What to Look for When Entering and Negotiating Business Contracts

The role you play in the contracts negotiation process can directly impact your rights and risks.  In general, parties who draft contracts for others to sign are in a stronger negotiating position than parties presented with contracts to sign.  By knowing what to look for in a contract, which ever side you are on, you can better protect your interests.

Understand What You Are Signing

Whenever contracts are presented to you for signature, you should assume they have been drafted by an attorney or someone acting on behalf of the company presenting the contract to protect that company's best interest.

The reality is that your best interest and the other company's best interest are not necessarily the same.  You should therefore always thoroughly read or have a professional review any contract presented to you before you sign it.

This is particularly true as the value of the contract increases.  A contract for $50,000 worth of goods or services, for example, deserves much closer scrutiny than a contract for a $500 piece of equipment.

Similarly, if there is a potential of risk involved (i.e., someone or something could be injured by the thing being contracted for), or the terms of the contract are complex, the contract deserves a comprehensive review.

What to Look for If The Other Side Drafted the Contract

If you are presented with a contract to sign, make sure that the business terms are consistent with your understanding of the agreement.  Does the contract actually say that you and the other party are supposed to do what you thought you and the other party where supposed to do?

If the contract says something different – question it.  The general rule of contracts is that what ever is written is what is intended.  Make sure it says what you mean – before you sign.

You will also want to take note of how long the agreement is intended to last ("its "term"), and whether there is any provision to end the agreement early if you decide you want out (a "termination clause").  Attorney's often call termination clauses "escape clauses" because although most contracts are entered into with the best of intentions, it is very common for one of the parties to decide that they want out early.

If the agreement can be terminated early, check to see if there are any special requirements - such as giving written notice or paying a fee.  Failure of a party to follow the requirements of a termination clause is one of the most common claims in breach of contract lawsuits.

Another important issue to look for if you are presented with a contract to sign is whether it contains any indemnity, assumption of the risk, limitation of liability, waiver of rights, disclaimer or similar clauses.  The purpose of these types of clauses is to pass some or all of the risk of the contract from one party (usually the maker of the contract) to the other.

If you need help understanding these clauses you should always consult a professional.  The potential cost of such a clause may outweigh the value of the contract, and it is imperative that you understand what rights you are agreeing to give up or liabilities you are agreeing to take on – before you sign.

On the Flip Side…

The other side of the coin, not surprisingly, looks a lot like the first in reverse.

If you are drafting a contract you probably want the term of the agreement to extend as long as is in your best interest (if you are a seller you probably want the buyers locked in for a long time; if you are a buyer you probably want to keep the deal as flexible as possible).

You’ll probably want to control the terms of terminating the contract, so that the other party cannot get out unless you want them to – or until you want to.

And, you will probably also want to transfer as much of the risk as possible to the other side.

Conclusion:  Be the One Drafting the Contract

If you are the party drafting the agreement, the conversation will start in your favor.  Presumably, if you hire a professional to draft your contracts, they will be written in such a way to protect your best interest.  The other side will be left simply trying to negotiate some of those rights back for themselves.

Because the side presenting the contract generally controls the terms of the agreement (even if some terms are later modified or changed after negotiations), it may be in your best interest to be the party drafting the contract.

If you enter a certain type of agreement on a regular basis, (for example, NDA’s, Service Agreements or Consulting Agreements), it will probably be in your best interest to have your own, professionally prepared, contract templates ready to present to the other party.  That way you can be sure that at the start of the conversation, your interests will be covered.

If you find yourself in the position of having to sign someone else’s agreement, be sure to read the contract thoroughly and, if necessary, have a professional review it.  Many terms can often be modified (even in “standard” agreements), and a contract professional can help you negotiate in your best interest.