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Most business people enter into contracts on a regular basis. Some of those contracts are simple, straight forward and easily understandable documents while others are all but incomprehensible. In its most basic form, a contract is merely an agreement between two or more people to do or not do a particular thing. That sounds simple enough but when those obligations are buried in the fine print on page 17 it may not be so easy to understand exactly what the parties are agreeing to do or not do. It is not uncommon for otherwise very careful people to glance over a contract and just sign it without really knowing what it obligates them or the other party to do. The question sooner or later becomes "Can they do that?" People who contract should carefully review each contract before signing it. It is also good practice to periodically review existing contracts such as insurance policies, leases and banking documents to determine whether they still meet your needs. So, what should you look for when reviewing a contract? Here are a few suggestions:

1. Correctly identify the parties. Use the complete name of the business to avoid confusion and identify corporate officers as such. Determine the marital status of individuals if spouses will be required to join in execution of the document.
2. Complete all blanks on any preprinted form and be sure all changes or deletions are initialed.
3. Double check the business terms of the contract (price, amount, duration, square footage, etc.) to determine whether it accurately reflects the agreement of the parties.
4. Know all of your rights and responsibilities under the contract. Carefully read the entire contract because rights and responsibilities are typically scattered throughout the agreement.
5. When another document is incorporated by reference always read the incorporated document. Don't assume you know what it contains.
6. Determine how risk is to be allocated. Risk is typically borne by the party in the best position to prevent loss. However, there may be reasons for a different allocation. Check insurance requirements and indemnification provisions.
7. Review and understand warranties and representations given by you and the other party. Don't give any representation if you do not actually know that the representation is true or if the other party is in a better position to know the facts being represented. If you must give warranties, try to limit them as much as possible. Remember that the other party is trying to do the same, so watch for disclaimers.
8. Determine what acts constitute events of default and whether you are able to enter into and perform under the contract without causing a default. Also consider what should be included as events of default by the other party.
9. Review remedies provisions. Determine the worst that can happen to you if you default. Explore ways to limit your liability. Also determine what types of remedies you need in the event of default by the other party.
10. Review causes of termination. Determine whether either party should have an option to renew, and if so, the terms of renewal. Consider ways to terminate the contract if it is not working to your benefit.
11. Check dates and deadlines. Always keep a calendar of dates and deadlines for important events and any affirmative act required to be done by you or the other party.
12. Determine how you want to deal with resolution of disputes. An arbitration or mediation requirement could ultimately save you time and money.

The foregoing is a limited list of general provisions to consider when entering into a contract. The type of transaction which is the basis of the contract, as well as the relative bargaining positions of the parties will dictate the actual terms of the agreement. Business people who take the time to thoroughly review and negotiate the terms of their contracts before signing them should find, in the long run, that it is time well spent.

This article is an adaptation of an article written by Joanne M. Cassidy which originally appeared in the August 1995 edition of DBA Houston magazine



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