Most people don’t take time to read the contracts they sign. That’s dangerous because your signature is taken for an admission that you’ve read the document. As your business grows and you begin outsource, you’ll hire a good business attorney to handle contract review and negotiations for you. Until then, you need to be responsible.
Unfortunately, many contracts seem daunting because of their length and because you don’t know what to look for. So for the hurried entrepreneur who doesn’t have a lawyer, here are the seven must-read sections in contracts you are asked to sign.
What are each party’s duties?
When someone gives you a contract, it’s most likely to pay for goods or services. Thoroughly examine to make sure you don’t have any other duties you need to be aware of. Also, pay particular attention to the other party’s duties. Are they what you expected them to be? Oral promises made before the contract is drafted hold little weight if those promises don’t appear in the written document.
How much you are going to pay?
There should be a section called “Compensation” or something similar. Look for a total amount, periodic (e.g. monthly or quarterly) payment amounts, possible late fees and penalties, commissions, and expenses. What parts are refundable and what is explicitly non-refundable? It all should be spelled out, but unfortunately some of the payment information may be spread out in multiple sections of the contract. If you have an electronic version of the document, search for “$” and “%” to help pinpoint amounts.
Term and Termination
If you get into the relationship, you might well want a way out. Here are the main questions you should ask:
- How long does the contract last?
- Can the other party terminate early and under what conditions? More importantly can you terminate early?
- Are only specific reasons allowed for termination or can you terminate for any reason at all?
- How much notice do you have to give if you do, and is there a fee for early termination?
Some contracts attempt to charge you a penalty for early termination, even if you don’t receive any additional goods or services after you terminate. Strictly speaking penalties are not allowed under standard contract law. But the contract may say that you can pay a discounted rate if you do not terminate for a year, and then require you to pay a “make up” fee that recovers the discount amount if you terminate early. That kind of arrangement may be enforced by courts.
Near the end of every contract are some “boilerplate” terms that might have a big impact on you. Look for the governing law and dispute resolution terms. They might be in different sections of the contract. Generally the party who drafts the contract will choose to have the laws of their own state govern the interpretation of the contract. The laws of different states tend to be only subtly different, so unless you know the differences, you might not want to dispute that.
Furthermore, is there a venue selection clause or stipulation to arbitration? If the contract says that you must litigate disputes in the courts of another state, you would likely be at a distinct disadvantage. Some companies prefer to settle disputes only through binding arbitration. Before you agree to that, know that you will be giving up the right to a jury. Jury trials are expensive for everyone, but you might prefer to have the option to choose the courts to settle your disputes rather than an arbitrator.
Who pays attorney fees
The default rule in American courts is that each party pays their own attorneys fees. Think about whether you want the loser to pay the attorney fees of the winner. If this is written into the contract, it makes litigation likely to be much more costly for a party that has a weak case.
Retain Your Intellectual Property
If you are hiring a company to do creative work for you—creating a website, writing copy for social media postings, developing an app for your company’s products, etc.—you want to own the product at the end of the project. The default rule when you hire independent contractors to do creative work is that the developer owns the end product, not you! You can overcome that default only by making sure there is a “work made for hire” clause in the contract. You also want a provision that says you retain ownership of any of your own creative work used in the product. Finally, if you have to share company-confidential information with the other party, make sure the contract says he has to protect that information.
If something goes wrong during your use or delivery of a product or service and a third party is harmed, that harmed person is likely to sue everyone who was even remotely involved in delivering that product or service. And that means you might be dragged into a lawsuit because the party you contracted with to make the product screwed up. It could be for copyright or patent infringement, careless product design, or anything else. An indemnification clause would say that you get compensated (in the form of having your attorneys fee paid) in case that happens.
And oh, by the way, your contracting partner will want to be indemnified for his attorneys fees in case you were the actual one who caused the harm to the third party. If there is an indemnification section in the contract you sign, make sure you are indemnified, not only the other party.
There are typically many more sections in a contract, and those other sections are important too — but by finding and reading at least these seven sections, you will be better off than you would be if you had not read any part of the contract.
Don’t sign a contract that doesn’t represent your interests. Negotiate for changes.