Whether you're an individual or a business, contracts are a crucial part of life. From employment agreements to service contracts, loans, leases, and more - contracts establish the terms and obligations for both parties. However, contracts can be dense legal documents full of complex jargon. Reviewing them thoroughly before signing is essential to protect your interests.
This blog post will cover key things to look for when reviewing legal contracts and documents. Following these tips can help you understand what you're agreeing to and avoid potential pitfalls down the road.
Define Key Terms At the start of many contracts, there is a section that defines key terms used throughout the document. Don't gloss over this! Make sure you clearly understand how the contract is defining important concepts like:
- Parties involved
- Services rendered
- Compensation and payment terms
- Timelines and deadlines
- Termination provisions
- Intellectual property rights
- Confidentiality clause
If any definitions are unclear, get clarification before proceeding. Misunderstandings over terminology can lead to disputes later.
Review the Obligations The core of any contract outlines the obligations that each party is committing to. Carefully review what duties, responsibilities, and deliverables you are agreeing to. Ask yourself:
- Are the obligations clear, specific, and reasonable?
- Do the timelines and deadlines seem realistic and achievable?
- What happens if circumstances change and obligations can't be met?
- Are there any open-ended obligations that require further definition?
- Do the obligations align with your expectations and previous discussions?
Don't make assumptions. If obligations seem vague, push for more specificity before signing.
Understand Payment Terms Payment terms are another critical area that requires a close look, especially for contractors, freelancers, and small businesses. Specifically:
- How much are you being paid, in exact dollar amounts?
- When are payments due and what are the accepted payment methods?
- Are there late payment penalties or interest charges?
- What happens if a payment is missed - does work need to stop?
- Are there any conditions to get paid, like deliverable approvals?
Vague or one-sided payment provisions can lead to cash flow issues, so make sure terms are fair and clearly outlined.
Consider the Limitations Most contracts will have sections detailing limitations of liability as well as warranting and disclaimers. Pay attention to any provisions that:
- Limit or disclaim warranties like those for merchantability or fitness
- Cap or restrict liability, especially for consequential damages
- Require indemnification of the other party for any legal claims
- Include forced arbitration or prohibit class action lawsuits
- Restrict your ability to work with competitors or in your field
These types of provisions can significantly limit your rights, so understand the implications before agreeing.
Check for Termination Clauses
Well-drafted contracts will have provisions covering procedures for termination or cancellation by either party. Understand:
- Valid reasons that allow for contract termination without penalty
- Notification requirements for termination, like advance notice periods
- If there are any damages or cancelation fees due upon early termination
- What happens to work in progress, intellectual property rights, etc. upon termination
- If there is an opportunity to cure any breach before termination
Having clear rules around termination prevents confusion and can facilitate an easier exit if needed.
Don't Forget the "Boilerplate" The final sections of a contract are often considered "boilerplate" - common legal provisions like choice of law, enforcement, severability, assignment, and more. Don't neglect this fine print! Key things to check:
- Which state's laws will govern the contract and where legal disputes must be resolved
- If the entire contract is nullified if part of it is unenforceable (severability)
- If either party can assign or transfer their duties to third parties
- General compliance with applicable laws and regulations
Reading through this boilerplate can flag potential issues around litigation, operations, and more.
Get Everything in Writing As you review a contract, chances are you'll have questions or want to suggest modifications. It's critical to get any changes, clarifications or additional agreements in writing and incorporated into the final document before signing.
Verbal promises or separate side agreements hold little legal weight. If it's not explicitly spelled out in the main contract, it's very difficult to enforce. Insist that all terms get properly documented.
Consider Getting Legal Support For high-stakes contracts like major business agreements, real estate transactions, mergers/acquisitions, and more, it's wise to have an experienced contract lawyer review everything. An attorney can:
- Identify potential legal risks or pitfalls you may have missed
- Explain your rights and the implications of certain provisions
- Negotiate more favorable terms on your behalf
- Ensure the contract complies with relevant laws and regulations
- Customize or add specialized terms to protect your interests
While hiring a lawyer involves legal fees, it could end up saving you from costly mistakes or litigation down the road.
The Bottom Line on Contract Review Contracts are legally binding documents that can have major ramifications, so never take them lightly. Investing the time to thoroughly review and understand every provision is essential. By following the tips above, you can go into contract negotiations more confidently and ensure you don't agree to one-sided or unfair terms. A little extra diligence can prevent major headaches and preserve your rights.
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