Check Your Contracts For These Items

Given that a contract commits you and your business, it’s worth giving all the terms a thorough read before signing. While every contract is different, and the most important advice is to work with a qualified legal professional, it’s also good to educate yourself on the key areas common to most agreements in order to have a better idea of what you’re signing.

Identities of the parties

A seemingly basic idea that is nevertheless vital, any contract should be clear about who is party to the contract. And there are important distinctions; is the contract between individuals, entities, or a combination? Even if you are the owner or proprietor of a business, by putting your name on a contract instead of the company, might make you personally liable for what would otherwise be your company’s obligation.

Rights and responsibilities

Contracts should also be crystal clear as to the rights and responsibilities for each party. Buyers are obligated to pay for goods, but the contract may grant an inspection right upon delivery to determine them acceptable; likewise sellers may have the right to on-time payment with compensation for lateness. Each side should know what is required and at risk based upon the contract terms.

Merger/integration clause

The full and final agreements arrived at via negotiations should be written into the contract for review and signature. A merger/integration clause states that only the terms reflected in the contract are the complete final version; this prevents any future disputes over alleged differences between that final contract and previous written or oral agreements.

Indemnification clause

If one party to a contract (Party A) believes that the contract presents some risk of liability through the other party’s actions (Party B) that are not within Party A’s control, an indemnification (or indemnity) clause will provide some level of protection for Party A against those risks. For example, an indemnity clause can be useful for a retailer who doesn’t want to be held liable for defective products manufactured by suppliers. Note that these clauses can be mutual but all scope and duration should be worked out with the aid of a business lawyer.

Insurance provisions

Even if your contract provides indemnity for both parties, it should also include provisions for insurance that would cover any losses resulting from mistakes and mishaps. Your contracts should state clearly whether one or both parties are required to obtain insurance and the type and dollar amount of coverage.

Termination of the contract

You may find yourself wanting to cancel a current contract before its end, but the agreement likely specifies the conditions under which you can do so and when. A termination clause typically allows for cancellation by either unilateral or mutual consent, or in the event that one party has breached or defaulted on the agreement. Termination, it should be noted, is different from simply refusing to abide by the terms of the contract; in order to reduce legal issues, be sure to meet the terms of this clause when ending your deal.

Breach of contract

In failing to live up to the stated terms of the contract, there may be a breach. Your agreement could include prescriptive measures for dealing with a breach of contract, ranging from fines to dispute resolution using arbitration, mediation, or litigation. Breaches also range from “minor” which are smaller infractions, to “material” which are more likely to prompt harsher penalties or actions including termination.

Dispute resolution

Most contracts should set forth the means by which any dispute over the contract is to be adjudicated with time-frames. In addition to understanding choice of law and forum you should have an understanding about the types of resolution, particularly if you are forced to use one. Remember that litigation is an option that both sides should be eager to avoid due to time, cost, and distraction from your business.

Term of the contract/renewal

Like the subscription service we don’t pay enough attention to, we run the risk of unwanted further commitment if we aren’t attentive to both the term of the contract and any potential renewal clauses. Some renewals may simply take effect if you take no action, and cancellation may require certain steps on your part, so read the proverbial fine print.

As important as it is to understand each contract you sign, your cursory education shouldn’t take the place of the expertise provided by a business lawyer. LegalShield members get help with all of their complex and confusing legal documents — like contracts — with document review from a provider law firm. Learn more about which LegalShield Small Business Legal plan is right for your company.