Contract review is one of the most important elements of starting a business. It protects you legally and saves you money in the long run. To maximize your protection, look out for these warning signs during contract review.
Make sure that all of the languages are understandable by both parties to avoid confusion later on down the line. Familiarize yourself with each clause so that you know what it entails before signing off on documents that have these clauses included in them. If any section confuses you, ask for clarification from your lawyer or the party with whom you are contracting.
Ambiguous Dispute Resolution Processes
A dispute resolution process is required to be unambiguous about who will settle disputes if they arise and how such disputes will be settled. If there is no clear process, this can lead to long waits while you wait for your lawyer to research the appropriate route of action or it may not even be clear who would legally defend your case.
Make sure to look out for the following clauses during your contract review: –
- Undisclosed Termination Clause
A termination clause clearly states what needs to occur for a contract to end and under what circumstances each party can terminate the agreement after a given period. Be wary of contracts that give one party too much power over the other or that state that one party just has to they want out of the contract instead of giving a clear reason for why they want to terminate the contract.
- Exclusive Dealing Clause
An exclusive dealing clause states that either party can only trade with one company or sell goods to customers through a specific business. This is often used as a way of discouraging competition and can be problematic if you already have an established relationship with another business. Be sure not to sign contracts with such clauses unless there is a very good reason behind them, it is within your best interests, and you are aware of all potential ramifications from doing so.
- Indemnification Clause
This type of clause requires that one party compensate the other for any damages done under certain circumstances. For example, your company agrees to provide your customer with a warranty for certain products you have built as well as any damages up to the value that your customer still owes you after they return those products. Be sure that such clauses do not include wording that there is no limit on how much compensation can be sought or that it will cover consequences caused by the indemnifying party’s actions, otherwise, problems may arise if actual damage greatly exceeds an agreed-upon value and/or due to irresponsible business practices.
- Automatic Renewal Clause
If your company does business with customers repeatedly this clause could be problematic. For example, if you provide services like hosting to clients who do not want to go through the trouble of finding another service provider when their existing contract expires, they will need to be able to easily terminate their service with your company or have a clause in their contract stating that the terms will continue on a month-to-month basis. If you do not include such a provision, an automatic renewal could cause customers to miss the deadline for canceling and lead to them being locked into another lengthy contract with little opportunity for them or yourself to change things.
- Arbitration Clause
An arbitration clause states that any legal disputes between the two parties must be taken to a designated third-party arbitrator. In some circumstances, this can benefit both parties by taking away time constraints and costs associated with going through the courts but in others, it may prevent both companies from taking advantage of options available through local laws and regulations.
Unclear Ownership Terms
These terms should clearly state who owns each section of intellectual property outlined in the contract. If these are not stated clearly, it may be difficult to prove ownership if the parties disagree later on hence check them clearly during the contract review.
Violation of Laws or Standards
Every good contract should list all costs involved in carrying out certain tasks under the agreement so there are no surprises later on. If there are costs outlined in the contract that you are not aware of, they should be discussed with your lawyer so you understand what is expected of you.
All contracts set parameters within which the business must operate. However, some have terms that are overly restrictive or may pose problems for your business’s future growth. For example, being unable to sign on new clients beyond a certain size could inhibit your company’s ability to grow. Make sure that the terms fall within the range of possibility for your business and do not hinder its potential.
Lack of Cohesive Termination Clause
Every section of the contract must explain when it terminates along with what steps need to occur before termination occurs. If a clause states it terminates with the death of one party but does not explain what to do if both parties die, this can be problematic.
No Scope for Change over Time
No contract is set in stone and as such needs to have written into it provisions that allow for change as time progresses. Be on the lookout for contracts that state they cannot be modified under any circumstance or those that do not include language allowing for changes without renegotiating the entire contract. Such language will make updates impossible and may even cause your business issues down the line when laws and standards change so make sure to check everything during contract review.
Prejudice Against Future Laws or Standards
During contract review ensure there are no clauses within the contract that penalize you for future legal actions either yours or others. For example, if your business is in a heavily regulated industry with laws that are constantly changing, it may not be wise to sign a contract with clauses that penalize you for future changes in these laws or reduce the allowable levels of risk within the contract. Such action could put you at an unfair disadvantage when dealing with other businesses that have signed contracts without such language.