You probably wouldn’t be surprised to hear that lots of people scroll down to hit “accept” on the “Terms and Conditions” page of any given website without reading a word of text. You might be surprised to learn that lots of business owners do the same thing to paper contracts which pertain directly to business agreements between their company and other entities or parties.
Yet failing to thoroughly read an agreement can have massive consequences for your business. You need to read every line of any agreement, even the definitions. Perhaps, given entire legal cases have been built on the meaning of words, especially the definitions.
Here’s what you should be looking for as you read a contract…and what can go wrong if you fail to understand, and thus to uphold, your end.
Verify Your Understanding of the Terms and Conditions
If there is anything you do not understand in the contract, it’s important to ask for clarification. There is no such thing as a contract that is “too clearly written.” You can ask for a rewrite of the contract to specifically clarify the language and to improve definitions if you feel like you may be missing something.
You also want to make sure the language matches the desired effect. Writing contracts is complicated, and even experienced attorneys sometimes struggle to choose the appropriate language for the task at hand.
Failing to do this could that you improperly understand your obligations and fail to meet them. The court is likely to uphold the other party’s claim in such a case.
Start with the definitions. Every term used in the contract should be firmly defined from the beginning in order to avoid confusion.
Make Sure Warrants are Accurate
Many contracts will contain “warrants,” or statements that you are asserting to be true. If these statements are later determined to be untrue the other party will no longer be obligated to fulfill the terms of the contract.
It is not unheard of for a contract to have warrants you’ve never discussed or even heard of. Make sure you understand what it is you are supposed to be asserting as fact before agreeing to those facts.
Look for Missing Items
Sometimes contract trouble arises because of what isn’t in the contract rather than a result of what is in the contract. The contract should cover any applicable situations that are likely to arise over the course of the contract.
For example, does the contract include a force majeure clause that releases you from your obligations if certain disasters befall your company? You don’t want to be in the position of having to deliver on a contract when most of your inventory’s been destroyed by a fire or a hurricane.
If you spot anything that hasn’t been covered, draw attention to it so the contract may be revised prior to signing.
Determine Whether the Contract is Even Enforceable
In most cases, the courts won’t intervene if you make a bad deal. The idea is that both parties have the right to enter unfavorable deals should they choose to do so.
This does not mean that courts have not occasionally thrown contracts out as being unenforceable or even unconscionable. Such a contract will ultimately fail to protect either party, as once it has been “thrown out” neither party will be bound by any provision of the contract.
That said, it is much easier to kick a contract back for revision of an unconscionable or unenforceable clause prior to signing than it is to challenge the validity of the contract in court later on.
Know What Happens in Case of a Contract Breach
In many cases the contract itself will outline what happens to either party if they fail to uphold their end of the bargain. In addition to the penalties outlined in the contract, the injured party may sue for damages.
This can mean losing hundreds of thousands of dollars, both to fight your case and to pay the damages in the event that you lose your case. Certain lawsuits can bankrupt companies, which may mean the end of your business.
Don’t sign anything before you’ve reviewed it.
Keep in mind that a contract doesn’t have to be called a “contract” to be binding. In certain circumstances courts have treated “letters of intent,” “memoranda of understanding,” and “agreements in principle” as if they were contracts.
Once you sign your name to any agreement you are bound to the terms of those agreement, regardless of the terminology used to create the agreement. The law will then offer remedies to the aggrieved party if any provision therein is violated. Proceed with care.
Consult a lawyer.
Did you know even the name you use on the signature section of a contract can vastly impact the outcome of a potential case? Working with a business attorney is the best way to protect yourself against nasty surprises.
You should still read the contract yourself, but having help from an attorney who can catch hidden pitfalls is invaluable.
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Meet Mr. Richman
SCOTT B. RICHMAN, ESQ.
Mr. Richman is the Managing Member and Founder of Richman Law Firm PLLC. In his role as Managing Member, Mr. Richman oversees the day-to-day operations of the firm and handles the litigation of the most complex legal matters across a vast array of practice areas and disciplines.
