In a transaction, during the hiring process, or as part of a discussion of a partnership, signing a contract can be seen as a formality, a routine matter at the end. From a commercial lease to an employment contract, a license for IP to a contract for services from a vendor, that stroke of the pen or click of the mouse button can have a tremendous amount of power.
A signature transforms the intended meaning of the conversation into a binding commitment. Upon execution, it is presumed that all the signatories have read, understood, and accepted everything within the “four corners” of the document. Legal deadlines are best adhered to and agreements in writing must be honored rather than accepted on faith. When it comes time to sign a contract, do a thorough due diligence investigation to safeguard your property, independence and professional reputation.
Reserve the necessary core fundamentals and contracting parties.
Don’t get caught up in legalese, and make sure that the underlying structure of the contract accurately reflects the actual terms of your contract.
Identify Legal Identities and Authorized Signatories.
Make sure that the agreement specifies the proper legal parties. In case you have a company or LLC, the contract should be signed in the name of the company, and never in your name. If you sign the contract personally, the veil may be lifted and your personal assets (e.g., savings, real estate) could be subject to commercial liability. In addition, check whether the person performing the document for the other party has the actual authority of the company to commit the company.
Clearly and precisely establish what work is to be done and what the deliverables will be.
The most important trigger of breach of contract actions is ambiguity. Avoid generalizing. Don’t agree to general terms that include duties like, “vendor will support digital marketing as needed. The contract should outline all the deliverables comprehensively and objectively:
Precise performance criteria, details and project completion dates.
Specific criteria for reviewing and accepting submitted works.
What other party must do, in order to have work start (mutual conditions precedent).
If a specific promise was made orally during the negotiation process make sure it is included in the document. Most basic contracts include an integration clause (also known as an “entire agreement” clause) that effectively renders all prior verbal discussions, emails and informal representations void in the eyes of the law.
Examine Financial Commitments and Payment Mechanisms
Money issues can be common and avoidable when financial covenants are clearly written.
Identify Payment Milestones and Out-of-Pocket Expenses on a map.
Don’t just glance at the top dollar figure. Examine payment terms closely: Are the payments based on time periods (such as net $30\text{ days})) or on sign-offs of deliverables? Specify for whom the auxiliary expenses, like travel, software license, shipping or material allowance, are met. Determine whether taxes are included or not.
Review the penalties, late fees and escalation clauses.
Discuss the impact of failure to pay or deliver on time. See if late payments incur penalties of interest and make sure that they do not exceed the usury limits set by statute. Beware of automatic price increases in multi-year contracts (clauses that permit an increase of $5%\text{ to }10%$ each year without notification).
- Balance Risk Allocation, Liability, and Dispute Mechanisms
The purpose of a contract is to establish what will take place when things go wrong. If you don’t calibrate your legal exposure correctly, you can end up losing a lot of money.
Ensure that there are indemnification and liability caps in place.
Indemnification clauses are clauses that state that one party will have to cover the other party for a certain amount of damages, legal defense fees, or third party claims. An overly general indemnification clause may require you to cover damages for which you are not responsible. Make sure it is strictly mutual, requires only direct negligence or willful misconduct, and is capped.
The limitation of liability clause is also important. Do not accept any indirect, special or consequential damages (lost profits, reputation) clauses. The idea is to set a dollar limit so that the exposure is limited to the dollar amount of fees paid under the contract over the last year, or $12\text{ months}$, or the time period of the contract.
Discuss Governing Law and Dispute Resolution Venues
Where and how will the conflicts be settled if they occur? The jurisdiction and legal venue is often explicitly outlined in contracts. Protecting yourself under such an agreement is very costly if you are doing business in California. Seek local jurisdiction or pre-litigation binding commercial arbitration to reduce litigation costs.
Know how to identify Termination Rights and Continuing Obligations
There should be a clean and straightforward exit roadmap before a relationship goes sour.
Differentiate Termination for Cause vs. Convenience
Examine end clauses. A fair contract specifies two different ways to get out:
Termination for Cause: When a party has committed a material breach. Make sure this provision has firm written notice and reasonable “cure period” usually $15 to 30 days” to rectify the situation before the agreement terminates.
Termination for Convenience: Gives either party the ability to cancel the agreement without alleging a breach typically by giving written notice of $30\text{ to }60\text{ days’ notice.
Complete audit of Post-Termination Restrictive Covenants
When contracts expire, obligations do not necessarily go away. Review surviving covenants, such as non-disclosure agreements (NDAs), non-solicitation clauses, and non-compete provisions. Establish clear and reasonable privacy limits (such as 2 to 3 years), instead of lifelong restrictions and make sure that limiting agreements do not restrict your ability to make a living in your chosen profession.
In conclusion, do your due diligence and keep your future in mind.
A legal contract should be an empowering business step not a cause of vulnerability. Do not allow any counter-parties to rush your review process or turn you down from utilizing qualified legal counsel. Protracted, emotionally charged litigation later is avoided with a little investment of time spent auditing definitions, clarifying payment schedules and capping legal liability. Every legal document you examine in a systematic fashion safeguards the professional assets and establishes every partnership on clear, fair terms.
