If you’re running a business, you will undoubtedly run into a fairly steady stream of business contracts on a daily basis. Some types of contracts are simple and won’t require much thought, while others are incredibly complex, leaving you to either sign your name and hope for the best, or seek business litigation attorneys to spell things out.
Rather than signing something you don’t understand, or running into costly lawyer fees, you can work through the following checklist to make sure you are protecting both yourself and whomever you are entering into the contract with. This way, you will know how to review a contract and be confident in your understanding of it before you put ink to paper. You can also use this list to review existing contracts, a practice you should be doing, to make sure they still meet your company’s needs.
Want to learn how to review a contract so you can protect your business? Check off each of the following boxes.
Negotiate the Terms
The first thing you should understand is that a contract is essentially an argument between two parties to either do or not do something. That “thing” can be an incredibly wide variety of agreements, but when it comes to a business, it generally involves an exchange of product or services. And having a contract presented is just the beginning of that argument.
For most any contract, you will be able to negotiate the contract terms. This will help you to understand the purpose as well as the scope of the contract and enable you to ask for what you want. Both parties involved want to make the deal happen, so it never hurts to ask. After all, the worst-case scenario is that they say “no,” and then you continue negotiating until you find a compromise.
Identify the Parties Involved
Another important aspect of your contract review is to make sure you can identify the parties involved. This is as simple as including the appropriate business names and addresses, and gather, or include, any other pertinent information to the contract.
Make Sure Nothing is Left Blank
Anything that is left blank on a contract could be filled in by someone else later on, so you should make sure to fill everything in. It’s also a good idea to put down your initials on anything that has been changed or deleted.
Have the Business Terms Been Properly Outlined?
You should be able to clearly identify the business terms and conditions of the contract. These will include the price, amount, duration, square footage, and more. This will outline the agreement and what is expected of both parties, ensuring there are no surprises.
Watch out for “stealth forever” contracts that have automatic renewals that will automatically kick in unless you give notice within a tiny window, such as between a random two-hour window, X amount of days before the end of the term. Sometimes there will even be penalties involved if notice was not properly given when you opt out of a renewal. Look out also for price increases upon renewal, evolving terms, etc.
When you have a business partnership that has been working, it may make sense to have an automatic renewal in the contract so you don’t have to worry about it, but it’s something that should be clearly outlined for contract management and allow for either party to painlessly get out of, or terminate the contract, should they choose.
Make Sure You Can Get Out
Being stuck in a contract with no way out is never a good thing, so make sure there is a way for you to get out should things not go the way you planned. Typically, an out clause will involve giving a 30- or 15-day notice. Sometimes this will be after a year (just like with an apartment lease), so you need to be sure you come to terms on an agreeable contract length and out clause.
The contract should also allocate how much risk is involved. The risk is usually borne by the party in the best position to prevent loss, which will vary depending on the contract, as there are sometimes reasons for a different allocation. You should also verify the insurance requirements to know if the cost of the required insurance outlined in the contract fits within your budget.
Hold Harmless & Indemnification Provisions
A hold harmless provision means exactly that — that you agree not to hold the other party in the contract responsible for any liability that may come out of the exchange. By indemnifying someone, you are agreeing to protect them against liability or loss that may occur within the transaction.
Your party should not be the only one doing the indemnifying — it should always be mutual, even if the other party will never be the cause of any liability. The indemnification clause may be a large part of the negotiation process, as you want to make sure it is fair for both parties.
An attorney review or legal advice will be very helpful during this stage of the negotiation process.
Read Any Incorporated Documents
If, by chance, there are any other contract documents referenced in your contract, you should always read the incorporated legal documents. You should never assume that you know what the document contains, even if you think you have seen it before. Always double check.
Are There Any Events of Default?
If the contract mentions any events of default, make sure you understand exactly what they are, and whether or not you will be able to perform under the contract without causing a default. If you don’t think you can meet these demands, renegotiate. Being realistic about any outlined events of default can be the difference between meeting or defaulting on a contract.
Remedies provisions outline the worst-case scenarios that can happen should something go wrong, such as a default. However, this is something you need to pay close attention to and consider, as things do go wrong in the course of doing business, and you need to make sure you are prepared if and when they do.
Sometimes, this will involve putting the necessary funds or mechanisms in place to protect your business. You should determine what kinds of remedies you require should you encounter a default by the other party in the contract. You should also make sure you try to limit your liability.
Causes for Termination
Look for ways to include causes for termination if there are none included. If a contract is not working the way you intended, or to your business’s benefit, you will want a way to conveniently terminate the contract, with or without cause.
Check Any Dates & Deadlines
Make sure you clearly understand any important dates and deadlines that are outlined in the contract. This includes items that need to be completed both by you and the other party.
Warranties & Representations
If you’ve been given any warranties and representations by the other party, you need to make sure you review and understand them. You don’t want to give any representation unless you know the representation is true, or that the other party is in a better position to know what facts are being represented. You should also try to limit warranties as much as possible.
Rights & Responsibilities
Who is responsible for what? Who is liable if something doesn’t go according to the terms of the contract? This isn’t something that should be an oral understanding or handshake agreement, including these provisions within the actual contract. Both parties should be able to clearly understand all of your rights and responsibilities. Make sure to carefully read through the entire contract for these, as they might be scattered throughout.
Resolution of Disputes
The contract should also outline how any resolution of disputes will be handled. Often, this will involve an arbitration or mediation requirement, which could save you a lot of time and money. Unfortunately, there are instances when you may need to go to court to find a resolution. Find flexibility in the contract here when you can.
Will the other party in the contract have any access to your nonpublic personal and/or protected health information? If so, you should consider including a provision that will require them to handle and secure your information in a safe manner that is consistent with federal and state laws.
Make Sure Everything is Signed by Both Parties
Search through the contract to ensure all contract lines have been not only signed, but that the lines refer to the proper individuals. The only people listed should be those who are authorized to sign the contract on behalf of the business. If any other person has signed, the contract might not be enforceable. You also need to make sure any amendments have been signed by each party.
This checklist on how to review a contract should help you navigate your way through any confusing contract that gets put in front of you. If you go item by item through this list, you should be able to have a much better understanding of what the contract terms are, as well as what items you would like to work on in a negotiation. Of course, the best way to make sure nothing slips past you is to have the contract looked over by an in-house counsel, experienced attorney or contract lawyer.