Reviewing Business Contracts/Agreements
Understanding contracts/agreements and why thoroughly reviewing them is extremely important.
Elements of a contract/agreement
Offer. Without an offer there is nothing to accept which ultimately means there is no enforceable contract/agreement.
Acceptance. The parties must accept the specific terms and conditions of the contract/agreement. Acceptance must be unequivocal and must correspond with the terms of the offer.
Awareness. The parties must be aware that they are entering into an agreement by signing the contract/agreement.
Consideration. This is what the parties promise to do within the contract/agreement.
Capacity. All parties must understand the terms of the contract/agreement.
Legality. All contracts/agreements must comply with all applicable laws, rules, and regulations within the jurisdiction that the contract/agreement will be enforces.
Doing an initial review of the contract is crucial prior to signing. Flag any sections that don’t make sense or are confusing. Also, flag any sections that raise any questions or concerns. While doing an initial review keep the following in mind:
Who is involved in the agreement?
What is each party exchanging as a part of this agreement?
What is each party agreeing to provide?
When will this contract/agreement commence?
When will this contract/agreement terminate?
What will happen if either party fails to hold up their end of the contract/agreement?
Who has the authority to sign and enter into this contract/agreement?
Who do you contact if you have questions about or need to make changes to the contract/agreement?
How do you contact this person if you have questions about or need to make changes to the contract/agreement?
Is there a deadline for signing this contract/agreement? If so, what is the deadline?
What to look out for while reviewing a contract/agreement:
Identify key clauses and pay close attention to clauses such as indemnification, limitation of liability, and confidentiality.
Indemnification. If the indemnification clause is one sided, flag it so it can be negotiated to be fair for all of the parties not just beneficial for one.
Limitation of Liability. These clauses reduce the overall risk of the parties by limiting their liability for damages. There are several things you will want to consider while reviewing the limitation of liability terms:
Liability caps. Is there a calculable amount or shared excess liabilities?
Waiver of certain types of damages such as consequential or indirect damages.
Exclusive remedies for certain types of breaches.
Potential carve-outs and exceptions to the foregoing limits. These carve-outs could create higher or unlimited liability.
Always consider what is the worst-case scenario in terms of damages when considering limitation of liability.
Thoroughly review payment clauses. Carefully verify due dates, how payments are to be made, and who they are to be made to. Also, verify whether there are any penalties for late payments and any conditions for financial obligations.
Understand the conditions for either party terminating the contract/agreement. Are there any ramifications or penalties for terminating early? How do you terminate the contract/agreement? Paying close attention to how to renew the contract/agreement is equally important. Does the contract/agreement auto renew? Do you have to contact anyone by a certain date to renew or terminate the contract/agreement?
Understand the dispute resolution terms. Make sure that you are able to comply with all of the terms of the dispute resolution terms. If you are unable to you will need to negotiate these terms so you will not default on the contract/agreement as soon as you sign it.
Make sure there are no vague or ambiguous terms within the contract/agreement. If there are vague or ambiguous terms, be sure to identify them and propose changes to those terms that will make them precise and clear.
Stay away from words like:
Reasonable. Example, reasonable expenses. Who knows what is reasonable, one persons reasonable will definitely be different to another person.
Standard. Example, standard quality. Again who knows what standard quality is, this would vary from person to person.
Undue delay.
Substantially and properly.
Material or materially.
Flag any unclear definitions that creates misunderstanding. These definitions will need to be made clear for anyone reading the contract/agreement.
Flag any unspecified terms, these terms will likely create vagueness and ambiguity within the contract/agreement.
Involve the correct people on your team in the contract/agreement review process.
If there are clauses that have specific compliance with information technology (“IT”) make sure you have someone from your IT department review the contract/agreement to make sure you are able to comply with all of the terms.
If there are clauses that have specific terms relating to finance or financial obligations have someone from your financial department review the contract/agreement to make sure you are able to be compliant with those terms.
If there are certain clauses that have to do with operations, make sure your operations team reviews the contract/agreement to ensure they can comply with those terms.
If you are unable to comply with these specific terms you will be in breach of the contract/agreement as soon as it is signed.
Tips and Tricks:
Develop and use a contract review checklist
Regularly update any templates that you use to make sure that all terms and any statutes referenced are not outdated.
Make sure that the contract/agreement complies with all relevant local, state, and federal laws.
