Most business people enter into contracts on a regular basis. They sign property leases, vehicle and equipment leases, advertising agreements, copier and phone system leases, web site development and maintenance agreements, banking documents, service contracts, and numerous other contracts in the usual course of business. Some of those contracts are simple, easily understandable documents while others are all but incomprehensible. It is not uncommon for otherwise very careful people to glance over a contract and just sign it without really knowing what it obligates them or the other party to do.
In its most basic form, a contract is merely an agreement between two or more people to do or not do a particular thing. That sounds simple, but when those obligations are buried in the fine print in the middle of a lengthy document, it may not be so easy to understand exactly what the parties are agreeing to do or not do.
So, what should you look for when reviewing a contract? Here are a few suggestions:
1. NEGOTIATE THE TERMS. When presented with a contract, remember that this is a starting point. You can negotiate the terms of nearly every agreement. You want to make the deal happen, but so does the other person. Ask for what you want. The worst that can happen is they say no.
2. IDENTIFY THE PARTIES. Use the complete name of the business to avoid confusion and identify corporate officers as such. Determine the marital status of individuals if spouses will be required to join in execution of the document.
3. FILL IN ALL THE BLANKS. Complete all blanks on any preprinted form because items left blank can be filled in later by someone else. Be sure all changes or deletions are initialed.
4. DOUBLE CHECK THE TERMS. Double check the business terms of the contract (price, amount, duration, square footage, etc.) to determine whether it accurately reflects the agreement of the parties.
5. AUTOMATIC RENEWALS. Look for automatic renewals. Do you have to give notice if you do not want to renew? Are there penalties if notice is not timely given? Is renewal on the same terms as the original agreement? Are there price increases? Consider adding options to renew on favorable terms.
6. ALLOCATING RISK. Risk is typically borne by the party in the best position to prevent loss. However, there may be reasons for a different allocation. Check insurance requirements. Will you be able to obtain the required insurance within your budget?
7. INDEMNIFICATION PROVISIONS. Check hold harmless and indemnification provisions. When you agree to hold someone harmless you are agreeing to not hold them responsible for liability that may arise out of the transaction. When you indemnify someone, you are agreeing to protect them from liability or loss that may arise out of the transaction. If you must indemnify the other party, limit the indemnification as much as possible. Negotiate the same indemnification for yourself. For instance, if you, as a buyer, agree to indemnify the seller of a business for losses they may incur as a result of actions after the sale, then they should indemnify you for losses you may incur as a result of actions before the sale.
8. INCORPORATED DOCUMENTS. When another document is incorporated by reference, always read the incorporated document. Don’t assume you know what it contains.
9. EVENTS OF DEFAULT. Determine what acts constitute events of default and whether you are able to enter into and perform under the contract without causing a default. Also consider what should be included as events of default by the other party.
10. REMEDIEIS. Review remedies provisions. Determine the worst that can happen to you if you default. Explore ways to limit your liability. Also determine what types of remedies you need in the event of default by the other party.
11. TERMINATION. Review causes for termination. Consider including ways to terminate the contract if it is not working to your benefit.
12. DATES AND DEADLINES. Always keep a calendar of dates and deadlines for important events and anything required to be done by you or the other party.
13. WARRANTIES AND REPRESENTATIONS. Review and understand warranties and representations given by you and the other party. Don’t give any representation if you do not actually know that the representation is true or if the other party is in a better position to know the facts being represented. If you must give warranties, try to limit them as much as possible. For example, a warranty in a deed might say that you warrant title to the property. You can limit the warranty by saying that you warrant title to the property only during the period of time in which you owned the property. Remember that the other party is trying to do the same, so watch for disclaimers or limitations.
14. RIGHTS AND RESPONSIBILITIES. Carefully read the entire contract because rights and responsibilities are typically scattered throughout the agreement.
15. DISPUTE RESOLUTION. Determine how you want to deal with resolution of disputes. An arbitration or mediation requirement could ultimately save you lots of time and money. However, there are times when you may want to go to court to resolve the dispute. When appropriate, try to give yourself some flexibility.
If you are a small business owner and have questions about the contracts you enter into during the course of business, give us a call at 253.858.5434 to see how we can help. We proudly serve clients throughout Washington and Idaho and are available to meet in person, by phone, or via Skype or FaceTime.