Updated: October 13, 2021
In today’s business world, you may be asked to sign contracts regularly. Whether you’re presented with an employment agreement or a commercial lease; an LLC operating agreement or a purchase contract; a licensing deal or an agreement for personal services; regardless of the subject of the contract, reviewing and understanding the written terms is extremely important. With the freedom of contract, also comes the ability to enter into a bad agreement. We can’t tell you how many times people have come to us trying to get out of a bad deal, or after suffering the consequences of a poorly drafted arrangement. Depending on your situation, the contracting process can be exciting, intimidating or overwhelming. Before you sign anything, especially in business, consider the following when you’re presented with a written agreement:
Obviously, it’s important to fully read and understand the entire contract. Agreements can often be difficult, long and extremely confusing. You might wonder if you’ll need a special dictionary to translate the “legalese” or need to review certain “fine print” pages with a magnifying glass. But that doesn’t mean you should skim through the document or, worse, just sign at the bottom. Some agreements may contain outdated, convoluted or inapplicable language. Don’t be afraid to ask questions or request clarifications in the document itself to replace unclear provisions. In other words, “spell it out.” As the saying goes, “the devil is in the details.” You need to understand the meaning and consequences of every contractual provision. This is why a thorough review of the agreement is essential.
In some cases, you can be screwed by the lack of detail. Make sure that the contract accurately addresses all the deal terms, and that you understand them all. We often represent clients who’ve been presented with very short contracts. These “anorexic” agreements are so bare that they lack key provisions or basic protections. Don’t assume that you can deal with key issues later on down the road, after a dispute has arisen. Don’t assume that if a 1 page contract worked for someone in the past, it will work for you. Agreeing on and including all the key terms at the start of the transaction is generally preferable, and can save a lot of time (and legal fees) later. Clear, specific, detailed, well-drafted agreements, can often avoid ambiguity and keep you out of court later.
Try to assess your bottom line: what must you get, at a minimum, in order to make the deal worthwhile? Is that reflected on paper? Your strategic minimum threshold may be a number of things: a certain amount of money, certain materials or services to be provided in a specific way, non-exclusivity, or final approval on a project. Prior to signing, or better still, at the start of negotiation, you should know what you can and cannot live without. Equally as important: try to assess the other party’s bottom line, where the other side may show resistance, and the point at which they may walk away.
Don’t be afraid to negotiate. If you want it, simply start by asking for it. If there are unfavorable provisions in your agreement, or obligations that you weren’t expecting, don’t be afraid to ask for changes. Or, ask for items to be deleted. People often feel that they cannot bargain for better terms, or that the proposed contract is somehow already set in stone. They may be told, “It’s our standard contract.” However, if you have a reasonable amount of leverage (i.e. if the other side really wants to do the deal with you), you are in many cases likely to achieve a more favorable provisions. So, let the negotiation begin.
Consider how long you are to be bound by the contract’s terms. Be aware of what is to be done by each party from start to finish, whether any rights (if any) are reserved or revert back at the end of the term, and your post-signing ability to legally enter into a similar agreement with someone else. For example, is there “non-competition language” that will block you from getting another engagement that would “compete”, even after the contract expires or is terminated? Understand how and when the contract can be terminated. Know what constitutes a breach of the agreement and at what point the non-breaching party can get out of the obligation. What happens if you’d don’t get paid, or if the other party doesn’t perform? What if they do perform, but don’t do it well? If you’re on the receiving end, consider enforcement and penalty provisions so that you can increase the likelihood of good performance or full, timely payment. If you intend to be paid a percentage of revenues, how can you make sure the other party provides proper and detailed accounting statements? Strong disclosure, audit and late fee provisions are some things to consider.
We recommend that you seek an experienced attorney that can review and negotiate your contract. Consult and retain a professional. However, if that’s not economically feasible, do yourself a favor and don’t automatically assume that your contract is fair and reasonable. Do some research on industry standards and the customary terms for your particular arrangement. Don’t be pressured into signing something you don’t like or don’t understand. Determine if the contract terms make sense for you. Signing a contract may call for great responsibility and commitment on your part. So, before you commit, do your research.