest”), if the effective rate exceeds legal limits, the contract could be unenforceable.
- Imputed Interest: If there’s no stated interest, the IRS may impute interest for tax purposes, which can lead to unintended tax consequences.
2. Overly Simplistic Contracts for Complex Transactions
Some deals are inherently complex and require more than just a one-size-fits-all agreement. A business sale is a perfect example. A proper sale of a business might involve:
- Asset or Stock Purchase Agreement
- Promissory Notes (sometimes multiple, depending on the structure)
- Security Agreements and UCC-1 Filings
- Non-Disclosure Agreements (NDAs)
- Assignment of Contracts and Intellectual Property
- Due Diligence Materials and Disclosures
- Non-Compete or Non-Solicitation Agreements
If someone presents you with a basic sales agreement and nothing more, that’s a red flag.
3. Internal Inconsistencies, Misspellings, or Poor Grammar
A well-drafted contract should be internally consistent and professionally written. Watch for:
- Terms defined one way in one section and differently in another
- Inconsistent dates or dollar amounts
- Confusing or ambiguous language
- Misspellings or ungrammatical sentences
These are strong indicators the contract was not prepared—or even reviewed—by a qualified attorney.
4. Questionable Parties or Inadequate Documentation
When you’re dealing with a business, you should be able to confirm:
- The business is properly registered with the Secretary of State
- The signatory has authority to bind the business
- The correct legal name and any DBAs (Doing Business As) are properly registered
- The names of officers or managers in the contract match the ones listed in a recent Statement of Information
If there’s no public record of the company or discrepancies in the documents, this could signal fraud, or at the very least, sloppiness. Even if not intentional (because we all can make mistakes) such mistakes or discrepancies should be avoided to avoid disagreements in interpretation and issues in enforcement.
5. Out-of-State Forms for a California-Based Deal
Contracts should reflect the laws and standards of the state where the deal is happening—or where the parties are based. Using a contract governed by the laws of another state (especially when it’s not even mentioned in discussion) can:
- Cause unnecessary legal confusion or conflict
- Undermine California-specific protections (like Business & Professions Code compliance, employment law requirements, or real property disclosures)
- Result in a contract that’s partially or fully unenforceable
Unless you have a reason to use out-of-state law, your contracts should be governed by California law, and reference California venues for dispute resolution.
Bottom Line: The Goal to Use Less “Complicated” Forms Can Lead to Complicated Problems.
Using a cheap or free template might save you a few dollars today—but it could cost you thousands (or more) down the line. If a contract seems too short, too vague, poorly written, or mismatched to the value of the transaction, trust your instincts. That’s a good time to bring in an experienced business attorney who can help protect your interests.
If you’ve been handed a contract to sign—or you’re thinking about preparing one for a business deal—don’t go it alone. A brief consultation now can help avoid serious problems later.
Need help reviewing or drafting a contract?
Contact us to schedule a consultation and make sure your business deals are built on solid legal footing.
Contact us to schedule a consultation and make sure your business deals are built on solid legal footing.