Six Questions To Ask About Any Contract Before You Sign ItMetropreneurial Legal Insights — By Bill Nolan on March 15, 2012 at 8:00 am
Small businesses are presented with contracts on a regular basis. Even if a document does not say “contract” or “agreement” across the top, if it is an agreement for an exchange of value, then for all practical purposes it probably is a contract. I have often heard people say, for example, “I don’t have an employment contract; all I did was sign an offer letter.” That’s a contract. (Contracts can be unwritten, too, though it is usually highly advisable to have contracts in writing.)
The great majority of contracts you are presented with were not written with your interests in mind. They fall into one of two categories.
One, somebody wrote them with the intent of giving the other guy every possible advantage. They assume that many people in your shoes will just sign the document without reading it. Often they’re right about that.
Two, they found an agreement on the Internet that seemed close enough, then revised it themselves. Even better are those contracts that try to blend two agreements found on the Internet. It should come as no surprise that these agreements do not always hit the mark. They were created with no knowledge of the two businesses at hand, and revised by somebody likely not trained to do so.
The good news is that most contracts –even the ones that aren’t very well prepared!– will never cause a problem. You and the other party know what you agreed to, even if it was not written down as effectively as it could have been, and when issues arise you will work them out in the spirit of the initial deal. After all, it is usually to your mutual benefit to continue to do business together.
To avoid expensive disputes over the occasional contract that becomes problematic, your business will benefit if you create a process for reviewing them carefully. I suggest a one-page cover sheet that goes on top of every contract. Even if you only see one contract per month, you will benefit from this exercise, and it provides good infrastructure for future growth. For more developed businesses, it can be an important aspect of quality control.
The form should outline the basic business terms in some way that makes sense for your business, but also should “force” you to ask the following questions:
1. Does it clearly state what you are receiving? Does it say what you talked about? Would somebody who was not part of the conversations where the basic deal was struck understand what you are receiving from the document? And is the description of what you are receiving –whether it is goods or services, or payment for your goods and services– sufficiently clear and specific? Ask extreme questions about things you do not expect to happen and see if it holds up.
2. Does it clearly state what you are providing? Now repeat the exercise for the other half of the equation and make sure you can live with what you are committing to when you think about extreme situations you may face.
3. Does the contract refer to documents you don’t have? Make sure you flag those and get a copy for review before signing. They are probably part of the contract. If you haven’t seen them, you don’t know what you are agreeing to.
4. Does the contract use words you don’t really understand? Tell the truth. Do you really know what “indemnify” means? Not many non-lawyers do. Words you do not understand may be fine, but if you don’t know what they mean they are just like those documents you don’t have (see item No. 3 above).
5. How does the contract terminate? Many contract disputes involve their termination. When does the contract terminate if all goes well? When and how does it terminate if one party wants out before then? Can you get out on terms that work for you if you want to? And can you live with the other party’s ability to get out of the contract?
6. How are disputes resolved? Does the contract require arbitration rather than going to court? Does it specify that disputes must be resolved in some location that is inconvenient to you? Does it say anything about one side paying the other’s attorney fees in the event of a dispute? Again, a lawyer needs to help you understand these options, but your cover sheet should flag these issues. It may seem remote to the deal behind the contract, but these paragraphs –typically toward the end of the contract in what you might dismiss as boilerplate– can prove critical later.
This process is not a substitute for legal review. But the mere exercise of making you or somebody on your team give this degree of focus to what is being signed will be a big step in preventing contractual issues for your business, and spotting when you most need preventive legal advice before signing. Spend a few minutes with your own lawyer to design a process that makes sense for your business.