In business many people struggle when asked to review a contract or agreement that has been presented to them. After all when finalising a deal or new business relationship, you are more likely to be focusing on the logistics and implementation of the deal than the wording of the contract.
However quickly glancing at a contract and just signing it to 'get the ball rolling' should be done at your peril.
Getting professional legal help with the document is your safest option, but if you're in the early stages of going through an agreement we wanted to share a few contract review tips on how to read a contract like a lawyer.
A contract is simply a written agreement between two or more parties to do (or not to do) a particular action. When correctly drafted and signed, a contract becomes a legally binding agreement that both parties must comply with.
The most important aspect of any contract is to precisely articulate the arrangement that has been agreed between the parties that is in line with current law and legislation.
The remainder of the contract should then document how any foreseeable scenarios will be dealt with for the duration of the agreement. Such as implementation, timings, payment, failures, disputes, termination etc.
The major terminology or wording used should be specifically defined, either in the body of the contract or in the case of a lengthy document in a dedicated 'Definitions' section. Disputes often arise if a term isn't clearly documented and is just left for each party to interpret. For example, common terms such as:
Identifying parties to a contract .
The individuals or businesses that are entering into the agreement should be clearly defined. If only the name of a business or individual is documented, it may be considered ambiguous should you ever need to enforce the contract.
In the case of a limited company make sure their registered office and company number is recorded which precisely identifies them, and with individuals detail their home address and date of birth.
Duration, termination and renewal.
The duration that an agreement covers or remains in force is an important clause to consider. While the parties may not want to be bound to an arrangement forever, they also may not want to be entering into a new contract every few months. Therefore, each party needs to consider what is a reasonable period for the contract to cover and how any extension or termination is dealt with.
Indemnity clause and limitation of liability.
Indemnity is when a party agrees to protect and compensate another party from losses that may occur in the event of a specific breach or negligence. For example, a retailer may seek indemnity from a manufacturer in the event the products supplied are defective and a claim is made against them by a consumer.
A limitation of liability clause is used to restrict the amount a party pays in the event another party suffers a loss due to the contract. Without this term, a party may be liable for an unlimited amount of damages and financial compensation.
Both these clauses require careful and clear drafting if they are to successfully manage the risks posed by a contract whilst not impacting a party's statutory rights.
Governing law, jurisdiction and dispute resolution clauses.
There's little point in carefully drafting a legal document without specifying the law and jurisdiction under which it falls.
You may think this is only important when dealing with international agreements, however this isn't the case. The UK alone has three legal jurisdictions (England and Wales, Scotland and Northern Ireland) each of which has their own distinct legislation.
A contract should clearly define which legal system it operates under and the court any dispute will be handled in. On the subject of disputes, court action should always be a last resort, so it is also worthwhile to consider dispute resolution options as part of the agreement.
A simple alternative dispute resolution clause that requires all parties must first undertake negotiation or mediation in an attempt to resolve an issue can save both time and money should a disagreement ever arise.
Legal document checking.
If you are presented with a contract prepared by another party or their solicitors, there really is no substitute for getting your own legal advice on its content.
Your own solicitor will be able to advise on the contract with your best interests in mind, tailoring a review to focus on the risks you would be exposed to and suggest amendments or additions which may be beneficial.
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
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