Read and Understand a Contract to Avoid Problems Later

If handed a business contract and informed, “Sign here,” read the contract carefully. Also follow these guidelines to avoid problems later. Unsurprisingly, a contract may vary from an agreement earlier reached by the parties, and the contract will ordinarily supersede the original agreement.

Contracts are legal documents and if they are valid, you can be taken to court to uphold your end of the contract. Whether a real estate contract, business sale contract, employment contract, or contract between you and a customer or vendor, these guidelines will help you.

What All Contracts Must Have

In addition to the ‘material’ elements that make a contract valid, i.e., enforceable in court, all contracts must:

  • Be clearly stated. As much as possible, both parties should agree on what is being said.
  • Express the agreement. After you have agreed verbally, the contract should state the agreement.
  • Be complete. A contract must answer questions that either party might have and to anticipate any “what if” situations.

Most lawsuits for contracts arise for contracts that are not clear and complete and that do not express the agreement as it was understood by the parties. Accordingly, the wise person will retain counsel to have an enforceable contract to ensure performance by the other party and to protect from liability. Retain counsel before entering into a contract; don’t be penny-wise and pound-foolish and retain counsel after the fact to clean up the mess. The cost of litigation is high and even then the remedy may not rectify the problem(s) with the contract.

Agree on Definitions

All major terms must be defined completely. Much difficulty in contracts comes from incomplete or missing definitions. In one case, an unclear definition of “overhead” in the calculation of payment to an independent contractor caused a lawsuit. Overhead usually means expenses for administration and operations. But what is included in overhead can differ from business to business. Spell out exactly what is meant by terms like overhead.

The Parties Need to be Correctly Identified

Make sure you are identified correctly. In most cases, it should be your business that’s entering into the contract, not you personally. If your business has subsidiaries or is part of a holding company, make sure that this is noted. Also, check the identity of the other party.

Don’t Assume – Ask for Clarification

Assumptions are really the most difficult part of any contract. Consider a contract that includes a section on how the value of property is determined. Even if you think you understand what has been written, ask for an example, or for the other party to explain the process per the contract. Don’t worry about appearing dumb or difficult; it’s better to clarify now than find out later you and the other party were thinking of two different meanings.

Ask “What is Missing?”

This part is tricky; it is difficult to know what should be in a contract but is not. This is yet another reason why an attorney should be retained; a layperson cannot presume to substitute his or her knowledge for that of an attorney with a lifetime of experience. In employment contracts, for example, there should be a section describing how the employer can terminate the contract and what notice must be given. Sometimes, however, there is no language about how an employee can terminate the contract and what notice must be given. For example, what if the contract has no effective date for measuring notices or incorrectly identifies the parties?

Carefully Read “Boilerplate”

Boilerplate is so-called “standard” language that is in many business contracts. While commonplace in contracts, the language is anything but common. Landmines may be sprinkled throughout by the attorney drafting the contract; don’t tread barefoot. What happens if one party does not meet the obligations of the contract? This is called “breach of contract” and the answer to the question may be in the boilerplate. Read it carefully.

Read those long boilerplate sections, even if your eyes cross and you start to nod off. Seek your own counsel, or at least ask that the section be simplified or that it be shortened. Or ask that it be changed or taken out if you don’t agree with it. Don’t hesitate to make changes that clarify, or which are to your advantage. Remember that in a contract, everything is negotiable, even “standard” language.

Finally, Get a Second Opinion

If you are reading a contract prepared by the other party, don’t rely on yourself or other non-attorneys to read the contract and find all the problems. Consult an attorney who knows the law in your state.

Following these guidelines to reading contracts may not prevent you from making a mistake and signing a contract that will cause you problems. Some of the risks, however, of ‘doing it yourself’ are revealed and clarified.

Disclaimer: This article is provided by LANCE S. DAVIDSON, P.C. for general education purposes only. The information should not be relied on as legal advice, nor does it serve to create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.