Contracts play an integral role in running a business. It establishes a strong and honest relationship between the parties and also protects both parties from legal risks.
Just as how a well-written contract marks the start of a fruitful relationship, a poorly-written one can do more harm than good. Sometimes, disputes are unavoidable and a poor contract will only contribute to existing issues.
You can prevent such situations with contract reviews.
What is Contract Review?
Contract review is the process of a thorough examination of legal contracts by which you can analyze and understand the clauses, terms, and conditions before agreeing to the contract.
Contract review highlights unclear or outdated provisions and helps you identify areas for possible improvement. In addition, it streamlines the process of detecting risks and looks for loopholes to make sure you are protected once you sign the contract.
Contract reviews are also essential after you initially sign the contract, leading upto important contract events such as re-negotiations, opt-out windows, renewals, etc. To conclude, contract reviews generally is your last chance to identify and request needed changes before you are locked into a legal agreement.
Hence, reviewing contracts requires diligence and keen attention to detail. It is important to carefully read out the terms, clauses, and obligations before signing the contract. Let’s look at the 8 things to not miss out on while reviewing contracts.
What Should You Look For When Reviewing a Contract?
1. Make Sure the Contract is Easily Readable
Read the contract thoroughly to ensure that there is no misinformation that you do not agree with. In addition, the legal language in contracts may contain some intricated words that are difficult to understand, which could lead to confusion.
To prevent this you should:
1. Take your time reading the contract word by word.
2. Make a note of difficult-to-understand terminologies.
3. Discuss the issues with external parties before signing.
2. Ensure No Blank Spaces & Check Correct Punctuations
Grammatical errors and black spaces have a significant effect on interpreting the meaning of the final legal draft. Let’s not forget the case of Portland-based company ‘Oakhurst Dairy’ that owed $10 million to 75 milk-truck drivers in the US state of Maine, because of a missing comma in a legal clause.
A minor blunder like extra space or a missing full stop can be interpreted as an incomplete contract that poses legal threats to your business.
Whether the contract is drafted manually or with the help of software, make sure to recheck the black spaces in the contract and look out for punctuation errors.
3. Verify The Significance of Important Dates
Often, the execution date of a contract occurs before the effective date. In such cases, the date at which the contract is signed is different from the date at which it comes into effect. That means a contract isn’t considered legal until all the parties sign it.
When reviewing a contract, pay utmost attention to reading and understanding the significance of all the dates in the document. It helps you understand when your role in the contract comes into effect, avoiding any confusion afterward.
4. Check Termination & Renewal Terms
Always confirm that you completely understand and agree upon the contract’s termination and renewal terms before signing a contract.
While reviewing the contract you should check things like automatic renewal language and opt-out windows so you know how and when you can cancel the contract and what are the consequences of not notifying the stakeholders by a certain date.
Reviewing renewals and termination terms also gives you a chance to plan ahead about the important dates and deadlines. Additionally, it is advisable to set reminders so you don’t miss opportunities to renegotiate or cancel the agreements within the stated clauses.
5. Understand The Consequences of a Breach of Contract
A smart way to reduce your compensation amount if a contract is violated is by discussing the consequence before you sign the final contract. In some cases, businesses pull each other into court due to an issue that could be easily avoided by clearing out the consequences. It saves you valuable legal time by preventing a rift with external parties.
6. Discuss & Record The Rights and Responsibilities
Make a Bussiness Pact: Never rely on oral understanding.
Verbal agreements draw unwanted risk to your business. So, decide and record who is liable for what if something does not go according to the contract.
In addition, to avoid confusion and disagreements, ensure you know what role you and the external parties are playing over the course of the contract. Being aware of all your rights and obligations before signing the contract minimizes ambiguity later on.
7. Review the Profit/Loss Sharing Percentage
The profit & loss ratio is the percentage decided by all the parties in order to distribute profits as well as divide any losses. Once the contract gets legally bound you are liable to all profit and losses as mentioned in the contract.
So, revise the percentage proportion in which the profit/losses will be split between the parties to avoid any pitfalls.
These are the 7 key things to not miss out while reviewing contracts. Learn more on how you can successfully review and manage contracts here: Why is it important to review contracts and who should do it.
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